G10 Currencies
EUR: Another month has passed and the question arises: “strong vigilance” or not. Will the ECB president use the code word for a rate hike at the next meeting on 7th July or will he disappoint markets? We expect him to use it. And the euro is likely to benefit. The rising yield differential towards the USD has been the most important asset of the single currency for some time now. At least where that is concerned everything seems to be normal in the Eurozone while the Fed is still sticking to its ultra-expansionary monetary policy.
The crisis in Greece on the other hand is getting increasingly serious. Also the report of the so-called troika (EU Commission, ECB and IMF) was not exactly positive. It demands further momentum as the implementation of important reforms had ground to a halt recently. That is not what we would call a positive verdict. The next tranche of the EUR 110bn. package which was due was not paid on 30th May and is likely to be withheld further. The troika assumes that Athens will not be able to finance itself on the capital markets any time soon, as had originally been planned. The report therefore draws the following conclusion: “The next disbursement cannot take place before this under financing is resolved”. That means that the ball is back in the court of the Eurogroup Finance Ministers. A new aid programme (scope between EUR 80 and 100bn.) is required.
This time round the conditions for a rapid agreement (Athens risks a default in Mid-July) are very complex. Germany demands the involvement of bond investors in further aid payments in an effort to take the pressure off the tax payer. That is a more than high-risk approach as the rating agencies have threatened that in the case conditions for existing bonds deteriorate or should creditors be forced into (an allegedly voluntary) exchange this would constitute a default. If Berlin manages to get its demands through the rating agencies are likely to put GGBs on default-status. The ECB has announced that in this case it would no longer accept Greek bonds as collateral – chaos would be perfect.
The risk of a further escalation of the debt crisis is likely to be overshadowed by the announcement of a further ECB rate hike today. This might cause EUR-USD to breach the 1.47 mark which failed yesterday. The potential for disappointments is also high though. In case Trichet does not announce a rate hike the problems in Greece might easily create an explosive mix. The next technical support level in EUR-USD is located only just below 1.44. Conclusion for EUR-USD: Everything depends on Trichet today!
USD: The US economy is growing at a frustrating slow pace according to Ben Bernanke yesterday. Other FOMC members are also sounding concerned and consider the Fed’s monetary policy to be appropriate. There are voices of dissent but it seems clear: key rates in the US are not going to change for some time. As a result the USD might increasingly turn into a financing currency for carry trades. In particular as the yen, a possible alternative has become considerably less attractive as a financing currency recently. That would also mean that weak macro data would once again support the dollar. Even if we have not quite got to that stage this scenario should be considered.
JPY: Already weak Japanese Q1 GDP data was revised further downwards last night. Officially the economy now shrank by 0.9% in two successive quarters. This still does not have an effect on the yen. The market is still cautious about trading well below the 80 mark in USD-JPY though.
NZD: It was obvious that RBNZ would leave key rates unchanged at 2.5% as no market participants had expected a rate rise. It is still too early for that. But the fact that the RBNZ dropped the line that the “current level of the OCR is likely to remain appropriate for some time” and now thinks that “a gradual increase in the OCR over the next two years will be required” to offset the expected rise in underlying inflation surprised some market participants, triggering a blip in the NZD. According to RBNZ Governor Allan Bollard, “the outlook for the New Zealand economy has improved since the publication of the March Statement”. Hence, the statement was more hawkish expected. Economic data suggests that the economy is beginning to regain its footing following the earth quake in Christchurch. Since March labour market data, business sentiment and trade figures are showing signs of rising economic activity. Inflation expectations in particular recorded a clear rise in Q2 from 2.6% previously to 3.0% now. The RBNZ remains on hold, mainly due to the strong NZD, cautious private households and fiscal consolidation. The RBNZ is not in a hurry in raising rates but shouldn’t run the risk of falling behind the curve either – with yesterday’s statement, the RBNZ clearly showed that it avoided this trap, something which we think is very positive. After the gains overnight, the kiwi will again be mainly driven by the general market sentiment and US dollar weakness. That means NZD-USD should remain strong and that a test of the recent highs at 0.8260-65 is possible. Only a clear breach of the 0.8070 area would constitute a first warning signal for us.
NOK: There was no real reason for NOK to come under pressure yesterday. Even though industrial production eased notably in April this is likely to be connected to the earthquake in Japan. The PMI also eased slightly in April but rose again strongly recently. That means that the collapse in manufacturing production is likely to have been temporary. And if one looks more closely Norges Bank’s Survey of the Regional Network should have been positive for the krona. On the whole Norwegian enterprises are more optimistic about the coming three months than back in January. At least the rising oil price, as a result of a difficult OPEC meeting, was able to support the krona yesterday in the afternoon. Until Friday, when Norwegian inflation data is due for publication EUR-NOK is likely to be driven by external factors, with the area of 7.90-7.9050 in EUR-NOK providing good resistance.
AUD: Disappointing employment data has put pressure on the aussie this morning. Even though employment rose slightly by 7800 jobs in May, but that was less than expected (25k) and was mainly due to an increase in part-time positions. Full-time positions on the other hand were reduced by 22k and the previous month was revised downwards. As a result of the publication AUD-USD lost approx. 80 pips and losses peaked at 1.0560. In view of the RBNZ’s hawkish statement (see above) the losses in AUD-NZD were even more pronounced. However losses towards 1.28 constitute opportunities to buy in our view as further losses are now rather unlikely in particular in AUD-USD: on the one hand the technical picture results in good support in the area around 1.0540 and on the other hand today’s data does not question the prospect of rising key rates.
Emerging Market Currencies
PLN: As expected the Polish central bank yesterday raised key rates by 25bp yesterday. The zloty only appreciated against the euro very moderately after the publication, as central bank governor Marek Belka confirmed during the press conference that the bank would now take a break in the rate hike cycle. The rapid succession of rate hikes so far – a total of 100bp since the beginning of the year – was likely to ensure that the inflation rate would return to its target medium term. We therefore expect only one more rate hike this autumn which is nonetheless likely to support the zloty. However, at present the currency is moving in the wake of the Eurozone debt crisis, like many currencies in the region, and is only likely to fulfil its full appreciation potential once risk aversion eases notably.
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