Open disagreement on Greek restructuring suggest more choppiness to come
China trade suggest at worse modest slowdown
UK ‘stagflation’ data to heat up the BoE QE2 debate
Coming out of yesterday’s press conference, Mr Trichet should have been delighted. Mission accomplished – he made it clear that another rate rise was imminent, but without prompting an undesired spurt higher in the euro, sell-off in risk assets or further blow out in peripheral spreads. But the open disagreement between German FinMin Schaeuble and the ECB on the extent of private sector participation in a new Greek bail-out deal confirms the gulf that remains to be bridged between now and the June 20th EcoFin meeting. While the Greek cabinet may have signed off the latest planned Greek austerity measures, the Greek opposition has not and the public protests against austerity measures remains palpable. Note markets are also reacting to a WSJ article reporting on more details of EUR1bn covered bond issue backed by Spanish regional debt that failed to sell last week: with investors already cautious, the potential for contagion is clear. We therefore continue to see ample scope for downward pressure on the EUR in the days ahead. It may not be long before US debt ceiling concerns knock the euro peripheral debt crisis out of the spotlight, but this is likely to be a late June/July story, not one for the next week or two. EURCHF rallies will remain laboured affairs, USDCHF downside risks will persist. EURUSD gamma looks a good buy for the next couple of weeks.
Chinese trade today data was mixed; while the figures show an overall drop in both exports and imports on a MoM basis, much of the drop can be attributed to a fall in two-way trade with Japan. Imports from Australia have held up; overall the numbers suggest that while the pace of growth may be slowing there is little sign of the much sharper slowdown feared by some. Indeed, trade with the EU – and the associated trade surplus – continues to rise, highlighting the importance of Europe, and a strong EUR, for China. Undoubtedly Christine Lagarde will have been asked to relay Chinese concerns to her current employers and to keep those concerns in mind if she finds alternative employment. And with the US recovery in doubt we can assume that Obama had a similarly forceful message for Merkel earlier in the week. There is much more than just German politics riding on the Greek solution.
Choppy price action in antipodean currencies looks like persisting. RBNZ Chief Bollard queried the logic of bidding up the currency on the basis that interest rates might rise later in the year: if the currency strengthens there may be less need for that, he told NZ radio. Past experience shows that the law of diminishing returns on attempts to jawbone the NZD lower sets in pretty quickly. AUDUSD meanwhile is struggling to recover off its post-employment report lows; while 1.05 holds we remain constructive and on balance we continue to prefer long AUDNZD here despite the bloody nose inflicted by the RBA and employment reports on Tuesday and Thursday.
Finally GBP could be in for more pain, after the chronic weakness evidently in the latest UK industrial production numbers, combined with some slowing in industrial product prices, will see the debate about whether BoEQE2 is more likely than Fed QE3 ratchets up a gear. Long GBPUSD looks better than EURGBP give downside risk on EURUSD.
BNP Paribas
Corporate & Investment Banking