G10 Currencies
EUR: It is obvious that they are trying hard, but so far the results are disappointing. Even though the Finance Ministers of the Eurogroup met yesterday there was no joint declaration. They all want to save Greece, just how. The volume of a further aid package also seems to be rising. While about a week ago the relevant sources referred to EUR 80bn. Finance Ministers now seem to be thinking of a volume between EUR 90bn. and 120bn. This is putting palpable pressure on the euro even if EUR-USD is still trading in the area around 1.44. That is probably also due to markets getting used to the fact that European politicians only ever agree at the last minute. The main stumbling block remains the integration of banks and insurance companies into the aid package. Germany is in favour of a sizeable private sector contribution but is meeting strong resistance above all from the ECB. Moreover the politicians have not got much more time for their negotiations. If no solution can be found the payment of the original aid package’s next tranche worth EUR 12bn. which was due on 30th May, cannot take place. Without the funds Greece faces a default in July at the latest. It is difficult to predict how the European financial system would react to that. The ECB in particular is referring to possible contagion effects. These are clearly visible in the yields for Portugal (see chart).
We assume that a solution will be found in time. The way things are standing at the moment more than a Vienna Initiative (i.e. the voluntary purchase of further bonds) will be impossible to achieve. Now that S&P downgraded Greece to CCC yesterday everything else would lead to the agency rating Greece as a default. As soon as an agreement seems possible (i.e. once the German side gives in) the euro is likely to breathe a sigh of relief. The biggest uncertainty at least would be off the agenda. FX markets will ignore the fact that Europe will have moved one step closer to financing Greece long-term.
USD: Today’s US data is likely to illustrate a rise in inflation. At 3.4% inflation will have reached the highest level since October 2008. This is unlikely to feed hopes of a rate hike as core inflation remains moderate at 1.4%. Only a clear surprise to the upside might provide moderate support for the USD. Even though today’s data on industrial production and capacity utilisation might come in slightly above expectations it will be unable to correct the image of a recently weak US economy. Conclusion: the range between 1.43 and 1.47 in EUR-USD is likely to remain intact.
SEK: The performance of the Swedish krona is really depressing at the moment. First of all EUR-SEK has become disconnected from the development of the rate differential and is reacting above all to market sentiment. That means that the market’s risk off mode is having a negative effect on the krona. Moreover NOK-SEK finally breached the technically important area of 1.1600-50 to the upside at the start of the week, putting additional pressure on SEK. Swedish inflation data for May published yesterday were roughly in line with market expectations and did not trigger any further rate speculation. And moreover a large Swedish mobile phone manufacturer announced yesterday that it was going to acquire a US telecommunications company for more than USD 1bn. in cash. Not good times for SEK. Following the breach of the April high at 9.1246 the technical picture for EUR-SEK has deteriorated. If uncertainty on the financial markets remains high, 9.1620 might also be breached. From a fundamental point of view these levels are exaggerated though.
GBP: EUR-GBP continues to be stuck between a rock and a hard place. On the one hand negative sentiment about the continuing eurozone debt dilemma acts as an impetus to the downside for the cross, whereas continuing high prints in inflation (Yesterday’s May CPI data was +4.5% yoy) give impetus to the upside. This continues a trend where GBP has only made gains on the back of negative external events rather than domestic developments. To some extent, short term progress for GBP is very much a hostage to fortune. Should a deal be reached with regard to a new loan package for Greece we think EUR-GBP should test the upside in the coming days. Levels to watch on the upside are 0.8920 and the convergence of the 21 and 55 dma at the 0.88 area on the downside.
Emerging Market Currencies
HUF: “If we make a mistake now, nobody will trust us”. The Hungarian Prime Minister Viktor Orban hit the nail on the head in a newspaper interview yesterday. By turning its back on the IMF last year Hungary has been standing on its own rather feet rather shakily and is now dependent on the international financial markets. This may work in times like these. Should markets return to the risk-off mode as a result of the eurozone debt crisis everyone is going to watch Hungary like a hawk to see if the budget aims set by the government will actually be implemented. Orban finds international criticism of the government’s habit of filling strategic posts with party-faithfuls difficult to understand. On the contrary he is quite open about the fact that if possible he does not simply want to tie the hands of the next government but also of the next ten after that. Comments of this nature do not exactly create confidence in the Hungarian market. Against this background, today’s inflation data for May becomes a non-event.
RUB: The IMF has concluded its fourth short visit to Russia and strongly recommended a continuation of restrictive monetary policy to the central bank. Even though the inflation outlook for 2011 was reduced from 9.3% to 8.0% the central bank’s rate hikes to date were nonetheless not sufficient to control the continued inflationary pressure. Bank Rossii had signalled recently that following the 50bp rate hikes there would be no rate changes over the coming months. Looking at the flagging ruble and inflation rates of above 9% it becomes obvious that further rate adjustments are necessary to control rising prices. The ruble has remained in a narrow range against euro and US dollar for some days now, without any notable new momentum this is likely to remain the case.
PLN: In its rate decision last week the Polish central bank (NBP) already pointed out that its rate hikes to date would reverse the current inflation trend medium term and that it was therefore going to pause its rate hike cycle. Today’s consumer price data for May is not likely to influence the central bank in a major way as the NBP is likely to rather focus on core inflation in an effort to spot possible second-round effects early on. The latter is not on the agenda until next week. As a result data on the year-to-date budget, also on the agenda for today, is likely to take centre stage. Surprisingly the government has so far been able to stick to its budget plans. Should this trend continue it is likely to ally investor concerns, allowing the zloty to record further gains.
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