G10 Currencies
EUR: The Greek Prime Minister George Papandreou won the vote of confidence. At 155 votes in favour of the Prime Minister he was able to gain the support of all the members of his Pasok party. Good news for the rescue of Greece as a change of government at this point in time would have implied the risks that Greece was going to abandon the EU / IMF imposed savings and reforms efforts – thus losing the support of the aid money. It seems surprising that the euro was unable to benefit from this news last night. This is likely to be due to three factors:
• The majority of analysts had expected a positive result. The Pasok party had proven last week that it supports Papandreou when it comes to the issue of party leadership. Yesterday’s upmove in EUR-USD may be largely due to the fact that market participants had expected the result which was achieved last night.
• The euro did not suffer massively due to the latest round of the Eurozone crisis. At present it is trading just 3.8% below this year’s highs seen in early May. As we have pointed out repeatedly before in this context: the Eurozone debt crisis is putting far less pressure on the single currency than was the case in 2010. If it is not putting pressure on the euro it cannot be the cause for its recovery either.
• Risks remain. Between 28th and 30th June the Greek parliament will debate the latest savings measures. In the end the decision on this matter will be decisive for the future of aid payments to Greece, not yesterday’s vote of confidence. Papandreou made a point of treating the vote of confidence separately from the other issue. Pasok members who were afraid of an early election last night will not necessarily vote in favour of the government’s fiscal policy.
Until then the news flow on the Greece crisis is likely to diminish notably. Following the decision of the Finance Ministers on Monday the EU summit tomorrow and the day after is unlikely to bring any news. That means also: the fundamental downtrend in EUR-USD, which is mainly due to the dollar weakness, might become obvious again.
NOK: Following a one year rate pause Norges Bank raised key rates to 2.25% in May. The reasons behind the central bank’s steps were a healthy growth in output combined with a better than expected labour market and the prospect of more rapid wage growth. Back in May Norges Bank did not provide any concrete information about a next step, though. It is too early for a continuation of the tightening cycle today – a view that market consensus shares. The new Monetary Policy Report, which will contain Norges Bank’s forecasts on growth, inflation and key rates, is likely to be more interesting. The higher capacity utilisation, solid growth outlook and recent wage agreements which signal increasing price pressure all point that way. We expect a rise of the key rate path which is likely to support NOK and help EUR-NOK to clearly breach this level (currently tested) to the downside. But caution: should the oil price come under pressure at the same time NOK gains are likely to be limited and moves might quickly go the other way again. So there is no danger of EUR-NOK leaving the wide 7.70-7.95 range in which the currency pair has been moving since the beginning of the year.
GBP: Later this morning we will receive the minutes from the BoE’s June rate decision. The MPC decided to keep rates on hold and to keep the asset purchase program on hold at 200 bln GBP. Foremost in the minds of the committee members most likely was the poor performance of manufacturing and production indices over the previous months. Against this backdrop it is unlikely that the minutes will show a particularly hawkish bias. Far from it, yesterday MPC member Paul Fisher spoke at length about the problems facing the UK consumer and the inevitable fall in living standards as a result of the shocks to the UK economy. It is unlikely that the BoE will seek to hike rates and impose further pain on UK consumers in the near term; all the more so given that the MPC sees inflation falling over the medium term. From a technical perspective, levels to watch in EUR-GBP are 0.8920 on the upside and 0.88 on the downside. In cable levels to watch are in the 1.6270 area on the upside and 1.6150 area on the downside.
Emerging Market Currencies
PLN: There is some important data on the agenda today with retail sales, core inflation as well as May’s unemployment rate, which has the potential to move the zloty. Following the differing views among MPC members on further key rate developments the market is likely to look for one direction or the other. In particular, a higher core inflation rate would fuel rate speculation notably, only that of course the difficulties in Greece are dominating the FX markets. While the uncertainty regarding the future of Greece continues EUR-PLN is likely to struggle coming off its current levels.
ZAR: The analysts agree that consumer price inflation in South Africa recorded a further rise last month. Only if price increases vary notably from expectations are we likely to see a market reaction though. The surprisingly good development of retail sales over recent months had already given rise to hopes of an imminent rate reversal. Should inflation point in the same direction this is likely to provide some positive momentum for the rand. However the South African currency as well remains under the effect of the Greece crisis so that the appreciation potential is likely to remain limited as long as risk appetite does not increase notably.
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