- PM Papandreou and Cabinet win confidence vote; EURUSD to rebound to 1.4500
- Norges Bank rhetoric will be important since they were more dovish than expected at the last meeting
- FOMC to firm up its dovish tone
Markets remained on the fence waiting for the Greek Parliament’s vote of confidence in the reshuffled cabinet. In the event, PM Papandreou and his cabinet won the vote of confidence, by a count of 155 to 143. The focus now turns to the passage of the budget on June 28. The government’s majority in the confidence vote, while short of providing the certainty that a larger 160+ majority might have brought, suggests nonetheless that the Parliament will pass the budget. While rejection of the budget at that stage cannot be ruled out, it would seem perverse for MPs to vote in favour of the new cabinet today only to vote down the most important piece of legislation associated with that same cabinet a week later. The major risk to the budget may be the size of street protests between now and the vote, with potential for pressure to get to some of the less committed MPs.
The passage of the new austerity budget will mean the approval of the next tranche of aid at a special EcoFin on July 3; while the EU has asked for national unity, we cannot see Europe withholding the funds on the basis of an unconvincing majority in favour of austerity. From there, and assuming the details of private investor participation can be worked out in time, a new Greece bailout package could be ready by July 11. While there is no guarantee of smooth sailing from here, the dark cloud over the euro may be passing. We favour a rebound in EURUSD to 1.4500 and EURCHF to 1.2167, a break here opens the way to further gains towards 1.23.
While we expect no rate hikes from the Norges Bank today, the rhetoric will be closely watched especially since the bank was more dovish than expected at the last meeting. Currently, it looks like the Norges Bank intends to deliver the next rate hike in October, but we think it could come in September given strong fundamentals. Thus, the statement could come on the hawkish side with an upward revision to the rate profile while acknowledging peripheral concerns as risks. A bullish statement may help EURNOK push lower, breaking out of recent ranges.
The FOMC will conclude its two-day meeting later today. Persistent data weakness out of the US will likely prompt the FOMC to enhance its already dovish tone. As such, we expect the FOMC to firm up its language on keeping rates low for an “extended period” and apply this language to the balance sheet as well. In addition, we see the FOMC announcing that they will reinvest longer term maturities in Treasuries. Thus, barring any events out of Greece, USD weakness should persist and risk should rally.
Given MPC members’ recent dovish statement, we would expect the BoE statement to come in on the dovish side. Both King and Fisher opined the need to keep rates at current levels. Our view is that the BoE is unlikely to hike in 2011, or even 2012, despite rising inflation. Economic data continue to highlight the weakness in the economy, and wage growth remains subdued, leaving the argument favoring rate hikes less convincing. We see further GBP weakness ahead especially against EUR and AUD.
BNP Paribas
Corporate & Investment Banking