- EUR continues to slide – volatility risks slipping over into real economy:
Concerns over progress on the Greek bailout and the sudden resignation of Juergen Stark from the ECB Governing Board has seen risk pummelled. The DJIA fell more than 300 points and the flight into safe haven assets kept USD and USTs well bid. The weekend has done little to improve the mood in financial markets, and the EUR continues to come under the cosh.
Under pressure from reports on Friday that Germany was contingency-planning for a Greek default, the Greek government said it would introduce a property tax and, in a largely symbolic move, cut the salaries of all elected officials. This may be enough to satisfy the returning ‘troika’ inspectors this week, but we will have to wait for confirmation of this. In the meantime, media reports suggested that the preliminary responses from bond investors on the proposed debt swap are running at only 70% – below the 90% threshold that Greece said it wants to go through with the deal.
Markets were also spooked by Juergen Stark’s resignation, reportedly due to his disagreement with the ECB’s bond buying program. This is undoubtedly a blow to the ‘hard money’ reputation of the ECB: Mr. Stark was one of the most vocal hawks on the Governing Council. There are concerns that his departure may result in less support for the Euro project in Germany, but greater risk at this stage seems to be one of worsening sentiment: the longer the current volatility persists, the greater the risk that the negativity in financial markets spills over into the ‘real’ economy. Without some reassurance for markets, the damage may be done – even if the Euro manages to navigate the numerous September obstacles that we have previously flagged.
- Risk aversion seeking alternative safe havens:
With CHF no longer the obvious option as a safe haven from European peripheral concerns, EURJPY and EURGBP have come under further pressure. EURGBP broke below the 200-day moving average and the move has been continued below 0.8600 this morning. EURAUD is now in sight of the 1.3000 lows seen end-July. AUD should continue to be supported as the rest of the China data releases this week indicates that the economy is on solid footing. Perhaps most significantly, EURJPY has broken to 10-year lows. Despite the lack of G7 support for Japanese intervention over the weekend, there is a significant chance of action even before the lows around 76. While the political and headline focus is on USDJPY, EURJPY is almost as important for Japanese exports. With fiscal half-year end just a couple of weeks away, the MoF will not want to see a stop-driven collapse. We still think a strategy of quiet semi-official bidding is most likely – the MoF will be aware of thick offers up towards 79-80 – but with a new FinMin in charge we would not be short USDJPY here.
- US policymakers inertia to keep stocks under pressure and USD strength sustained:
With the OECD and IMF calling on the G7 nations to do more given less than impressive growth and the risk of recession, policymakers continue to disappoint the markets. President Obama’s jobs plan, after taking account of revenue and spending measures that will not be allowed to expire, will have only moderate impact on GDP. According to our economists’ estimate, the package would boost GDP by only 0.5% in 2012 and lift employment by less than 700k. As such, more QE looks to be the only promising option for the US at this point. Fed’s Bullard said that the Fed’s most potent weapon would be to do QE3, and has not made a decision on operation twist. Today, the Fed’s Fisher, a hawk and a voter, is scheduled to speak. His speech will likely highlight the divergence in opinions among Fed members. With no evidence of the Fed ready to do more stimulus, equity markets will continue to drag, keeping USD well supported.
Click here to read the full report:
http://www.easyforexnews.net/wp-content/uploads/2011/09/Daily-FX-Str_Europe_12Sept2011.pdf
BNP Paribas
Corporate & Investment Banking