Foreign investors are selling European sovereign debt, (mostly German) politicians assert that stepping into that breach is ‘not the ECB’s job’ and the EC will put forward possible scenarios for the creation of a Euro Bond in a discussion paper later this week. I doubt that assurances of future austerity alone, can help restore private sector confidence in individual Euro zone governments’ debt without first seeing a devastating overshoot in yields. The week is starting quietly in FX markets, the focus will once again be on bond yields and spreads, and the risk must be that yields don’t fall. There are bill auction sin the Netherlands, France and Slovakia due today but this week’s only longer-dated fixed-rate bond auction is from Germany.
The US budget ‘supercommittee’ appears to be in deadlock. ‘Reality is starting to overtake hope’ said the co-chairman of the committee. US debt and budget negotiations tend to go to the wire, but any hope that fiscal policy will be additive to growth in 2012 is surely fading.
Spain’s new government is off n search of that legendary policy mix – growth-boosting austerity and the risk is that the political bias of the government makes no short-term difference. Still, the pundit response is positive and the FX markets is either ignoring Mr Rajoy or welcoming him with the euro holding above USD 1.35…
Flash PMIs will dribble out from mid-week onwards and could re-focus attention on growth. We’ve got a clear pattern of ‘better’ US growth and ‘poor’ Euro zone growth, but some uncertainty and a lot of trepidation about what is happening in Asia. Today we just get Euro zone current account, US existing home sales and Chicago Fed index data.
CFTC IMM positioning data (see chart) shows that positions are not extreme, but the market is re-loading with long dollar positions hardly surprising but leaving us with a ‘risk-off, euro-short’ FX market. That feels like the right position to have so the fight between news and positions will continue. We are short EUR/GBP, CHF/JPY and AUD/JPY, and long GBP/CHF.
Societe Generale
Research & Analytics