Political And Economic Risks In Europe
The euro came under modest selling pressure in the European session, through a combination of heightened political risk and weak economic data. The flash PMIs in the Eurozone were generally soft. The composite indicator came in at 46.0 vs consensus of 48.0 in April, the lowest since June 2009. In France, initial poll results suggest Socialist Party candidate Hollande is on track to win the first round of the French Presidential elections with 28% of the vote. The second round will be held on May 6. Also the Dutch coalition broke down after disagreements over budget cuts. While the euro was immune to some of the bad news overnight in Asia, it eventually sold off in the European session before stabilizing as the US walked in. The Australian dollar fell sharply overnight after Australian Q1 PPI inflation came in well below consensus. Our Australian economics team reacted by lowering their forecast for tomorrow’s headline CPI reading. They see this as not only bolstering the case for a 25bp RBA rate cut on May 1, but the soft PPI print also raises the risk of a follow-up cut in June. Over the weekend the IMF received pledges of “over $430 bn” from IMF member countries to boost its crisis-fighting resources. Although the G20 statement made it clear that the additional funds will not be earmarked for any particular region, the intention is to have enough resources on standby to deal with any potential escalation in Europe. We doubt the euro will get much support from this news, however, given the final sum is very much in line with comments by IMF Managing Director Lagarde over the past week – remarks which the market didn’t react to at the time. There also appears to be an element of double-counting here given that Eurozone central banks had already announced their intention to contribute $200 bn back in December. Finally, investor attention is currently more focused on whether additional Eurozone countries will need external financing and whether the Eurozone’s own rescue facilities have the means to offer it. This week yen-watchers will focus their attention on Wednesday’s FOMC and Friday’s BoJ policy decisions. Our US economists believe it is too early for any directional change from the Fed, though the quarterly forecasts may be revised up by some of the hawkish members in a manner consistent with the less-dovish commentary seen of late. Our Japan economists expect a JPY 5 trn expansion to the BoJ’s asset purchase program.
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UBS Investment Bank