A Slow Grind Lower
While markets slowly ground lower, FX markets and the euro in particular have shown remarkable resilience towards the developments in the European political landscape over the weekend. The move lower was somewhat halted by very strong German industrial production data which rose 3 times more than expected (+2.8% m/m). Our Economists note that it suggests the IFO was “right” and the PMI “wrong”, since we have seen an unusual divergence between the 2 with the IFO pointing up and the PMIs down. Despite, the strong data, worrisome post-election headlines continue to emanate from Greece: the Democratic Left Party has refused to join any New Democracy/PASOK coalition; PASOK’s leader Venizelos has insisted that Greece should renegotiate the terms of its bailout; New Democracy leader Samaras has failed to form a new government giving up after only a few hours even though he had up to 3 days available to him for this purpose; and warnings from unnamed Greek finance ministry officials that the country may run out of funds by the end of June. To be sure, it would be dangerous to let recent price action obscure the risk of euro-unfriendly outcomes in the end, whether manifest in the form of greater tensions within Greece if the austerity drive continues, a halt in EU/IMF support if a new government tries to renegotiate earlier agreements – or at the extreme, speculation of a Greek exit from the Eurozone. For now, however, EURUSD is drawing support from the lingering threat of further Fed easing that is weighing on the US dollar, heavily skewed market positioning, and a recognition that the anti-austerity vote in Greece does not imply an anti-euro vote. Renewed risk aversion should ultimately be more evident in general yen strength not to mention a more vulnerable Australian dollar. AUDUSD did indeed struggle overnight weighed down by third successive trade deficit which again was wider than expected. Details emerged of the new Australian budget which will see a A$1.5bn surplus in 2012/13. GDP forecasts for coming years were left unchanged (3.25% in 2012/13), and the unemployment rate rising to 5.5%. There was limited FX impact on the news but we believe it indicates more scope for monetary easing and is therefore marginally negative for the AUD. Our Australia economists expect the cash rate will be 50 bp lower by August.
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UBS Investment Bank