Euro Looks Past Negatives
Despite a flurry of negative developments in the Eurozone, the euro was well supported and pushed higher in the European session. The main driver of the support came from the sovereign debt markets where periphery spreads versus Germany tightened following the sharp sell-off yesterday. The Spanish press reported that the scheduled audit on the countries banking sector had been delayed – though sources from the Bank of Spain later confirmed that the delay referred to the full report (deferred to September from July 31) rather than the preliminary report due before. EURUSD then came under pressure when the German constitutional court ruled that the government didn’t inform parliament sufficiently about the configuration of the ESM. However a ruling coalition source later said that the constitutional court ruling won’t impact ratification of ESM or fiscal pact and the euro reversed the losses. Elsewhere, GBP underperformed after some weak CPI data (-0.1% m/m, +2.8% y/y vs consensus +3.0% y/y/), the lowest since December 2009. There will be no need for the Bank of England governor to write to the Chancellor of the Exchequer to explain why the inflation target band of 1-3% has been missed, as has become a quarterly habit. This also opens the door to further QE, which we expect in August. SEK also traded on a soft note as the unemployment rate jumped to 8.1% in May (consensus: 7.8%). EURSEK remains confined to a fairly tight range however. Negotiations to form a coalition government continue in Greece, with reports suggesting that an agreement between New Democracy, Pasok and possibly the Democratic Left will come soon. The minutes from the RBA’s June 6 meeting showed no sign of panic, and the decision to cut 25 bp off the cash rate was described as “finely balanced”. The Board also noted that the benefits of the cuts made so far would “flow through the domestic economy over the coming months”, which implies a willingness to wait-and-see before taking additional policy measures. The rates market is pricing in 100 bp in further easing over the next 12m, however our Australia economists conclude from these minutes that we are nearer the end of the cutting cycle than current market pricing suggests. They now sees a reduced chance of a cut in July, but still call for 25 bp of further easing at the August meeting.. Elsewhere, investors continue to debate whether the ECB will reactive its SMP program in a bid to drive down Spanish sovereign yields which yesterday reached new Eurozone highs. A reactivation would likely be a significant
short-term euro positive, however we do not see much chance of this in advance of the EU Summit on June 28-29, even though Spanish bond markets may remain under stress as Thursday’s auction approaches. Greece is still without a government in the wake of the weekend election, although we do see a government emerge once coalition negotiations have concluded – the only question is how long such an administration can survive. Today, the Bank of England is due to announce the size of the inaugural auction of its Extended Collateral Term Liquidity Facility which is due to take place on Wednesday. With investors currently inclined to reward the currencies of proactive central banks, any auction size greater than GBP 5 bn could eventually trigger some sterling upside, after what would be an initial bout of sterling weakness.
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