G10 Currencies
EUR-USD: Are markets no longer worried about a Greek default? One would be forgiven for thinking so, after all EUR-USD still trades above 1.46 despite the fact that the German Minister of Finance Wolfgang Schauble now demands a restructuring of Greek debt.
In a letter to ECB president Jean-Claude Trichet and the Eurozone Finance Ministers confirmed by the Ministry of Finance Schauble supports a “fair distribution of the burden” between tax payers and private investors. So what’s the problem?
Everyone seems to have worked out now that Greece needs more money. Not even the most cheerful optimists any longer believe that Athens will be able to finance itself on the capital markets in 2012. The German government now wants to avoid the impression that it is mainly the tax payers who will have to shoulder the burden. Therefore Schauble demands that the contribution of the bond holders goes beyond the demands of a Vienna Initiative. This term more or less describes the voluntary re-investment into the corresponding new bonds when the old ones reach maturity (see our Hotspot Is a new Vienna Initiative the solution? dated 1st June on the issue). Should such a system really work it would be easier for Greece to roll over its debt. Schauble on the other hand wants a further reaching “quantifiable and substantial contribution of the investors in Greek bonds”.
By doing so he risks that the rating agencies will rate Greece as a default. The agencies have all made it clear that it does not matter whether a restructuring is voluntary or not. As soon as the conditions for the bond holders deteriorate they assume that it is a default as nobody really renounces demands voluntarily. The ECB has so far been very clearly opposed to Schauble’s demands, as it is particularly worried about a contagion of the banking system. This is particularly likely if the restructuring leads to the CDS being triggered. Banks that sold CDS would then face considerable demands.
What happens next? It is clear that the ECB’s point of view (and that of many other governments) differs widely from that of the German government. It is difficult to say at this stage who is going to give in in the end. Moreover time is running out. The new aid package was meant to be ready by 20th June (Eurogroup meeting in Luxembourg). Schauble has warned explicitly about a “disorganised national insolvency” but time pressures and the complexity of the matter might cause exactly that to happen. The FX market does not seem to have grasped this risk so far. A controversial debate between the individual parties over the coming days is likely to change that. That means that things will remain interesting until 20th June and if anything volatility is likely to rise. This debate will tend to put pressure on the euro. Due to a lack of data publications we are unlikely to see any momentum on the data front. This leaves the showdown between ECB and Berlin.
JPY: This morning USD-JPY is again trading just below the 80 mark. We nonetheless consider immediate interventions to be unlikely. So far the BoJ (or the Ministry of Finance responsible for interventions) have rarely defended a certain level but have pursued a policy of leaning against the wind. Does that mean that interventions are off the agenda? Not at all. In particular if the speed of USD-JPY losses picks up again Tokyo is likely to act – as experience teaches. But before that we would no doubt hear officials to give verbal warnings. A first small intervention came from Chief Cabinet Secretary Yukio Edano today who pointed out that the government was watching developments on the FX markets closely.
CHF: In May prices in Switzerland rose by 0.4% yoy, slightly more than expected. This publication confirms us in our view that there is no need for the SNB to intervene against the Swiss franc as there is no danger of deflation. Secondly there is no urgent need for the SNB to raise rates in its meeting next week either. Inflation is still relatively moderate at present and Q1 GDP disappointed. We therefore consider it likely that the SNB will leave rates unchanged one more time next week beginning the rate hike cycle in September. The franc came under slight pressure yesterday. Rate hike expectations might have been adjusted slightly following the moderate publication, as there has been some speculation recently that the SNB would raise rates next week.
Emerging Market Currencies
PLN: Things are going to get interesting again in Poland as the MPC will decide on key rates today. Once again the decision is not going to be easy. 26 of the 33 analysts polled by Bloomberg expect a 25bp rate hike and thus the NBP’s fourth rate step this year. The recent rise in inflation expectations as well as higher than expected wage growth in April are pointing that way. Consumption also remains robust as reflected by the strong increase in retail sales in April. Based on the arguments for the last key rate hike the probability of the NBP continuing its rate hike cycle today is indeed high. At the time of the last meeting fears of rising inflation expectations had been decisive. However, the Polish central bank is known for being unpredictable so that a surprise – thus an upward spike in EUR-PLN – cannot be excluded today.
HUF: With a rise of 9.5% yoy the data on Hungarian industrial production came in above expectations – in contrast with the current regional trend. That means that despite weakening global demand the Hungarian economy has been able to stand up relatively well. That is however unlikely to support the forint as EUR-HUF is likely to run out of steam below 265. Not even the upgrade of the rating outlook on Monday was sufficient to provide any positive momentum. The current levels are above all, the result of rising risk appetite on the market. Against the background of the Eurozone debt crisis, with a possible second aid package for Greece potentially causing turbulence, we might see a reversal to the upside in EUR-HUF.
BRL: In May the rate of inflation in Brazil continued to rise marginally from 6.51% previously to 6.55% now. Even if economic growth in Brazil is weakening it will have to be seen whether this will take the pressure off prices. There is likely the need for further action on the part of the Brazilian central bank initially and we expect to see a further 25bp rate hike to 12.25% tonight. It will be interesting to see whether the Brazilian central bank will announce an imminent pause in the rate hike cycle. Recently officials had stated their intention to extend the adjustment process, but weaker economic data in Brazil and globally might cause it to take a break a little earlier. This is unlikely to put pressure on the real. The rate level remains attractive and in any case it is once again external factors moving the real.
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