- Markets allow Hollande a brief honeymoon; more concerned about Greek divorce
Francois Hollande’s victory in the French Presidential election was expected, and so far the bond market reaction has been muted. Markets may be awaiting the outcome of the first Merkel-Hollande meeting to pronounce judgement; the meeting is said likely next week, and the focus will be on the extent to which the new French President tones down his anti-austerity campaign platform. In the meantime, political developments in other European nations will be important, the risk being that a softer approach by Hollande may be seen as providing a get-out opportunity for those nations squeezed most tightly by austerity measures. And nowhere is that potential for slippage on austerity commitments more pronounced than in Greece, where the electorate’s rejection of the two main political parties risks an unstable coalition government and potentially new elections. With the vote almost complete, anti-austerity parties look to have taken 151 of the 300 seats in parliament, calling into question the ability of New Democracy to form a workable government – and by extension the ability of Greece to come up with the next round of cuts necessary to secure release of the next instalment of bailout cash. Greek bonds and equities have reacted accordingly. While it can be argued that that anything that brings about less negative growth outcomes in the EZ may ultimately be positive, the additional uncertainty surrounding the path to fiscal recovery suggests further pressure on EURUSD and EUR crosses in the week ahead.
- Risk appetites sorely tested as growth concerns come further to the fore
Friday’s 115k NFP print was tempered slightly by an upward revision to March from 120k to 154k and, at first blush, the unemployment rate which fell to 8.1% from 8.2%. However, falling participation (-0.2%) was again responsible, now down to its lowest levels since 1981. While the report may not leave the Fed waving the white flag and moving swiftly to implement a new round of QE, it certainly keeps them on their toes and increasingly more data dependent. There are no indications that the economy is headed for a downturn, but at the same time, there are no indications that we are about to break into above trend growth. Fed speak in the coming week will now be of particularly keen interest – the soft March payrolls report could be dismissed as ‘one data point,’ but if the May report in June is also soft, it may be more a case of ‘3 strikes and out’ as far as FOMC resistance to more easing once ‘Twist’ rolls off in June. While this should ultimately mean more pressure on the USD, for now concerns about global growth and the inadequacy/inability of policy to do much about it, are dominating.
- AUD still the G10 global growth barometer
AUDUSD has been under pressure since the RBA’s surprise 50 bp cut last week. Our view is that simple yield-driven carry trades have not been a significant driver of AUD strength over recent months, but nonetheless lower yields add to a number of other negative factors. FX Reserve diversification has seen consistent flows into AAA Aussie govvies, but slowing Asian Central Bank FX Reserve accumulation and already-rich levels in the bonds may see this support wane. Meanwhile, reports suggest that some of the larger mining projects – which have supported the AUD on imported capital flows – are under review. Longer term, we remain bullish on the AUD, but some further softness appears inevitable given the break of a number of key technical levels on Friday. Still though, option desks remain very long gamma and we expect the weakness to remain orderly. European risks aside, local factors will also play a part: while AUDUSD is unlikely to receive a boost from tomorrow’s budget announcement, strong numbers from China later this week could help restore market confidence in global growth. The CPI and trade prints will be most important; April loan numbers will also be of interest, with March data tentatively suggesting that the credit cycle has turned more positive.
- IMM speculative community takes CAD longs back to near extremes
The highlights of Friday’s IMM numbers was an extension of the net CAD long back to extremes – just when the oil market and US growth worries are taking a toll, highlighting the potential for a short term purge of speculative longs.
BNP Paribas