Cross-winds Keep FX Quiet
FX markets for confined to narrow ranges in the European session with limited newsflow on the wires. The euro came under some modest pressure with the German IFO index below expectations at 105.3 (consensus 105.9, prev 106.9). UBS economics notes that although the subsections in the data are too volatile to draw conclusions, it fits to our overall view on the German economy: Domestic resilience, reflected in better sentiment in retail and construction, versus more skepticism in export-orientated manufacturing and a possible read-through from weaker European trade to wholesale/inventories. The absence of any major news in the Eurozone and the recent drop in implied vols has led to a somewhat-more-stable picture, though we remain cautious of any rallies with expectations for policy breakthroughs elevated. Elsewhere, the Swiss KoF raised its 2012 GDP forecast to +1.2% from +0.8%, while lowering the 2013 outlook to +1.7% from +1.9%. These forecasts are similar to the official forecasts of the Swiss government. USDJPY was the stand-out mover during an Asia session which was quieter than usual on account of a China holiday. US 2y yields were mostly unmoved and heavy yen selling out of Tokyo was inspired largely by FX technicals. Earlier, Moody’s downgraded the ratings of several global investment banks, although there was no further market reaction after the headlines hit, given the news had been leaked hours earlier by a TV channel. The meeting of Eurozone finance ministers concluded without any apparent agreement on any substantive issue. The question of how to handle the delicate ESM seniority issue was not resolved, and a decision will now be deferred until the EU summit on June 28-29. EFSF Chief Regling said that given Eurozone loans to Spain would amount to less than 10% of Spain GDP, the question of seniority is not as important as is sometimes believed. IMF Managing Director Lagarde, who also attended the meeting, sounded somewhat exasperated afterwards. She said that the Eurozone needs a fiscal union and a banking union with several elements – including regulatory supervision, deposit insurance, and a bank resolution mechanism. She also noted that the ECB has room to provide additional support via the SMP or traditional monetary policy. Eurogroup Chair Juncker confirmed that Greece will receive the EUR 1 bn previously withheld by end-June.
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