“Its like déjà-vu, all over again” – Yogi Berra
After the relief of a ‘pro-bailout’ Greek government and a G20 communique that urged and promised action to stem the Eurozone crisis, a sense of reality has returned to the market sentiment. In light of the recent deterioration of global economic activity, it is going to take more than encouraging descriptive narrative to solve the Eurozone’s ills.
In the US, while the Fed stopped short of physical money printing this week, opting to twist instead, the recent string of data keeps commentators focus on QE3 firmly in place. Yesterday’s release of the Phily Fed business outlook survey did not bode well for the higher profile ISM release over the coming weeks and the initial jobless claims continue to point to a less than inspiring level of job creation in the US. In Asia there has been growing concern that the troubles of the Eurozone are having a more meaningful impact on the Asian economies. In fact Japan posted its first trade deficit with the Eurozone on record last month! Pressure on the Eurozone to ‘do something’ is growing from all corners of the globe!
In the UK, after the Bank of England Governor, Mervyn King was in the (biggest possible) minority in voting for further QE at the June Monteary Policy Committee meeting, the market has now almost fully priced in the probability of GBP 50 billion at the July 5 policy meeting. While economic theory may suggest that this should be negative for a currency, in the current environment, in conjunction with the other proactive credit measures and a degree of independence from the Eurozone, I would expect that in practice, further asset purchases are supportive for the pound, as previous rounds have proven to be.
Japan
Given the move lower in the long end interest rates of the UK and most significantly the US, it is perhaps surprising that the JPY has weakened notably over recent sessions, where typically the JPY is ‘negatively’ correlated to US rates. The formal election of two ‘doves’ to the Bank of Japan policy board has been touted as a driving force and the possibility that there has been some stealth intervention from the BoJ, given the potential Eurozone outcomes cannot be dismissed. From here, however, I would suggest that further gains will be more difficult without a positive development in Europe.
A week to save the Eurozone?
This brings us back to the troubles of the Eurozone. Mario Monti, the technocratic Italian Prime Minister, warned overnight that if the Eurozone summit on the June 28 /29 fails to resolve the problems of the eurozone quickly then not only “public opinion, but also that of governments and parliament…will turn against further integration” as reported in the Guardian newspaper espousing his view that “we have a week to save the eurozone”.
Raising the stakes
So it seems that yet again the market is resting its hopes on Eurozone officials to come up with a plan to save the Eurozone, a panacea for the debt crisis. I sense that the markets and the people of the Eurozone are running out of patience with this continual déjà vu. As it stands I am in total agreement with Sr Monti, so, it seems, is Christine Lagarde too who warned overnight that “long term measures being considered by EU leaders ahead of the summit next week are not enough”.
Limited data today leaves the market susceptible to comment and rhetoric but I would suggest that USD buying will continue to be the dominant theme, as equities and broader risk asset positions are pared back. EURGBP should continue to grind lower in this environment where there should be a lower level of volatility than in the USD crosses.
Neil Staines,
SAXO BANK