G10 Currencies
EUR: The euro’s small recovery seen on the Asian markets came to an abrupt end this morning. EUR-USD collapsed from levels close to 1.42 to 1.4091. Hardly surprising.
The euro is under increasing pressure due to the continued uncertainty surrounding Greece. Even if we continue to expect that a solution will be found in time, the situation is becoming increasingly tense for two reasons:
First of all the Greek government is in crisis. Its majority in parliament has dwindled and Prime Minister Giorgos Papandreou’s efforts to include the opposition into a government of national unity failed yesterday due the opposition demands to renegotiate the savings measures. There would be no time for that. As a result the financial crisis is increasingly turning into a political crisis as well. As a consequence parliament will hold a vote of confidence on the Papandreou government on Sunday. His socialist PASOK party only holds a thin majority of 5 votes in the 300 seat parliament. The opposition is calling for early elections. Should Papandreou lose the vote of confidence this would be a considerable set back regarding a new aid package for Athens. The increasingly fierce protests against the planned savings measures also create the risk that such a package will fail because the Greeks fail to recognise the seriousness of the situation.
Secondly a compromise regarding the German demand of a substantial integration of bond holders is becoming increasingly difficult to obtain. While the ECB and other countries are aiming for a type of “Vienna Initiative” (i.e. the voluntary subscription of new bonds once the old ones mature) the German Finance Minister Schauble’s demands go well beyond that. The rating agency Fitch has now made it clear that even a “Vienna Initiative” would be considered to be a sign of a Greek default. Whether bond holders were taking part on a voluntary or obligatory basis was of little relevance as they had to accept a loss in value of their investment in any case. The bonds would be paid back fully at the end of their maturity but only in the form of new bonds with unchanged yields. As a consequence Fitch would regard that as a distressed debt exchange and thus a default, even if the involvement of the bond holders was taking place on a voluntary basis. The German demand for an involvement of the bond holders is increasingly becoming a knock out criterion for an aid package.
As a result speculation as to the effects of a Greek default on the European financial system is going to rise. It is often assumed that the Greek banking system would collapse within a short space of time, as the ECB has announced that Greek bonds would no longer be accepted as collateral in case of a default. Greek commercial banks would then no longer be able to receive liquidity via the ECB’s repo trades, while they have been cut off the interbank market for some time. A default of Greece would not necessarily lead to the collapse of the banking system though. Even without the ECB’s go-ahead the Greek central bank would be able to provide liquidity to its own commercial banks under the so-called Emergency Liquidity Assistance (ELA) as has happened in Ireland. That is possible as the national central bank decides which collateral to accept under the conditions of the ELA.
What would the implementation of the ELA mean for the euro? Initially it would no doubt reduce the systemic risks for the European financial system. If major turbulence was to be avoided this would also limit the pressure exerted on the euro. Greece’s unlimited printing of money bypassing the ECB (that is exactly what the ELA means) would certainly put a lot of strain on the monetary union long term.
As a result the euro is likely to remain under pressure today. From a technical point of view the next support is located in the area around 1.4020/10. On the data front Eurozone consumer prices are on the agenda today. This is unlikely to provide any notable support for the euro. Instead inflation might have eased slightly in May thus hardly fuelling rate speculation.
CHF: At today’s quarterly meeting the SNB is likely to leave rates unchanged once again. The appreciation of the Swiss franc seen over the past few weeks is likely to prevent the SNB from taking a first rate step. Therefore the monetary policy assessment, to be published as part of the rate meeting, is going to be of the greatest interest. Markets are likely to look for the first signs as to whether the SNB might begin to hike rates at its next meeting in September. The SNB will probably raise the forecast for the inflation path. Should it stress more notably than before that the expansionary monetary policy cannot be continued for too long without threatening price stability markets might consider this to be a hawkish comment. The SNB could on the other hand again sound concerned about possible negative effects of the strong Swiss franc on the economy thus causing speculation about a later rate step. While a hawkish SNB is likely to support the franc a dovish central bank would probably only put temporary pressure on the franc in the current market environment. The franc is only likely to come under heavy pressure should the SNB signal possible interventions. But as there is no risk of deflation at present we consider that to be unlikely.
Emerging Market Currencies
PLN: Consumer prices in May increased by 5% yoy thus exceeding even the most pessimistic analyst expectations yesterday. But even some members of the MPC are likely to have been surprised by the data – Anna Zielinska-Glebocka had stated just beforehand that she expected inflation to peak at 4.6 – 4.7%. The publication caused EUR-PLN to head rapidly south, as rate speculation made the rounds again. It is however still more than uncertain whether the central bank really will abandon plans of a break in the rate cycle. Today’s wage data and the core inflation data due for publication next week will shed more light on the issue. Should they also signal rising inflation pressure rate expectations are likely to be raised again giving some support to the PLN.
HUF: At 3.9% the Hungarian inflation rate remained well below expectations of 4.4% in May. This increases the likelihood that the central bank will sound less hawkish at its next central bank meeting on Monday. Even though gross wages adjusted by bonus and one-off payments have risen at the fastest rate since 2008, in view of the moderate rate of inflation the central bank is unlikely to move away from its mantra of inflation rate easing back towards the inflation target by the end of 2012 without further rate steps. This was reflected in much lower forint levels against the euro and US dollar. Increased uncertainty on the markets also contributed its bit. We do not expect any notable forint gains in the near future.
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