G10 Currencies
EUR-USD: It finally arrived at 2.00 am (CET): the statement published by the European Finance Ministers relating to their meeting in Luxembourg (which started a day earlier). Those who had thought that following the approaches between Angela Merkel and Nicolas Sarkozy on the involvement of private bond holders everything would be quite quick to sort out were thoroughly disappointed though. The 1-page statement only says that “Ministers decided to define by early July the main parameters of a clear new financing strategy”.
Following this weak statement EUR-USD was unable to defend the 1.43 mark which the pair had regained on Friday. Why did the Eurogroup meeting not produce any more concrete results? There are different possible explanations, none of which is really positive for the euro.
(1) Perhaps the parties involved simply could not agree on the main features (how to split the burden?) of a new programme. A substantial contribution of the private bond holders in financing the package is still being mentioned. This is in contrast to it being voluntary. So questions remain unanswered as it had been expected that the heads of state and government who are meeting again later in the week were presented with the final rescue package. This would once again illustrate the structural weakness of the monetary union’s decision making process. If many parties with differing interests have a say it will of course be difficult to come to a decision.
(2) Should the ministers consider their vague promise to be sufficient they are in for a surprise over the coming days. Admittedly an immediate uncontrolled default of Greece is off the agenda for the time being. The Eurogroup made it clear in its statement that it does not want to risk the rating agencies putting Greece on default status. But the responsible parties have always made vague promises in the run up to almost every savings programme, so far these have not calmed the financial markets down. As a result the danger of contagion remains.
(3) Did the Ministers have some good reasons not to make a decision just yet? Almost any statement issued either officially by the Eurogroup or by individual European politicians refers to the need for reform and savings efforts in Greece. But these efforts are currently in doubt. It is certainly not surprising that savings efforts lead to protests among the population, but as Prime Minister Giorgios Papandreou failed to include the oppositions in his measures the political crisis has reached a new level. On Sunday Papandreou proposed a vote of confidence. The vote is projected to take place on Wednesday. However, Papandreou is considered to be the guarantor of Greece’s willingness to make savings. It would be a serious setback should he lose the vote. Moreover the Greek parliament still has to decide on the new savings measures. It therefore makes complete sense for the Eurogroup to wait whether the Greek will continue with their savings measures or not. The statement therefore says that the passing of important laws on “fiscal strategy and privatisation” will pave the way for the payment of the EUR 12bn. tranche which has been due for some time.
The votes due in Athens over the coming days will keep the FX market on its toes and will tend to put pressure on the euro. We assume that in the end Athens will present savings measures which will be deemed sufficient by the donor countries. In that case the euro has appreciation potential. In case that the decision in Athens should become completely derailed (Papandreou loses the confidence vote or parliament does not pass the new savings measures) a short term default of Greece seems unavoidable. In that case it would be difficult for the European politicians to provide further funds to Athens in consideration for their own electorates. This risk scenario is likely to put further pressure on the euro for the time being.
Emerging Market Currencies
HUF: The Hungarian central bank is likely to again leave key rates unchanged at 6.00% at today’s rate meeting. In May the inflation rate had recorded a surprise fall from 4.7% yoy in April to 3.9%. As a result the central bank is likely to stick to its new favourite mantra that “inflation will in all likelihood ease back towards its inflation target by the end of 2012 even without further rate steps”. As a result interest rates are unlikely to provide much support for the forint. Any changes in sentiment continue to have a particularly big effect on USD-HUF. If there is a break in the Eurozone debt crisis we therefore suggest buying on dips in USD-HUF.
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