The press response to Europe’s latest Greek bailout was pretty negative, maybe in part because the euro failed to gain any traction on Friday. The upshot is that we start the week with the broad EUR/USD 1.40-1.45 range holding, the mood slightly negative and not a lot of newsflow to help us along. US debt-ceiling talks may be more important. We remain optimistic, though as the euro fails to capitalise on good(ish) news, so the euro-sceptic majority feels vindicated.
The US still doesn’t have a debt ceiling agreement. Common sense decrees that some kind of an increase is likely at the 12th hour, but as with the Europeans, the inability to act more quickly and more decisively is confidence-sapping. The yen and the Swiss franc have had good days on Monday, the latter in particular. Is it too simplistic to conclude the Republicans want spending cuts, the Democrats want tax increases, the voters want neither and markets are unable to provide their usual role as enforcer of discipline?
UK GDP data are released tomorrow and a 0.1% increase is expected. With signs of discord re-appearing in the Coalition about fiscal restraint in a sluggish recovery, anything weaker than our 0.1% Q/Q increase will increase the volume of sterling bears – though the challenge is what to sell it against when euro, yen and dollar look this bad.
Another highlight this week will be Australian Q2 CPI data on Wednesday. We expect a slight dip in inflation to 3.2%, which would be enough to keep monetary policy on hold, and to leave us nervous of an AUD correction in the coming months. It has held up exceptionally in the face of falling rate expectations but we doubt that can continue.
Chicago and Dallas Fed indices are due, with markets fearful of softness. Beige Book (Tuesday) and Q2 GDP (Friday) are the main US focus aside from debt talks.
Seb On the sustainability of US deficits: In a risk averse environment, funds accelerate into EM and are recycled into the front end of the US Treasury market. The risk premium will be seen in the back end 10s30s or more probably 20s30s as well as labor spreads and US and then to a lesser extent US banks CDS. These banks may fund EUR balance sheets in EUR land and find it eventually more difficult to do so if the situation worsens a lot (a bit unlikely as you get free funding from Asia). Nonetheless EURUSD forwards will be interesting to watch for any signs they need to fund more out of USD land.
DXY support at 74 to watch. Gold in EUR or USD continues to be your friend. USDJPY should continue drifting higher. Precious metals should start to outperform CHF and eventually JPY (and especially AUD) as the feedback loop from a high currency to the economy starts to hit hard. Switzerland should be the one to watch with high cost basis in CHF.
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Societe Generale
Research & Analytics