G10 Currencies
EUR-USD: EUR-USD was able to stabilise somewhat in the Asian trade this morning and has temporarily breached the 1.43 mark. The trading range between 1.4050 and 1.4450 remains valid though. The currency pair seems trapped between the difficulties with the US debt limits and the European debt crisis, with Greece remaining the dominating subject. Even if the representatives of the Eurogroup have long since abandoned their long-standing point of view that Greece will not need further aid this has not really poured oil on troubled waters. It does not really matter in this context what exactly the aid for Greece will look like. Slowly but surely it is becoming obvious that the donor countries have an issue with further payments. The German chancellor Angela Merkel is being criticised heavily by the opposition that she is asking the Greeks to make more of an effort when it comes to consolidating their national finances, in particular the reference to the early retirement age and long holidays attracted heavy criticism from the opposition.
What does that mean for the euro? First of all Mrs Merkel is likely to reflect the general mood amongst Germans quite accurately and secondly she is referring to the core of the Greek issue. The criticism is probably not applicable for all of Greece but for the public sector. Many Greeks have demanded that the measures and reforms in the public sector progress more rapidly. Not only is this sector hopelessly inflated and inefficient. Anyone in Greece who is not a public sector worker objects to the often absurd privileges in the same way foreigners do. Without far-reaching measures in the public sector Athens will be unable to achieve the required progress to make further aid payments politically acceptable in the donor countries long term. Sadly it is exactly this public sector which would have to bring the reforms in Greece under way and implement them.
As a result the Eurogroup representatives are facing a difficult conflict: if they hesitate too much with their bailouts the horror image of an enforced restructuring (i.e. a default) will take centre-stage again threatening to put pressure on the whole of Europe. Rapid aid payments on the other hand might give the impression to the Greek public sector that they can continue as before (at least in most respects). In the end this results in a contradictory communication policy from the Eurogroup which is also putting pressure on the euro now. This constellation is unlikely to change short term. Following the official resignation of Dominique Strauss-Kahn early today speculation regarding his successor is also likely to centre on the question whether possible candidates will be prepared to bailout Greece quickly.
On the data front attention will today focus on the US housing market. Existing home sales are likely to have recorded a more notable mom rise. That is no more than a normalisation though. Initial jobless claims always due for publication on a Thursday have more potential to surprise markets on the upside. It is however unlikely to cause a retest of Monday’s low at 1.4050.
JPY: Anyone claiming that economic data has no effect on the yen is still correct. The best example is the Q1 GDP data published last night. At 0.9% the fall was not only almost twice as high as expected (-0.5%) but the previous quarter was also corrected notably downwards from
-0.3% to -0.8%. The data is particularly concerning as Q1 was only partially affected by the earth quake (11th March). This makes Japan one of the economically weakest countries in the world even if the Japanese Minister of the Economy Kaoru Yosano does not yet want to talk about a recession, despite the fact that the fall in Q2 is likely to be even higher due to the effect of the earth quake. The data did however not cause any yen weakness. Instead USD-JPY bounced off the resistance at 81.80. That does not change the fact that among the G10 currencies the yen remains the most unattractive currency until year end for us.
GBP: The minutes from the last MPC meeting were released yesterday. As expected there was no change in the voting pattern of 6-3 in favour of keeping rates on hold at 0.5%. The minutes indicated ongoing concerns about the subdued level of economic activity and the expectation that high unemployment might persist for some time. Therefore today’s retail sales data could offer some insight into the recent performance of the UK economy. The April sales could be positively distorted by the bank holidays in April including Easter and the royal wedding. Recent retail sales have surprised to the upside, albeit that expectations were quite low, hence positive surprises have had a limited impact on the currency. If retail sales disappoint we expect to see further pressure on GBP, though the upside should be capped around 0.8920.
Emerging Market Currencies
HUF: 160 is the magic number for the fixed CHF-HUF exchange rate for loan repayments envisaged by the government to take the pressure off debtors with foreign currency denominated loans. That caused a stir at the FX markets as the exchange rate of 190 mentioned previously was well above the level now aimed for. It is hardly surprising that the banks oppose this additional burden and negotiations are lengthy. As the government has agreed to reduce the banking levy and is thus trying to accommodate the banks, both sides have already signalled that an agreement will be reached. Markets seem to ask the question though whether the long suffering Hungarian banking sector will be able to shoulder yet another burden. As a result a forint recovery is still not in sight.
PLN: As feared by the Polish central bank the high consumer price inflation is now beginning to have an effect on wage growth. As inflation rates have remained above the NBP’s target for more than six months it is understandable that the working population wants to be compensated with higher wages. At 5.9% the yoy rate was not just well above consensus but also above the most pessimistic outlook of the analysts polled by Bloomberg. Despite the dovish comments from MPC member Elzbieta Chojna-Duch following the publication of the data the zloty was able to appreciate against the euro during the course of the day. According to Chojna-Duch the wage data was no reason for concern and she did not expect the inflation rate to rise above 5% (April: 4.5%yoy). That is nothing new though from the mouth of a convicted dove. The minutes of the last rate meeting will be published today and should provide a better insight into the majority opinion among MPC members. Should the minutes be even more hawkish than the statement following the previous meeting further zloty gains might be possible.
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