- Barrage of Eurozone news leaves EUR under pressure
- CHF strength likely to be limited from here as SNB continues to express concern over FX strength
- Higher than expected Norwegian GDP to keep NOK well bid
Headline out of Europe led markets trading with a risk of tone on Monday. While uncertainty remains over Greece, other headlines across Europe were no saving grace for EUR. Besides the Socialists defeat and S&P’s outlook downgrade of Italy over the weekend, other factors including the softer than expected Eurozone PMIs and the downgrade of Belgium’s rating outlook to negative by Fitch kept EUR vulnerable to further losses. The rating downgrade of Belgium to negative is in line with S&P’s rating outlook. The real threat to EUR would be if any of the five AAA rated countries (Germany, France, Netherlands, Finland, Austria) who are guaranteeing the AAA status of the EFSF are downgraded.
Nevertheless, Greece remains the focal point of this never ending saga. The Greek Finance Minister mentioned that the IMF has made clear that it cannot hand out the next tranche of aid unless Greece has EU support for 2012 funding and noted that without this next tranche Greece will default. The tranche likely comes with the condition that Greece must do its part to trim its deficit especially since Northern Europe has often expressed its dissent to bail out Southern Europe. This further highlights the lack of closure the markets will receive on Greece any time soon. Key support for EURUSD holds at 1.3977, the 100-day moving average.
With peripherals under pressure, EURCHF traded down to a record low of 1.23235. Further CHF strength from here is likely to be limited, barring any Greek credit event. SNB’s Jordan said he was very worried about CHF’s rise and would act if deflationary risks were to emerge. He also mentioned that the export sector has coped reasonably well despite CHF appreciation. Despite the fact that CHF looks ‘overvalued’ on a REER basis, It is unlikely that the SNB will intervene in the FX markets given its failed intervention last year. However, jawboning may be its main method in easing some of the pressure of CHF. With Swiss CPI subdued, the SNB will likely keep rates on hold. As such, we don’t expect the SNB to hike until Q3 but this remains contingent on the strength of the currency.
We reiterate our short GBPNOK trade of the week given our expectations of a strong Norwegian Q1 GDP print. In addition, we favour short EURSEK positions. The stellar performance of the Swedish economy serves as a proxy for the strength of the core European countries. Sweden is part of the European Union, but not the Eurozone, and has similar trading patterns as Germany. Both of the Scandinavian countries exemplify fiscal fitness which should keep NOK and SEK well supported against EUR.
Meanwhile on the data front, the German Ifo survey is likely to confirm the loss of momentum, but it has a long way to go before they signal anything other than continued robust growth. Also, UK public finance data will have to show the improving finances of the government. Otherwise, it may prove to be negative for GBP.
BNP Paribas
Corporate & Investment Banking