G10 Currencies
EUR-USD: Having traded below the 1.40 mark for the first time since Mid-March again, it looks as if EUR-USD has recovered slightly this morning. The news on the debt crisis is however little suited to support the euro. Following Italy Belgium’s rating outlook was now also downgraded to negative. That means the country is in danger of losing its AA+ rating, at least with S&P. The rating agency is of the view that since the country has been without a government since the parliamentary elections in mid-2010 the savings measures and thus the budget targets will be missed.
In Greece on the other hand the pressure exerted on the government by the EU and IMF seems to be having an effect. Athens announced new savings measures yesterday, which will amount to a further EUR 6bn this year alone. With these measures Athens wants to prevent the imminent collapse as the payment of the next EUR 12bn tranche of the 110bn packet has so far been prevented by the lack of reforms being implemented and Athens is in danger of becoming insolvent in Mid-July. We consider news that the IMF has made the payment of the next tranche conditional of further EU guarantees for 2012 (Finance Minister George Papaconstantinou allegedly said that in a televised interview) to be questionable as it would clearly contravene the IMF’s usual approach. But that is not Greece’s only problem. There is not just a lack of short term liquidity but also in follow-up financing once the current programme comes to an end. It seems impossible at present that Greece should then be able to finance itself on the capital markets.
Just for clarification: Greece’s new savings programme might lead to the payment of the next IMF and EU tranche but it is much too late to consolidate the national finances of an over-indebted country. So what can be done? One possibility would be a reduction of Greek debt via a restructuring. In doing so an official default would however have to be avoided if one does not want to risk renewed problems for the entire European financial system. There is however a danger that not enough investors will agree to the voluntary exchange of their bonds into new securities. Moreover it will hardly be possible to reduce the Greek debt so far that the country will be able to get by without foreign aid in future. Another possibility are further loans. These would not solve the underlying problem but would buy time and would therefore probably be well received by the FX market. For weeks a volume of EUR 30bn to 60bn has been mentioned. But with a view to its own voters the Eurogroup will struggle to agree to these loans until the IMF releases the next tranche. In the end it has been useful to include the IMF (on the insistence of Germany) as this prevents that funds are allocated to Greece too quickly and without demanding anything in return. This is positive for the euro long term, but puts pressure on the currency short term. The pressure is only likely to ease once the EU and IMF experts arriving in Athens on Wednesday give the go-ahead for the payment of the next tranche.
On the data side there is a real market mover on the agenda today in the shape of the Ifo business sentiment index. However, the situation in Germany is anything but decisive for the euro at present. So from that point of view mainly bad data might put additional pressure on the weakened euro. Does that mean that the risk in EUR-USD at 10:00am CEST is pointing exclusively downwards? Things are unlikely to be that straightforward as market participants might use a positive surprise for a further correction of the heavy losses in EUR-USD seen over the past few days. We expect an Ifo result slightly below consensus though. It seems questionable whether EUR-USD will then be able to defend the 1.40 mark.
NOK: It is obvious with EUR-NOK that external factors had the upper hand at the start of the week. Yesterday the oil price was under pressure and the NOK as well. But at least this morning attention will focus on local factors as the Q1 GDP data is due for publication. Overall growth (including the oil and gas sector) had risen considerably in Q4, a development due to extraordinary effects though. Moreover mainland GDP is the more important data for Norges Bank. Following rather disappointing +0.3% qoq in Q4 it is likely to have risen by 0.8% in Q1. But only a much better result would prevent EUR-NOK rising towards 7.90-7.9050. If the oil price remains under pressure as was the case yesterday EUR-NOK will continue to trend upwards.
Emerging Market Currencies
HUF: The March retail sales will be a non-event today, whereas the details on the agreement between the government and the banking sector, who have settled on the fixed CHF-HUF exchange rate for the repayment of foreign currency denominated loans, will grab the headlines. First Sneak Preview details published on Friday had caused much movement in the forint. The envisaged price of CHF-HUF at 180 would cause considerable loss of earnings for the banks. It is still unclear whether the rise of the Swiss franc on Friday was due to the hedging activities of the Hungarian banks. But it is clear that one or several of the main protagonists will have to bear the costs – government, banking sector and/or households. It seems likely that the exchange rate risk will remain with the households. With the concept of the secondary loan, which results from the difference between the actual and paid exchange rate on a separate account discussed so far, the repayment of the loans by the households would merely been postponed. In this environment forint gains against the euro are not in sight. We will keep you updated on the situation with an FX Hotspot.
LatAm: Of course the bad sentiment on the FX markets has also had an effect on the Latin American currencies. The Chilean peso in particular came under strong pressure against the US dollar. The fall in copper prices is likely to have hastened the downward trend. But also comments by central bank governor Jose De Gregorio have not exactly helped. On Friday evening De Gregorio mentioned the possibility that the central bank might take a break in its rate hike cycle. He did however make it clear that the central bank would also be willing to keep raising interest rates by a 50bp should inflation risk rise, even if he considers this to be currently less likely. The central bank made it clear at the last rate meeting in Mid-May that it was capable of providing a surprise. Rather than reducing the pace to 25bp it once again raised key rates by 50bp.
Against the background of rising rates we still see upward potential for the Latin American currencies. At present currencies are once again driven by external factors though. As soon as the situation on the markets calms down again the uptrend against the dollar should resume.
ISK: No, a liberalisation of the capital markets in Iceland or a free float of the krona is not likely to be on the agenda for some time yet. But Iceland is demonstrating its good will. The strong adjustment recession, drastic capital controls and the IMF transfers have caused a strong rise in Iceland’s currency reserves over the past few months. The central bank therefore has the possibility to carry out a first auction which will make it possible for investors to sell the krona buying euros instead. This auction, which will be held on 7th June, will be processed through local banks and comprises EUR 90m. It is only directed to capital account transactions and applies to holdings which have been owned continuously by the investor since 28th November 2008. More recent or current transactions are excluded. So some investors can therefore have hopes of being able to convert some of their funds frozen in ISK for over 2 ? years into euros. The investors will however have to accept some exchange losses as EUR-ISK has been trading well above 100 since March 2008 and on the Icelandic on-shore market is currently trading around 164-165. But nonetheless the central bank will likely receive many offers, as many will act according to the motto: “better a bird in hand than two in the bush”.
Commerzbank Corporates & Markets
Foreign Exchange
EUR-USD: Having traded below the 1.40 mark for the first time since Mid-March again, it looks as if EUR-USD has recovered slightly this morning. The news on the debt crisis is however little suited to support the euro. Following Italy Belgium’s rating outlook was now also downgraded to negative. That means the country is in danger of losing its AA+ rating, at least with S&P. The rating agency is of the view that since the country has been without a government since the parliamentary elections in mid-2010 the savings measures and thus the budget targets will be missed.
In Greece on the other hand the pressure exerted on the government by the EU and IMF seems to be having an effect. Athens announced new savings measures yesterday, which will amount to a further EUR 6bn this year alone. With these measures Athens wants to prevent the imminent collapse as the payment of the next EUR 12bn tranche of the 110bn packet has so far been prevented by the lack of reforms being implemented and Athens is in danger of becoming insolvent in Mid-July. We consider news that the IMF has made the payment of the next tranche conditional of further EU guarantees for 2012 (Finance Minister George Papaconstantinou allegedly said that in a televised interview) to be questionable as it would clearly contravene the IMF’s usual approach. But that is not Greece’s only problem. There is not just a lack of short term liquidity but also in follow-up financing once the current programme comes to an end. It seems impossible at present that Greece should then be able to finance itself on the capital markets.
Just for clarification: Greece’s new savings programme might lead to the payment of the next IMF and EU tranche but it is much too late to consolidate the national finances of an over-indebted country. So what can be done? One possibility would be a reduction of Greek debt via a restructuring. In doing so an official default would however have to be avoided if one does not want to risk renewed problems for the entire European financial system. There is however a danger that not enough investors will agree to the voluntary exchange of their bonds into new securities. Moreover it will hardly be possible to reduce the Greek debt so far that the country will be able to get by without foreign aid in future. Another possibility are further loans. These would not solve the underlying problem but would buy time and would therefore probably be well received by the FX market. For weeks a volume of EUR 30bn to 60bn has been mentioned. But with a view to its own voters the Eurogroup will struggle to agree to these loans until the IMF releases the next tranche. In the end it has been useful to include the IMF (on the insistence of Germany) as this prevents that funds are allocated to Greece too quickly and without demanding anything in return. This is positive for the euro long term, but puts pressure on the currency short term. The pressure is only likely to ease once the EU and IMF experts arriving in Athens on Wednesday give the go-ahead for the payment of the next tranche.
On the data side there is a real market mover on the agenda today in the shape of the Ifo business sentiment index. However, the situation in Germany is anything but decisive for the euro at present. So from that point of view mainly bad data might put additional pressure on the weakened euro. Does that mean that the risk in EUR-USD at 10:00am CEST is pointing exclusively downwards? Things are unlikely to be that straightforward as market participants might use a positive surprise for a further correction of the heavy losses in EUR-USD seen over the past few days. We expect an Ifo result slightly below consensus though. It seems questionable whether EUR-USD will then be able to defend the 1.40 mark.
NOK: It is obvious with EUR-NOK that external factors had the upper hand at the start of the week. Yesterday the oil price was under pressure and the NOK as well. But at least this morning attention will focus on local factors as the Q1 GDP data is due for publication. Overall growth (including the oil and gas sector) had risen considerably in Q4, a development due to extraordinary effects though. Moreover mainland GDP is the more important data for Norges Bank. Following rather disappointing +0.3% qoq in Q4 it is likely to have risen by 0.8% in Q1. But only a much better result would prevent EUR-NOK rising towards 7.90-7.9050. If the oil price remains under pressure as was the case yesterday EUR-NOK will continue to trend upwards.
Emerging Market Currencies
HUF: The March retail sales will be a non-event today, whereas the details on the agreement between the government and the banking sector, who have settled on the fixed CHF-HUF exchange rate for the repayment of foreign currency denominated loans, will grab the headlines. First Sneak Preview details published on Friday had caused much movement in the forint. The envisaged price of CHF-HUF at 180 would cause considerable loss of earnings for the banks. It is still unclear whether the rise of the Swiss franc on Friday was due to the hedging activities of the Hungarian banks. But it is clear that one or several of the main protagonists will have to bear the costs – government, banking sector and/or households. It seems likely that the exchange rate risk will remain with the households. With the concept of the secondary loan, which results from the difference between the actual and paid exchange rate on a separate account discussed so far, the repayment of the loans by the households would merely been postponed. In this environment forint gains against the euro are not in sight. We will keep you updated on the situation with an FX Hotspot.
LatAm: Of course the bad sentiment on the FX markets has also had an effect on the Latin American currencies. The Chilean peso in particular came under strong pressure against the US dollar. The fall in copper prices is likely to have hastened the downward trend. But also comments by central bank governor Jose De Gregorio have not exactly helped. On Friday evening De Gregorio mentioned the possibility that the central bank might take a break in its rate hike cycle. He did however make it clear that the central bank would also be willing to keep raising interest rates by a 50bp should inflation risk rise, even if he considers this to be currently less likely. The central bank made it clear at the last rate meeting in Mid-May that it was capable of providing a surprise. Rather than reducing the pace to 25bp it once again raised key rates by 50bp.
Against the background of rising rates we still see upward potential for the Latin American currencies. At present currencies are once again driven by external factors though. As soon as the situation on the markets calms down again the uptrend against the dollar should resume.
ISK: No, a liberalisation of the capital markets in Iceland or a free float of the krona is not likely to be on the agenda for some time yet. But Iceland is demonstrating its good will. The strong adjustment recession, drastic capital controls and the IMF transfers have caused a strong rise in Iceland’s currency reserves over the past few months. The central bank therefore has the possibility to carry out a first auction which will make it possible for investors to sell the krona buying euros instead. This auction, which will be held on 7th June, will be processed through local banks and comprises EUR 90m. It is only directed to capital account transactions and applies to holdings which have been owned continuously by the investor since 28th November 2008. More recent or current transactions are excluded. So some investors can therefore have hopes of being able to convert some of their funds frozen in ISK for over 2 ½ years into euros. The investors will however have to accept some exchange losses as EUR-ISK has been trading well above 100 since March 2008 and on the Icelandic on-shore market is currently trading around 164-165. But nonetheless the central bank will likely receive many offers, as many will act according to the motto: “better a bird in hand than two in the bush”.