- Greece/Eurogroup uncertainty now reigns
Risk is back under pressure. The positive start to the year in global equities and in the likes of AUD, NZD and SEK in FX markets suggested a level of complacency about the Greek crisis: the sense has been that markets have assumed that through all the bluster and posturing, when push came to shove, a deal on Greece would get done. That optimism has been sorely tested by reports suggesting that Eurozone officials were examining ways of delaying parts, or even all, of the second bailout programme for Greece – possibly until after the general elections (currently scheduled for April). Die Welt suggested that default could still be averted by some sort of bridging loan to cover the March 20th bond redemption. A statement from Euro group chairman Juncker following the conference call late Wednesday failed to fully dispel this notion. Juncker noted that while Greece had complied with what was asked of it (i.e., the additional 325mn of budget savings and written commitments from Papandreou and Samaras), “further considerations are necessary regarding the specific mechanisms to strengthen the surveillance of programme implementation and to ensure that priority is given to debt servicing”. Uncertainty now reigns until Monday’s Eurogroup; and the prospect that markets might have to endure months more of uncertainty over Greece means that the risk of a deeper correction in the Euro appears high. Other risk counters have not been immune, with the AUD lower despite a stellar employment report that should put an end to speculation of another rate cut on the back of domestic fundamentals. Indeed, signals from other asset markets warn of a much deeper correction in commodity currencies. Bank credit is one in particular – see chart of the day – and this will presumably be even more convincing after Moody’s last night announced a wide-ranging review of global and European banks’ ratings.
- FOMC minutes fail to set USD back on weaker course
Adding something to the firmer dollar tone late Wednesday were the FOMC minutes, and where the Treasury market reacted by pushing yields slightly higher. As noted by our US economists, the FOMC minutes purveyed an overall dovish tone consistent with the decision to extend the forward guidance until late 2014; yet the implications for QE3 are not clear cut. “A few members observed that…current and prospective economic conditions….could warrant the initiation of additional securities before long”, while “other members indicated that such policy action could become necessary if the economy lost momentum or inflation seemed likely to remain below its mandate of 2 percent over the medium run”. So, while this suggests that the Committee appears tilted towards doing more, it is a very close call and dependent on the evolution of economic events over the coming months. While BNP Paribas maintains its view that QE3 is slightly more probable than not but is unlikely to happen before late Q2, the minutes are evidently not going to shift current consensus thinking away from the view that on balance QE3 is unlikely. This should leave the dollar enjoying mild tail winds for the time being, independent of other influences, and much stronger tailwinds should the risk backdrop deteriorate markedly.
- Australia employment, Riksbank decision, US initial claims, Housing Starts and Philly Fed all due
The Riksbank’s policy decision later Thursday is not clear cut (market assigns a 60% probability to a 25bp cut). BNP expects one, and we prefer to run short SEK into the 09:30gmt decision. Decent Norway GDP data today could in these circumstances help NOKSEK higher. From the US, initial claims, housing starts and Philly Fed are all important but the impact of decent numbers could be swamped by eurozone developments.
BNP Paribas