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Eurozone fudges the fixes

  • Middle East unrest intensifies
  • Portugal election creates bond market dilemma
  • Fed officials sounding more optimistic on recovery
  • Sterling losing its shine
  • Return of risk appetite hobbles the Swiss franc


Events on Friday and over the weekend have perfectly illustrated how the agenda for resolving the euro crisis has been overtaken by domestic politics.   Finland was instrumental in delaying the reform of the EFSF until at least June, whilst Germany softened the terms of the permanent crisis resolution mechanism (European Stability Mechanism).   The latter included reducing the initial capital and building it up over a longer period, neatly timed to reduce the fiscal strain ahead of the 2013 federal elections.

Guest post by FXPro.

The triple-A rated nations, so vital in providing initial capital for rescue mechanisms, are all fighting electoral discontentment, to vary degrees.   Meanwhile, German Chancellor Merkel’s defeat in the weekend state elections in Baden-Württemberg was more down to the nuclear issue than anything else, but is particularly notable in one of the best performing eurozone states economically.   All things considered, the euro has held up relatively well, but it makes for a decidedly uncomfortable backdrop for euro bulls.



Middle East unrest intensifies. The weekend has seen further unrest in several countries, including protests in Syria, alongside the likely departure of the President of Yemen.   There were also further riots in Jordan.   Oil prices remain at the recent highs, but the eyes of the markets remain on Saudi Arabia, given that this is the pivotal country for proven oil reserves.


Portugal election looming in June. There has to be at least two months between the dissolution of parliament and an election and, right now, indications are that June is the most likely time.   This is pretty uncomfortable, because of just over EUR 5bn of refinancing that comes up in the middle of the month.   Furthermore, given that a request for EFSF assistance has to come from the country itself, the lack of a government until then is going to make for a tricky time for bond markets in particular.

Fed officials increasingly confident on US recovery.
Very gradually, Fed officials are becoming more convinced about the nature of the US recovery. Atlanta Fed President Lockhart suggested on Friday that a self-reinforcing virtuous circle of final demand is increasingly becoming established. Although he believes that the current stance of monetary policy is appropriate, he is conscious that inflation has moved higher over recent months, although at the same time he expects these price pressures will diminish.


Recently, the Fed Presidents of Philadelphia, Richmond and St Louis have all pushed for a review of QE in light of the strengthening economic recovery and the rise in inflation. Minneapolis Fed President Kocherlakota claimed on Friday that the economy would need to ‘worsen materially’ to justify an extension of QE2 past June, and Dallas Fed Chief Fisher stated that there was danger that monetary policy was doing too much. In a memorable quote, Fisher intoned that ‘no central banker wants to become the instrument of a lecherous congress or parliament’.

Sterling losing its shine. Over the past year there has been more of a tendency for sterling to be something of a safe haven as the euro was battered by sovereign risk and uncertainties over bail-outs. There is little sign of this happening right now, with EUR/GBP at its strongest level since early November. The different reaction this time appears to be for three reasons. Firstly, whilst markets are largely sticking to the view that eurozone interest rates are still heading higher (most likely in April), there are more doubts on UK rates, especially in the wake of Thursday’s retail sales data which showed limited (if any) signs of a bounce back after the very weak Q4.

Secondly, on the euro itself, we are seeing a greater resilience to what’s going in the sovereign risk arena. This is not denting demand from Asian sovereigns to diversify away from dollars whilst the Fed is still pursuing QE2.

Finally, the glow of fiscal austerity in which sterling basked last year has dimmed somewhat. It may have served to stem concerns over the UK’s funding capability. Now however the bigger fear is the impact on growth and the extent to which the economy can hold up in the face of the spending cuts and tax changes that will bite in April’s new fiscal year.

Return of risk appetite hobbles the Swiss franc, helps the Aussie. The recovery in risk appetite in recent days has prompted the usual response from the major currencies, with safe haven currencies like the Swiss franc and Japanese yen giving back some of their recent gains while high-beta currencies like the Aussie and the Korean won press ahead. At the start of the last week, the Swissie was trading around the 0.90 level and seemingly poised to go lower. EUR/CHF has been even more interesting – mid-month this cross fell to near 1.24 but is now above 1.29. In contrast, the Aussie continues to recover in very creditable fashion – back in mid-March it almost traded down to 0.97, but has since benefitted from continued buying interest and is now up to 1.0250. The post-float high back on the final day of last year was 1.0256. Helping the currency is confidence that the global recovery will not be harmed too much by the events in Japan and the high oil price. It remains to be seen if this interpretation is correct – there are some signs that the elevated oil price is damaging the recovery in some countries, a warning also made by the IEA Chief Economist this morning. Favourable interest rate differentials and the bounce in commodity prices are also helping the AUD.

Looking Ahead

Monday: UK: Lloyds Business Barometer, March (previous 3); US: Personal Spending, February (expect 0.5%, previous 0.2%); Personal Income, February (expect 0.4%, previous 1.0%); Pending Home Sales, February (expect 0.4%, previous -2.8%); Dallas Fed Manufacturing Activity, March (expect 18.5, previous 17.5).

Tuesday: JPN: Jobless Rate, February (expect 4.9%, previous 4.9%); Job-to-Applicant Ratio, February (expect 0.62, previous 0.61); Household Spending, February (expect 0.0%, previous -1.0%); Retail Trade, February (expect -0.5%, previous 0.1%); GER: GfK Consumer Confidence, April (expect 5.8, previous 6.0); FR: Consumer Spending, February (previous -0.5%); IT: Business Confidence, March (expect 102.5, previous 103); UK: GDP, Q4 final (expect -0.6%, previous -0.6%); Net Consumer Credit, February (expect – £0.1bn, previous – £0.3bn); Mortgage Approvals, February (expect 46.8K, previous 45.7K); US: Case-Shiller Composute-20 House Prices, YoY (expect -3.2%, previous -2.4%); Consumer Confidence , March (expect 64.8, previous 70.4).

Wednesday: JPN: Industrial Production, February (expect -0.1%, previous 1.3%); EC: Business Climate Indicator, March (previous 1.45); Eurozone Consumer Confidence, March (previous -10.6); UK: CBI Reported Sales, March (previous 6); US: MBA Mortgage Applications; ADP Employment Change, March (expect 210K, previous 217K).

Thursday: UK: GfK Consumer Confidence, March (expect -29, previous -28); Hometrack House Prices, March (previous -0.2% MoM and -2.7% YoY); Nationwide House Prices, March (expect -0.2%, previous 0.3%); GER: Unemployment Change, March (expect -24K, previous -52K); Unemployment Rate, March (expect 7.2%, previous 7.3%); EC: Eurozone CPI, March (expect 2.3%, previous 2.4%); US: Jobless Claims (previous 382K); Chicago PMI, March (expect 70.0, previous 71.2); Bloomberg Consumer Comfort (previous -48.9).

Source: Bloomberg

Simon Smith, Chief Economist


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