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What’s been noticeable over the past week is the weight on developed market currencies. Emerging currencies put in their best performance last week for over a month, as the US and Europe were weighed down by concerns on both growth and also debt. Currency markets are very short-termist, but sometimes the divide between emerging market economies and the rest can start to look quite stark. The IMF sees government debt in developed markets rising every year for the next five years, whereas for emerging and developing economies, the opposite is true.  Furthermore, the UK and US especially are still grappling with still excessively high levels of household debt. FX markets can forget this but, over the past week, have woken up to the fact that the road to recovery for many developed markets still has a long way to go and that the risks of further recessions are not to be sniffed at.

Guest post by FXPro

Commentary

The RBA holds steady once again.  Whilst most were expecting this outcome, the AUD did register some disappointment with today’s policy meeting result, losing around 0.5% vs. the USD to settle around the 1.0680 area.  The accompanying statement did not signal any strong intention to raise rates in the coming months, suggesting that CPI would fall into line over the coming 12 months (the target is 2% to 3%).  It is just possible that the economy is losing some momentum. House prices fell in the first quarter, employment has stagnated in the first four months of this year, and consumers have become much more cautious with their spending (resulting in the saving rate climbing to a 20-yr high – above 10%). Recently, the Federal Government announced stringent measures to return the budget to surplus over the medium term. Also, over recent weeks, we have seen a definitive shift in American economic prospects with some genuine concern that the recovery is losing traction.  Further rate increases look far from assured for this year.

Indications of softer UK retail spending.  The BRC survey has been pretty choppy of late, showing like for like sales falling 3.5% YoY in March and then rising 5.2% YoY in April. A lot of this was down to the later timing of Easter this year, together with the extra bank holiday in April.  Therefore, the slump in the May data (falling 2.1%) suggests that underlying conditions on the high-street remain tough.

Misplaced Greek optimism. One of the explanations for the euro’s improved performance over recent trading sessions has been optimism that the next tranche of EU/IMF bailout money due later this month will now be forthcoming after the Greek government agreed last week to additional austerity measures. However, this optimism could very easily and very rapidly unravel.  Firstly, although the Greek public seems to understand that austerity is needed, the current government is losing popularity nevertheless. An anti-government support group is gaining a lot of momentum – especially within Athens, and unions have called for a general strike on June 15th. Papandreou also faces revolt within his own Pasok party, with discussions set to take place over the next couple of days to convince members to support the measures he agreed with the country’s creditors last week. Should Greek politics become more unstable, then Greece’s ability to honour the commitments given last week to the EU/IMF/ECN troika would likely be significantly undermined.  Secondly, there is certainly no guarantee that all members of the EU will happily sign off this new Greek deal. In Finland, protracted negotiations on forming a new government are still continuing weeks after a surprise election outcome which saw a surge in support for the anti-EU True Finns party. Germany’s population is becoming extremely agitated about handing out more money to fiscal miscreants, as are the Dutch.  On balance, unfortunately, the train crash that is Greece’s sovereign debt crisis is likely to worsen in the near term. Greece is simply too far gone to avoid default and, in any event, it does not have the internal political will and organisation to implement the demands of its’ increasingly insistent creditors.

Sterling suffers as Chancellor stands firm. In what was a fairly subdued start to the week in FX markets, it was sterling that was feeling under the weather on the majors.  This saw cable push back below the 1.64 level, with EUR/GBP gaining ground into the end of the European session to a fresh one-month high. Whilst there were no specific drivers for the sterling move, the tone remains soggy after last week’s GDP data reflecting the weak domestic sector and softening outlook from the PMI surveys. The prospects for sterling have turned dramatically since the start of the year when the market was pricing rate hikes by May.  In the background, there is growing unease with the government’s fiscal austerity plans and the lack of a ‘plan B’, but the Chancellor is seemingly remaining steadfast.  There was no surprise to see the IMF siding with him in its latest report on the UK, given its recent track record in backing the UK fiscal stance.  Nevertheless, there was an acknowledgement of the need for further stimulus measures should the economy fall short of expectations.