The eurozone peripherals raise a stink
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The eurozone peripherals raise a stink

  • Aussie hit overnight with yen also softer
  • Dollar stages a partial comeback
  • Weber’s hawkishness fails to spark the euro
  • Broadbent might just join the MPC hawks

Guest post by  FxPro

It appears that the bears were out in force on Tuesday picking over the slowing-rotting carcass that is Europe’s peripheral bond market ahead of the first of this month’s two key EU summits this Friday. Greece came in for the most pronounced scavenging, with the 10yr yield climbing as much as 48bp to 12.82% at one point, a new record. Spain also suffered, the 10yr yield rising 10bp to 5.45%, not helped by the government’s syndication of new debt issues through local banks. The Irish 10yr yield rose another 10bp to 9.22%.  For the bears, the view is increasingly that Germany and other members of Europe’s core are unlikely to agree to measures such as broadening the scope of the EFSF or reducing the interest rate on the bailout packages. If this is the case, the risk of a debt restructuring increases significantly.


Aussie hit overnight with yen also softer. The Aussie dollar was the main loser in overnight trade, mainly on the back of the slump in home-lending data, which fell at the fastest pace for a year.   This ensured the Aussie pushed back below the 1.01 level. Meanwhile, the yen was also on the soft side, although data on Machinery Orders came out on the strong side of expectations. This, together with the marginally softer tone to the oil price, helped put most stock markets in positive territory during the Asia session.

Dollar stages a partial comeback. After an indifferent start to the new week, the dollar staged something of a comeback against most major currencies on Tuesday. The EUR has found the air above 1.40 too rarefied and has backed away to below 1.3900, while cable is down at 1.6140 from above 1.63 early on Monday. The Swissie was especially noteworthy – it rose 1% to 0.9350, helped by some strong buying. The forex market specifically, and asset markets more generally, are keeping a close eye on developments in the MENA region: the oil price has already been particularly volatile this week with Brent crude jumping to $118.50 at one stage on Monday only to fall back below $113 overnight after some OPEC members pledged to raise production to compensate for the loss of Libyan output. As we remarked in Tuesday’s Daily Forex Brief, both traders and hedge funds are particularly short dollars right now – it remains to be seen how this trade performs if the oil price continues to spike higher over coming weeks.

Weber’s hawkishness fails to spark the euro. Soon-to-depart ECB Governing Council member Axel Weber effectively endorsed the market’s interest rate expectations on Tuesday, claiming that he would not want ‘to signal any dissent with how markets priced future policies’. According to Weber, inflation may be ‘more sustained and more fundamental’ than the latest set of ECB projections suggest. Interestingly, on a day when sellers appeared to be in command, his remarks failed to provide the euro with any sustenance at all.

Broadbent might just join the MPC hawks. The MPC’s resident hawk Andrew Sentance has only a few more meetings to sit through before his tenure ends, but it appears that his replacement, Ben Broadbent, also has a particularly hawkish disposition on monetary policy. In a recent research note published by Broadbent in his current role at Goldman Sachs, he maintains that the British economy could overcome both fiscal austerity and an interest-rate increase. Although he concedes that both household income and spending will be squeezed this year, he contends nevertheless that the economic impact of any rise in rates may well be small.

We would concur with that view; if the Bank did decide to raise rates any time soon – an outcome that is already quite fully reflected in the current rate structure – it is not clear that it would have much of an impact. That said, it would be critical for the Bank to communicate that any such increase in rates was not part of a sustained tightening campaign. Interestingly, the pound has lost some ground against the euro recently, in part because traders are more convinced that the ECB will tighten ahead of the BOE.  

Looking Ahead

Wednesday: UK: Trade balance, January (previous – £4.83bn); GER: Industrial Production, January (expect 1.5% MoM and 11.1% YoY, previous -1.5% and 10.0%); US: MBA Mortgage Applications; Wholesale Inventories, January (expect 1.0% MoM, previous 1.0%).

Thursday: FR: Industrial Production, January (previous 0.3% MoM and 7.0% YoY); GER: Trade balance, January (previous €11.9bn); EC: ECB Monthly Report; IT: Industrial Production, January (previous 0.3% MoM and 5.4% YoY); UK: Industrial Production, January (previous 0.5% MoM and 3.6% YoY); MPC meeting (expect rates on hold at 0.5%); US: Initial Jobless Claims (previous 368K); Trade balance, January (expect -$41bn, previous -$40.6bn); Bloomberg Consumer Comfort; Monthly Budget Statement, February (expect -$235bn).

Friday: UK: NIESR GDP estimate, February (expect 0.5%); PPI Output Prices, February (previous 1.0% MoM and 4.8% YoY); GER: CPI, February f (expect 0.5% MoM and 2.2% YoY); CAN: Net change in employment, February (previous 69.2K); US: Retail Sales, February (expect 0.6%, previous 0.3%); Business Inventories, January (expect 0.7%, previous 0.8%).

Source: Bloomberg

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