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EURUSD déjà vu
Publication date: 18 June 2012
Author: John J Hardy, Saxo Bank
This Monday has largely been a repeat of last Monday – but will the rest of the week look anything like last week? FOMC is the next potential stumbling block for the recent risk rally.
The market scenario is playing out largely as expected so far, as we saw a kneejerk rally to the news that the New Democracy-led coalition government outcome is the likeliest. As everyone including ourselves has been pointing out today, the situation is, of course, far from resolved. In Greece, there is still the question of renegotiation of the bailout deal, which every party garnering significant support in the Greek election was promising it would do. In that light, what happens first – does Greece run out of money and patience with the troika and simply exit on its own in frustration (least likely) or does the Troika tire of Greece first and give it the boot (more likely).
As we never live in a black and white world of the above two scenarios, the grey reality might risk being a scenario in which Greece indeed “runs out” of funds, but continues to receive just enough new liquidity and emergency facilities and live hand to mouth for long enough to delay an outcome for far longer than currently seems possible with no solution in place. (Current calculations have many saying Greece will run out of funds already by mid-July, but it is so very much cheaper for the Troika to ante up another billion here and billion there than to take the multi-hundred billion immediate hit and risk of further contagion.). Also, we have to realize that Greece somehow spent a billion more Euros this year from January through May than it did last year despite the supposed extreme austerity it is imposing.
The country quickly to overshadow Greece if current trends continue will be Spain, where yields today punched well through the 7.0% yield level for the first time in the EU-era. There are plenty of questions that the coming EU summit on the 27th-28th will have to answer. Escaping some notice as well, we have the French parliament captured by the socialists over the weekend, which paves the way for more dramatic policy moves from the Hollande-led government. Can we expect a leftist government to come up with anything even of a vaguely pro-growth variety or aren’t we more likely to see recycled tax-and-redistribute policies?
It doesn’t seem like there is an elsewhere at the moment, but we are also watching GBP with interest, as I discussed in today’s FX Chart post earlier today, as the GBP has done practically nothing but strengthen since the BoE/UK government easing measures announced last week. As well, NZD has moved stronger still versus the Aussie as interest rate spreads continue to widen in favour of the smaller kiwi – this was encouraged by the strong May services PMI reading overnight. CAD has been the weakest of the three commodity dollars, but that may be about to change if the US dollar also pivots, as CAD tends to be susceptible in the crosses to the direction of greenback. Wednesday’s FOMC meeting will be an important test for CAD in crosses like AUDCAD as well as for the USD.
The next major event risk this week is, of course, the FOMC meeting on Wednesday. Some are looking for an extension of Operation Twist while others are looking for a full on hint of QE3 taking shape. While I have argued in general that Bernanke is in a very different position this time around due to the political environment of the US presidential election season, there is one argument in favour of Bernanke moving now rather than later if we assume that he would prefer an Obama win, which would prevent unwanted attention from the united front of a Republican congress and Republican president. That argument is that, if Fed policy acts with a lag (in the real economy – we all know what Fed measures have done for asset markets over the last few years), then Bernanke must move now if the real economy is to feel anything at all come November. The meeting after this one is not until the first of August, only three months before the November 2 election.
Look out for the RBA June meeting minutes tonight in Asia. Tomorrow we have UK CPI data and the German ZEW survey.
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