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German Chancellor: “No bonds in my lifetime”
Publication date: 27 June 2012
Author: Simon Smith, FxPro
Tagged with: Simon Smith
No doubts from Germany
The comments from the German Chancellor late yesterday, at a private meeting with her junior coalition partners, leaves little doubt of her stance, saying that there were to be no common bonds in her lifetime. This sits firmly against the blueprint published by the European Commission ahead of this week’s summit, which hopes to start exploring the issue, as well as measures leading to closer political union. Clearly Merkel’s comments were not meant for public consumption, but they do further underline that this summit is not going to deliver the break-through that markets are hoping for. The comments did cause a wobble on the euro into the European close, but EUR/USD has since recovered to its favoured comfort zone around the 1.25 level. FX markets were decidedly steady overnight, but with month and quarter-end at the close of the week, it’s unlikely this stability will last.
Yen again. Leaving aside the tight ranges overnight, it is the yen is that is proving to be the more interesting currency this week, even though the euro is meant to be worrying whether EU leaders will sort it out a long-term future this weekend. EURJPY has jumped higher in client trading volumes, helped by the break back below the 100 level, whilst the Aussie has moved lower in the rankings, probably not helped by the twists and turns we’ve see this month vs. the near one-way street of last month. It remains ironic that a country with a debt/GDP ratio far surpassing anything in Europe and debt issuance running ahead of tax revenues in terms of funding of spending should be considered a safe-haven during the eurozone crisis, but it’s hardly a new phenomenon for markets to contend with.
Sterling surprise. Whilst EUR/USD has been languishing, the other standout has been sterling, EUR/GBP moving lower on Tuesday to break back below the 0.80 level for the first time this month. The economy is in recession; the BoE is set to resort to a third round of asset purchases; fiscal austerity is working but incredibly slowly; and the trade sector is not contributing to growth in the way expected. A number of explanations account for why the pound is still doing relatively well, but from our perspective the following are the most significant. Firstly, strong demand for sterling from European investors and corporates seeking to reduce their exposure to the embattled single currency has been in evidence for quite a while and this process still has a way to run yet. Secondly, high net worth investors and real money managers in Asia have been keen to diversify some of their wealth into hard currencies and assets, which partly explains why London property prices and gilts are so well-bid. Both motivations have been a very significant source of capital inflow for the pound. It would not be a shock if sterling continued to surprise in the second half of this year.
Aussie trading patterns. Leaving aside the steady tone seen overnight, we’ve seen some revealing price action on the Aussie recently. For almost two years now, a quite consistent pattern has emerged. Any dips below parity tend not to last very long, and are met by chunky buying. Also, when the Aussie gets above the 1.07-1.08 level, this also tends to be short-lived, met by equally determined selling. For those involved in the AUD, it is worth being aware of this broad trading pattern. In recent weeks, the Aussie benefitted from some weighty buying interest after plunging rapidly to a low of 0.9582 on the first day of June from the 1.05 level early in May. A good proportion of this buying was traders covering short positions; at the end of last month, net shorts in the AUD were at a two-decade high. In addition, there was evidence of strong buying by both corporate and sovereign wealth funds. Many of the latter are still minded to accumulate the Aussie on weakness – as a sovereign, Australia is one of a rapidly diminishing few that still have an AAA rating. Another explanation for the improved performance of the Aussie has been healthier economic news down under. This in turn hosed down what was a very aggressive profile for RBA rate cuts being factored into the front end. That said, government bond yields are still a long way below the cash rate – for instance, the 5yr yield is currently 2.42%, vis-a-vis a cash rate of 3.5%. Also, the front end still expects the RBA to lower the cash rate by nearly 100bp by the end of the March quarter next year. If only because these expectations might be watered down further, we may well see the AUD recover further in the near term.
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