The week started out with positive news out of Athens as the pro-bailout New Democracy party beat anti-bailout parties in the Greek parliamentary elections, thus essentially removing the immediate danger of a “GREXIT” and a potential EU collapse off the table. Market responded with optimism and risk demand as the EURUSD started out the week on a strong note. Greece formed a new coalition government with New Democracy party leader Samaras as the new PM later on during the week. Samaras wasted no time and began a campaign for a two-year extension of Greece’s consolidation requirements under the second bailout agreement. There were unfavorable comments from Germany as Chancellor Merkel is said to have “assumed Greece will continue with its bailout commitments and now is NOT the time for giving discounts to Greece…”, although the favorable treatment given to the Spanish Banking Bailout agreement may open the door for extension, but based on the current condition in Greece, an extension would practically require a third bailout to cover the extension periods, and that would cause considerable damage to the EU that may even rival a Greek Exit.
In Spain, the government didn’t yet formally asked for a bank bailout from its European partners this week, although it is expected to make the formal request on the 25th of June. A stress test conducted by independent auditors suggested Spanish banks would need up to €62B in additional capital under an adverse scenario, and pledges from the Eurogroup of up to €100B in funding will be available and enough to cover. There were reports that Bank of Spain (BOS) was said to have asked auditors to delay their reports in order to conduct a more thorough study. Press reported the central bank asked the four auditors (Deloitte, KPMG, PwC and Ernst & Young) to delay their reports until after the summer instead of by July 31st. The auditors are conducting the second phase of an external overview of Spain’s financial sector. This maneuver by BOS helped to diffuse some tension and fear as the market breath a sigh of relieve.
Elsewhere in Europe, Italian PM Monti invited German Chancellor Merkel, French President Hollande, and Spanish PM Rajoy to discuss the European crisis and hopefully lay some of the groundworks for next week’s EU Leaders Summit. The four leaders agreed to propose a growth package equal to 1% of EU GDP, about €130B, as Europe’s leaders slowly shift toward admitting growth policies are badly needed. As of this week, PMI data out of Europe showed that Germany is no longer immune to economic contraction; as a matter of fact, Germany’s June Adv. Manufacturing PMI is below Euro Zone average at 44.7 versus 44.8…
In U.S., the FOMC extended Operation Twist through the end of 2012 on Wednesday, but markets were largely disappointed; as a matter of fact, some analysts felt that the Fed did “nothing”, while others pointed to the subtle change in the FOMC Statement and the Fed is hinting to the market it will do more soon. The FOMC is clearly divided over what’s the best course of action as Fed’s Lacker stated on one hand “that Extension of Operation Twist risks boosting inflation without making any big difference for economic growth; Inflation is currently close to the Fed’s 2% target, a substantial and persistent decrease in inflation might require more stimulus.”, while Fed’s Bullard said “Unemployment has declined at a faster rate than expected over the last year, and that QE3 still faces a very high hurdle”. In the meantime, the Fed reduced its estimate for 2012 GDP by half a percent to +1.9-2.4%, and Unemployment Rate to 8.0 ~ 8.2% (practically saying that we should NOT expect further Unemployment Rate reduction this year).
In UK, the BOE minutes took on a more dovish tone with the vote being 5 to 4 to keep Asset Purchase Target steady at £325B. BOE Gov King, Miles and Posen voted to increase QE by £50B while Fisher voted to increase QE by £25B. The last time the BOE Gov last voted in the minority was back in Aug 2009. The MPC discussed merits of cutting rates and saw no advantage over further QE but ruled it would be best to ‘wait-and-see’ on Euro Area before more QE. The MPC also discussed changes to banks’ reserves with BOE, but saw drawbacks. All MPC viewed risks to inflation shifting to the downside compared to May forecasts. Sterling has been well supported after an initial sell-off as traders see more stimulus as positive signs for the currency as BOE has been notoriously behind the curve in the past.
In Australia, the RBA meeting minutes showed that the central bank felt June’s decision was finely balanced. Inflation expected at the lower end of 2-3% range over the next year or so; output will rise towards trend. Domestic data has not suggested a significant weakening in conditions relative to forecast, and the market’s take away from last rate cut was more of a pre-empt move to boost growth… RBA is now expected to pause from further rate cuts unless global economic condition worsens again.
In New Zealand. the Q1 2012 GDP came out at 1.1% versus 0.4%E, which is at 5 year high. The year on year number is now at 2.4% versus 1.3% previously. With the uncertainties in Europe coming to an end and the potential shift in market sentiment to risk appetite, NZD is positioned to move higher on both risk and fundamental sentiments.
On Thursday, Moody’s reminded that market of its long-threatened bank downgrades and followed up with the action on Friday. Moody’s cut the credit ratings of 15 global banks, including the five largest US banks, highlighting the challenges faced by an industry facing falling GDP, the euro zone disaster, tougher regulations and nervous investors. Credit Suisse was hardest hit, with a three-notch downgrade. Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup, Deutsche Bank, Barclays, UBS, Credit Agricole, BNP Paribas, and the Royal Bank of Canada all got a double-notch downgrade. Bank of America, HSBC, Societe Generale, and the Royal Bank of Scotland received single-notch downgrades. The downgrades mean banks will have to post more collateral and will face even more pressure to deleverage, but financial stocks experienced a modest relief rally on Friday as there were no big negative surprises among the downgrade.
In conclusion, I believe that EUR is expected to remain range-bound, with the potential of retesting the 1.2750 while falling back down to the 1.2400. The key will be on headlines out of the EU Leader’s Summit next week, therefore I’d recommend everyone to use extreme caution. GBP is likely to remain neutral or a bit bullish as recent BOE ECTR and the potential of further APT increases should help to keep the currency afloat, and that’s not even considering the positive inflows of EURGBP pair as investors wait for dusts to settle in Europe. AUD and NZD are likely to remain in demand, especially considering that the Feds did extend ‘Operation Twist’ and both Australia and New Zealand are posting better than expected economic figures. I’d be looking to buy those two currencies on dips. JPY is expected to remain under selling pressure, as it has already moved above the 80.00 handle against USD. JPY is facing more selling pressure as traders have shifted their view (ever so slightly) that perhaps Yen is no longer a true safe-haven currency due to BOJ’s recent loss of credibility as a deflation fighter. I’d definitely be looking to SELL more JPY this week. CHF is likely to strengthen against USD, although SNB still maintains the peg with the Euro, but I believe we could very well see the neutral currency strengthen to the 0.9100 level once again. CAD is likely to remain range-bound, although the general direction should still be on CAD buy as Canada’s outlook still remains the best out of the majors. USD is likely to consolidate its recent gains especially after the Feds disappointed the market by not doing more… However, I believe ultimately USD is likely to weaken, especially considering the dire situation in the employment sector.
Here’s the list of tradable news for the week, it is a quiet week and I have to say it is definitely a nice change of pace from last week’s busy schedule!
Make sure to follow the links above and read the analysis!
Forex Market Review And Upcoming Forex News Calendar June 25 ~ 29, 2012
June 23, 2012 by 11 Comments