This week’s trading was characterized by the reaction to Spain’s bank bailout – which was discounted very quickly and didnt’ help restore calm to the EUropean sovereign debt crisis. The market was also focused and anticipating the results of this weekend’s Greek elections…

 

Overnight Developments:

• France downgraded by Egan-Jones (will bigger credit rating agencies follow?).
• Rumors (based on a G20 source) of coordinated central bank intervention if Greece elections create turmoil in financial markets.
• ECB President Draghi says he stands ready to assist.
• That has given a “risk-on” tone to markets.
• BOE and UK government unveiled a £100bn plan to bolster the economy in the face of the “eurozone debt storm”.

More on BOE

• Warning of a “black cloud” from Europe, King said in a speech in London late yesterday the case for more stimulus in the U.K. “is growing.”
• The BOE will activate a sterling liquidity facility to aid banks and start within weeks a credit-easing operation that may boost lending in the economy by 80 billion pounds (£124 billion).
• Action prompted by a rapidly deteriorating UK outlook and could mean another round of QE by the central bank is around the corner.

Key Events This Week:

Spain Bank Bailout:

• Spain becomes 4th European country to get European bailout.
• Spain to receive loans worth up to €100bn into its bank restructuring fund (FROB) to use to recapitalize its banking system.
• Details say loans will be at 3%, a maturity of 15 years, with a 5 year grace period.
• Market discounted the news very quickly considering much of bailout funds comes from troubled countries like Italy.
• The funds will go through Spanish gov’t meaning that the amount will be added to total debt, adding about 10% to Spain’s debt to GDP figure.
• Also fear of seniority issues and the possibility of being subordinated in any Spanish PSI-type deal.
• Spanish yields rose to near 7% this week.

US Macro Data Highlights – Speculation over Fed Stimulus

• This week was light on macro data.
• In the US we saw inflation (both PPI and CPI) slowing as a result of falling energy prices (-6.8%).
• CPI down most in 3 years.
• US retail sales were down 2 straight months (though lower spending on gas was a big part of May data), jobless claims rose more than expected.
• Part of the market still holding on to speculation that Fed may act next week, though data has not deteriorated enough to warrant such a step.

Central Bank and Greece

• The most important risk event is still to come – Greek elections.
• A victory by Syriza, the party that promises to renege on Greece’s end of the bailout deal, could speed the nation’s exit from the euro.
• Several central banks have highlighted the danger (ECB, BOE, BOJ, BOC, Fed), China has cut rates, and RBA extended its easing cycle with a 25 bps cut last week.
• We can see coordinated action next week if markets are roiled by a Syriza victory.

 

1. EUR

Positives:

• Spanish bank bailout helps reduce short term stress on periphery as run on banking system averted.
• Market discounted this very quickly and looked ahead to possibility of more aid for Spain and worries over Italy.
• A victory for pro-bailout parties.

Negatives:

• A victory for Syriza or another inconclusive Greek election.
• Rising yields in Spain despite bank bailout.
• While macro data was light this week, we are seeing continued slowdown in Europe.
• For instance industrial production shrank 0.8% in April (before onset of uncertainty in May).

2. USD

Positives:

• Worry over Greek election can bring about risk-off tone at end of week.
• Negated by hope of action by central banks.
• Before this action comes into play, we may still see flight to safety to open next week.

Negatives:

• Weak NFP, a rise in jobless claims, falling retail sales, and falling prices give scope for Fed to act if needed.
• Last week several FOMC officials (Yellen, Lockhart, Williams) say Fed may have to do more stimulus.
• Spain’s bailout can undermine safe haven currencies like USD if it reduces stress.

3. GBP

Positives:

• Action by BOE/gov’t may help boost growth, but need for action shows weaker picture for economy.
• May Services PMI beat expectations, holding up better than manufacturing sector.

Negatives:

• Manufacturing production 0.7% in April, with the PMI for May deteriorating sharply.
• Producer prices slide, easing inflation pressure.
• More QE from BOE on the way?

4. AUD

Positives:

• Central bank intervention hopes boost higher yielders.
• Chinese cuts rates, shows stronger trade data, and with weaker inflation market expecting further action.
• Australian data improved last few weeks (1Q GDP, employment data, trade data).
• Lower interest rates should help consumer confidence/spending, and housing market.

Negatives:

• RBA cuts rates, narrowing rate differential advantage.
• Global growth slowing (US, China, India)

5. NZD

Positives:

• No outright mention of rate cut by RBNZ in its policy meeting.
• Central bank intervention hopes boost risk sentiment and higher yielders.

Negatives:

• If market turmoil spreads after the weekend, sensitive risk currencies will be hit hard.

6. CAD

Positives:

• BOC kept its slightly hawkish tone in last week’s statement.
• Central bank intervention will help risk-sensitive currencies.

Negatives:

• Will there be fallout from Greek elections?
• Softening in US data.

7. JPY

Positives:

• Worry over Greek election can bring about risk-off tone.

Negatives:

• Risk-on as a result of coordinated central bank action would undermine safe haven.
• Further jaw-boning about JPY strength by officials.

8. CHF

Positives:

• Flows in CHF from Europeans concerned about Euro-zone break-up.
• SNB determined to maintain the 1.20 ceiling vs EUR.
• Greek election has the capability to plunge financial markets back into heavy risk-off mode.

 

 

 

Nick Nasad is a macro economist, market analyst, and educator; and one of the main contributors to FXTimes.com – provider of  News, Analysis, Education, Videos, Charts, and other trading resources.

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.