Friday May 28, 2010 - 14:32:03 GMT
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FX Briefing - Chill pills for euro investors
FX Briefing 28 May 2010
ïƒ˜ PBoC denies rumours that it is reducing exposure to the euro
ïƒ˜ G20 finance ministers will try to alleviate worries about the euro
ïƒ˜ Census hiring gives US payroll increase an additional boost
Chill pills for euro investors
The forex market is still vacillating between hope and trepidation. The Spanish central bank took control of CajaSur, a smaller savings bank in Cordoba, sparking fresh fears about the situation in Spain. Markets had already been extremely worried about the situation of the banking system in Europe, and this news, against a background of rising tension in money markets and rocketing CDS premiums for banks, prompted a further retreat from riskier assets. The escalation of the conflict between North and South Korea also rattled investors.
Furthermore, a few days earlier, there had been rumours that important international investors, particularly the Chinese monetary authorities, were reviewing their exposure to the euro. However on Thursday, the Peopleâ€™s Bank of China explicitly denied this: the relevant article in the Financial Times was unsubstantiated, Europe remained a key investment market for Chinaâ€™s foreign exchange reserves, and China supported the actions taken to stabilise financial markets in Europe.
The latter comment could be worth noting particularly in connection with the impending meeting of G20 finance ministers and central bank governors on 4-5 June in Korea. As well as discussing financial market regulation, the participants might also take the opportunity to try to reassure the markets about eurozone public debt. The stabilisation of the euro is of particular interest to emerging markets such as China. Chinese foreign trade has weakened significantly (see chart), and additional burdens brought about by an appreciation of the yuan against the euro would be most unwelcome.
Markets began to stabilise after the PBoCâ€™s statement and EUR-USD climbed to around 1.24. In our view, the single currency is still vulnerable to further losses. In the short term, however, uncertainty over possible G20 support measures could bolster the euro. Coordinated intervention to support the euro is another subject which could be broached in Korea, albeit not publicly. We think it more likely that the G20 will express confidence in the EU measures decided so far, demand implementation of the proposed consolidation steps and otherwise confine themselves to a general promise of support.
In the past few weeks, upbeat economic data have tended to make little impact on the markets. Given the dark clouds on the horizon, the current economic situation has become less relevant. But next weekâ€™s indicators might be able to bolster confidence in the economy to some extent. We expect US payrolls to have risen by over 550,000, partly due to temporary Census hiring. Moreover, the ISM manufacturing index is set to remain at its high level, the ISM non-manufacturing index will probably have risen somewhat, and pending home sales will have surged. Provided there are no fresh shocks, EURUSD should remain relatively robust in the short term.
Stephan Rieke +49 69 718-4114
+49 69 718-3642
Foreign Exchange Trading
+49 69 718-2695
Matthias Grabbe / Klaus NÃ¤fken
+49 69 718-2688
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