Friday June 18, 2010 - 14:26:32 GMT
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FX Briefing - Euro: continuing to recover despite credit fears
FX Briefing 18 June 2010
ï EU is planning to publish bank stress test results
ï SNB hints at end of forex market intervention for the time being
ï FOMC set to maintain monetary policy stance
Euro: continuing to recover despite credit fears
During the course of the week, EUR-USD continued to strengthen. It is now around 1.24 â almost 3 cents higher than on Monday morning. The euro was boosted partly by stronger equity markets, which are reflecting relatively robust global economic growth, and partly â even though this is not confirmed by the latest CFTC data for euro positions of 8 June â by the fact that extremely short net positions seem to have been reduced. Overall, sentiment on the euro is less negative.
It is remarkable that the euro gained ground in the first half of the week against a backdrop of widening credit spreads on southern European countriesâ sovereign bonds. On Wednesday, the difference in yield between 10-year Spanish Bonos and benchmark German Bunds widened to a record 221 basis points, over 30 points more than at the close of the previous week.
These developments on the credit side were partly caused by new crisis reports. After the Belgian general election, the Flemish and Walloon separatist parties emerged as the strongest parties, which will probably weaken the heavily indebted central government further. Moreover, on Monday, Moodyâs downgraded Greeceâs credit rating from A3 to Ba1, so that Greece has now lost its investment grade rating.
This was not wholly unexpected, however. Markets are much more jittery over the risks in the Spanish banking system, particularly the situation of the Cajas, and the potential consequences for Spanish public finances and banks in the rest of Europe. At the beginning of the week, the Spanish press published a story claiming that the EU Commission, the IMF and the US Treasury (!) were putting together a âŹ250bn rescue package for Spain. Although this was hastily denied, such rumours still tend to have some impact in the present environment. The widening spreads, however, were probably also partly due to the fact that a large number of government bond were about to be issued: in addition to German Bunds and French bonds, âŹ3bn 10-year and âŹ500m 30-year government bonds from Spain and Hungarian bonds totalling over 50bn forints.
The Spanish bonds saw good demand, which calmed markets somewhat. By the end of the week, the spread had narrowed to around 200 points. This was presumably also partly due to the Spanish governmentâs announcement that it intended to publish stress tests on Spanish banks. On Thursday, the European Council also backed this initiative for more transparency. Towards the end of July, test result are to be published throughout the EU.
The Swiss franc advanced on Thursday across the board, after the SNB had hinted at its quarterly monetary policy meeting that it was not intending to continue intervening in the forex market for the time being. The SNBâs latest statement no longer says that it will attempt to stem an appreciation of the franc. This is because, in view of growing foreign demand and an improvement in the domestic economic situation, the SNB now regards the deflation risk as negligible.
With its inflation forecast of 2.2% for 2012, the SNB is signalling that, in the longer term â if the present trend continues â interest rate hikes could be on the cards. However, the central bank also emphasizes that uncertainty remains very high; that also explicitly includes the option of further intervention in the forex market. After the Swiss monetary policy shift, EUR-CHF dropped to below 1.3750. The record low of 1.3734 will probably have served as a support.
Next week, markets are likely to focus more on America. On Tuesday and Wednesday, the Federal Open Market Committee is meeting to discuss monetary policy. We are expecting the Fedâs assessment of the economic outlook to be favourable for the most part. However, it is also likely to point out the weakness in the construction industry, the slow recovery in the labour
market and extensive spare capacity, and underline the uncertainty. Potential risks posed by developments in the eurozone will probably only be mentioned in passing, if at all. Overall, the FOMC is expected to maintain its present monetary policy stance, including the âextended periodâ phrase.
The markets are probably still expecting the Fed to stick to its soft policy, which should support the euro against the dollar. The European indicators are also likely to have a similar effect: in our view, the sentiment indicators â including the ifo business climate â should turn out to be stable, given the improvement in the order situation and capacity utilization.
Stephan Rieke +49 69 718-4114
+49 69 718-3642
Foreign Exchange Trading
+49 69 718-2695
Matthias Grabbe / Klaus NĂ€fken
+49 69 718-2688
This report has been prepared by BHF-BANK Aktiengesellschaft on behalf of itself and its affiliated companies (together "BHF-BANK Group") solely for the information of its clients. The information and opinions in this document are based on sources believed to be reliable and acting in good faith, but no representation or warranty, express or implied, is made by any member of the BHF-BANK Group as to their accuracy, completeness or correctness. Opinions and recommendations are given in good faith but without legal responsibility and are subject to change without notice. The information does not constitute advice or personal recommendation, for which the duty of suitability would be owed, but may facilitate your own investment decision. Moreover, you should seek your own advice as to the suitability of an investment matter mentioned herein. Investors are reminded that the price of securities and the income from them can go down as well as up and that the past performance of an investment or a market is not necessarily indicative for future results. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete, and this document is not, and should not be construed as, an offer to sell or solicitation of any offer to buy the securities mentioned in it. BHF-BANK Group and its officers and employees may have a long or short position or engage in transactions in any of the securities mentioned in this document, or in any related securities. This publication must not be distributed in the United States.
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