ItÃ¢â‚¬â„¢s been a difficult week for the Euro Ã¢â‚¬ËœbearsÃ¢â‚¬â„¢; you get downgraded, receive some suspect economic data and fail to agree on a Ã¢â‚¬Ëœhaircut’ in stone just yet (details over the w/d), yet the currency appreciates +150pts from this years lows and in danger of edging even higher. WhatÃ¢â‚¬â„¢s with that?
Many analysts seemed to have factored in a record single currency low print somewhere in their trading strategy calculations. Is this attainable? Much depends on key issues such as the Greek PSI and the forthcoming Euro-area summit. The currency remains susceptible to possible near term policy risks in Europe and fiscal tightening.
For now, the market remain focused on the ongoing Greek private sector involvement negotiations. There are rumored reports that indicate an initial agreement has been reached on a voluntary restructuring, but uncertainty is likely to persist until it becomes clear how widely private sector participants will adopt the plan.
Below are some other highlights of the week:
- Merkel and Sarkozy started the week sounding the trumpets Ã¢â‚¬Å“We must solve EuropeÃ¢â‚¬â„¢s competitiveness problemsÃ¢â‚¬Â
- EU: Greece dispatches officials to the US for meetings with the IMF. The fear of a default and a subsequent euro-zone exit has overshadowed a mass credit downgrade of euro-zone countries. Athens requires a deal with the PSI within days to avoid going bankrupt when +EUR14.5b of bond redemptions fall due in late March. Talks with its creditor remain ongoing.
- EUR: The single currency is beginning to lose support from foreign Cbanks. Reserve data for the 4Q in 2011 reveals a weakening in reserve accumulation as compared to previous years. The Ã¢â‚¬Ëœbuild (buy EURÃ¢â‚¬â„¢s) to hold down local currencies was nearly Ã¢â‚¬Å“zeroÃ¢â‚¬Â-resulting in a change of global asset prices.
- FRF: French Treasury came to the market a day after being downgraded from AAA to AA+ by S&PÃ¢â‚¬â„¢s. They auctioned +EUR8.7b of 84-day-357-day T-bills. The issues drew strong investor demand in Frances first bill auction of 2012 with short-term yields rising only slightly from record lows reached in its last auction of 2011.
- EU: It was not a market surprise that the EFSF program was downgraded from AAA to AA+ late Monday.
- EUR: Stronger set of Chinese growth data managed to push the EUR off this years lows, a couple of days after sovereign credit downgrades. The single currency short term remains elevated!
- EU: The EFSF auctioned +Ã¢â€šÂ¬1.5b of 6-month bills, with a bid-to-cover ratio of 3.1 despite S&PÃ¢â‚¬â„¢s downgrade to AA+. The Eurogroup has agreed to discuss the implications of trying to restore the AAA status. Spain also issued +Ã¢â€šÂ¬4.9b of 12- and 18-month bills with strong support.
- ECB: Euro-zone inflation was revised a tad lower to +2.7%, y/y, from the +2.8% initial estimate. Inflation had been boosted over the past three-months by VAT hikes and electricity prices. The ECB projects inflation to slow to +2% this year. Market does not expect an imminent rate cut. FI is pricing in one for March.
- GER: Despite remaining at depressed levels, the German ZEW expectations recovered sharply to -21.6 from -53.8 last month (sharpest increase in history).
- UK: UK inflation slowed to +4.2%, y/y, from 4.8% in November, in line with consensus. Last month, the core-inflation happened to fall to +3.0% from +3.2%. Not necessarily obstacles for expanding the QE program, but recent growth indicators suggest the risks are now for less rather than more QE next month.
- IMF: Market reports indicated that the IMF will seek to increase resources by $1Trillion, drawing largely on the BRIC economies, Japan and oil exporters. This news provided some risk appreciation and perhaps even more if augmented by a fully functioning ESM. Do not expect automatic or willing contributions!
- EU: Negotiations on Greek private sector involvement resumed midweek. ItÃ¢â‚¬â„¢s been reported that Greece is close to agreeing to pay +32c per EUR of government debt. Aiding the negotiations, Greek officials have signaled increased willingness to use collective action clauses if participation in PSI falls short of 100%.
- GBP: UK jobless claims surprised low at +1.2k in December vs. an expected +7k and continuing the positive trends for the unemployment rate. However, the ILO unemployment rate increased to +8.4% from +8.3%.
- EUR: The market risk rally remains intact, despite the poor data out of Australia. The CE3 block and Scandinavia currencies continued to outperform on the week.
- EUR: There was a successful longer dated issuance in both Spain and France. Spain issued +Ã¢â€šÂ¬6.6b in 5-10yr bonds while France placed +Ã¢â€šÂ¬7.9b worth of 2-4year paper and +Ã¢â€šÂ¬1.5b in inflation linked bonds. Despite the auctions yielding Ã¢â‚¬Å“strongÃ¢â‚¬Â bid-to-cover ratios, the auctions failed to generate market momentum in FI.
- GBP: UK retail sales ex-fuel rose +0.6%, m/m in December. With sales remaining subdued, analysts expect falling inflation to help real consumer income and support future data releases. Cable is expected to remain under pressure.