It has been an uninspiring jobbing week for the single currency. The EUR has been confined to within a tight two cent trading range. Volatility blips have been fueled by strong rhetoric from Merkel, very much backing earlier Draghi comments, a think tank suggesting that a Spanish bond buy strategy was imminent and mixed global data. Overall, it seems that the market remains unequivocally bearish on the EUR, where a Treaty-consistent solution to Spainâ€™s economic crisis has yet to be discovered. It looks very much like the currency is gradually taking over from the USD as the funding currency of choice for long Emerging Market carry positions and its beginning to correlate negatively with risk. To date, Euro zone politicians have rarely taken any significant pre-emptive action without market pressure. We may have to wait until September before we get to see some real market movements.
Below are some other highlights of the week:
- EU: The week started with German press reports that its government is pushing for more EU integration. Supposedly Merkel wants Europe to move toward an ever closer union and is already pushing at the limits of what is possible under the constitution, implying a referendum may be needed.
- NOK: Norwayâ€™s retail sales fell -1.1%, m/m, in June, disappointing against expectations for -0.5%. Oil prices will mostly likely prevent Norges Bank from easing.
- EUR: Positive surprises on the French (flat) and German GDP (+0.3%), albeit being minuscule, the fact that they were not to the downside or showing GDP in contraction is market proof that the core is very much independent from the â€œcliff divingâ€ peripherals.
- EUR: Euro Regional economic output fell -0.2% in Q2, making it more difficult for the European leaders to end the fiscal crisis any time soon. Basic economics expects rising unemployment and falling consumer and business sentiment to â€œworsen the regions public finances in many countries and in turn, push back debt-reduction targets even further, which will only heighten concerns amongst investors.
- GER: the regular ZEW German sentiment indicator showed that the countryâ€™s economic expectation fell for a fourth consecutive month in August and managed to hit the lowest reading this year (-25.5). The decline suggests that the financial market expects the German economy to cool down even further throughout the next six-months. The Euro-zoneâ€™s crutch is under pressure and by default so too is the rest of Europe. The German economy cannot be expected to continue to defy the euro zoneâ€™s worsening debt crisis. The ZEW current conditions index fell further to 18.2 from Julyâ€™s unrevised 21.1.
- Gr: Greece completed its largest debt sale in two years mid-week, making sure that it has the liquidity to repay bonds held by the ECB next week. The Greek Public Debt Management Agency sold +EUR4b at +4.43% 13-week T-bills. Funds raised are for ECB repayments so Greece does not default making it impossible for the countryâ€™s banks to carry on borrowing from the ECB. The problem is that the bad Greek banks brought most of the bills and they are funded by the ECB. What wrong with this scenario?
- SEK: Swedish data continues to come in better than expected. IP surprised and rose +0.4%, m/m in June compared to expectations of a +1.0%, m/m fall and very much a surprise considering the Euro-zone weakness.
- GB UK headline inflation surprised stronger than expected with a +0.1%, m/m gain compared to expectations for a +0.1% fall in prices in July. The annual rate picked up to +2.6%, y/y from +2.4%, y/y. This could make more easing from the BoE less likely.
- CEE: CZK and HUF remained in recession in Q2. Hungary contracted -0.2%, q/q, a touch better than consensus for -0.4%, while Czech GDP at -0.2% was in line with expectations.
- UK: UK unemployment claimant count measures fell last month by -5.9K with the previous month revised higher by only +1k rather than the +6.1k initial release. Analysts note that the Olympics has clearly had a positive effect on the headline, but the fall could have been larger had it not been for the changes in the benefit system.
- UK: The BoE minutes suggested that the UK economy may not be as weak as Q2 growth figures suggest and that a new lending scheme would boost activity in H2. The MPC voted unanimously to maintain the size of the BoEâ€™s bond-buying stimulus program at +375b and to keep its key interest rates at +0.5%.
- BoE: Governor King firmly reiterated that the risks from the Euro-zone debt crisis remains substantial and said the pounds â€œrecent strength outright versus the EUR weakens rebalancing risks.â€
- GER: German court confirms September 12 date for ruling on constitutional matters.
- ESP: It seems that Spain is allowed to dip its hand into the cookie jar a tad earlier to receive an emergency disbursement from the +â‚¬100b bailout of its financial system because of limits the ECB imposed last month on repos of government guaranteed bonds.
- GBP: Retail sales (+0.3%) increased more than expected last month, and this despite earlier feedback suggesting that the Olympic games had no effect on trade. Constantly telling the masses to give London amiss for the past few years did not seem to work. Even the June headline got a boost, jumping from +0.1% to +0.8%. This strong data will be a blow to the doves who are calling for more UK QE in November.
- EUR: Euro CPI data did not even flinch. It held steady at +2.4% for the third consecutive month and just above the ECBâ€™s annual target rate. For the 17-member Euro-zone it happened to fall -0.5% on the month compared to -0.1% in June.
- EUR: Euro-zonesâ€™ current account surplus continued to rise in June due to an expanding trade surplus. The current account surplus has rallied to +EUR12.7b from +EUR10.3b in May.
- EUR: EZ June exports boosted the regions surplus on trade (+EUR14.9b largest since 1999) to its highest point since records began, up +12%, y/y far outpacing the +2% rise in imports.