Sunday, June 19, 2011

Forex Week in Review June 12-17

Markets are ending the week on firmer footing. The meeting between Merkel and Sarkozy and the news of a new Greek cabinet is supporting the EUR. The German Chancellor has agreed to compromise and work with the ECB on a debt plan for Greece. Supposedly, they will use a ‘Vienna-style’ voluntary debt rollover as the framework. The Greek PM Papandreou has formed a new cabinet, setting the stage for a confidence vote in parliament next week. Market uncertainty remains. No one knows the depth and scope for ‘the’ rollover agreement. The European finance ministers resume their talks on the second bailout package for Greece this Sunday.

“When you are insolvent you do not solve things with new and larger loans”-Yanis Varoufakis

Below are some of the highlights of the week:


  • Italian IP was strong in April with a +1.0%, m/m rise, well above the +0.2% expected and pushed the annual growth rate of industrial production to +3.7%, y/y from +3.4%.
  • UK headline inflation was stable at +4.5%, y/y in May. Core inflation subsided to +3.3%, reversing the exceptional spike to +3.7% last month. Transport services, the main cause, fell -5%.
  • S&P’s added to Greece’s woes, cutting its long term sovereign rating three notches to CCC, citing, a ‘significantly higher likelihood of one or more defaults’.
  • UK RICS house prices fell to -28 in May from -21. Analysts note that weak data and softer inflation continue to argue against a hawkish turn in the BoE policy stance.
  • Swedish inflation stayed stable at +3.3%, y/y in May, while core inflation moderated a touch to +1.7%, y/y from +1.8%. Market believes its in line with Riksbank’s expectations and that they will continue to raise interest rates.
  • Tuesday, EU finance ministers ended their first meeting with little evidence of progress in agreeing on a framework for private sector involvement in the Greek rescue. Meet again this Sunday.
  • Euro-zone IP grew +0.2%, m/m vs. expectations for a -0.2% decline. March was revised upward to flat from the -0.2% m/m fall. Strength was driven by Italy, Finland and Luxembourg, offsetting the -0.6% m/m fall in Germany and the -0.3% fall in France.
  • UK labor report disappointed with a spike in jobless claims to almost +20k, above the +6k consensus. Weekly earnings were weak at +1.8%, y/y, down from +2.3%. No reason for the BoE to turn less dovish.
  • SNB kept rates on hold, maintaining a relatively dovish tone in the policy statement. Growth forecast unchanged at +2%, y/y. Inflation forecast for 2013 was revised lower to +1.7%, y/y, from +2.0%. The franc strength is the reason behind lower inflation forecasts from 2012.
  • UK retail sales ex-autos fell -1.6%, m/m, in May with the year-on-year growth rate now reduced to 0%. The weak wages and money growth reported earlier are likely to pull down inflation.
  • Euro-zone final CPI for May was unrevised from the flash estimate of +2.7%,y/y. Core inflation also moderated slightly to +1.5%, y/y, from +1.6%. Lower energy inflation was the main reason behind the softer headline.


  • US Retail sales (-0.2%) fell last month for the first time in eleven-months as receipts at auto dealerships dropped sharply, but the decline was less than expected (-0.6%), and provided investors some optimism of a pickup in economic activity in the second half of the year.
  • US CPI surprised to the upside with a +0.2% rise in the headline and a more worrying +0.3% rise in the core (ex-food and energy). This is the strongest monthly rise in nearly three-years, making it more difficult for helicopter Ben to implement QE3. Analysts’ have noted that the y/y core-CPI has accelerated to +1.5% from +1.3%.
  • An ugly Empire State manufacturing print (-7.79) can be added to the long list of softer US data. This is the first negative headline in eight-months and a complete surprise to the market who had expected the index to edge higher to 13.5.
  • US TIC data showed that net foreign purchases of long term securities rose from +$24b to +$30.6b last month. China has added $7.6b to its net-treasury holdings.
  • CAD manufacturers saw sales slip -1.3% in April, reversing much of the previous month’s gains as the Japan earthquake cut off supplies to the auto industry.
  • The Philly Fed factory index came in at a miserable -7.7 this month, mirroring the ugly Empire print and calls into question the durability of the US recovery. It was the weakest headline reading in two-years.
  • US weekly claims were a tad better, declining -16k to +414k, again above that psychological +400k barrier. The headline print was aided by an easy seasonal factor.
  • US May house starts rose + 3.5% to +560k. Giving a better performance was US May permits, rising +8.7% to +612k.
  • US current account deficit rose in the 1st Q (-$119b vs. -$112b), dragged higher by rising imports. Most of the increase in imports came from gains in industrial supplies such as petroleum,
  • CAD Wholesale sales edged down -0.1% to $46.8b in April, following a +0.3% gain in March.
  • Confidence among US consumers dropped more than forecasted in June (71.8 vs. 74.2) as households contended with higher prices that are eating into incomes amid slowing job growth.


  • NZD suffered more earthquakes in Christchurch, causing some damage to roads and structures in residential areas of the city.
  • China reported that new loans totaled CNY551b in May, much lower than the consensus forecast for CNY650b and down from the CNY739.6b in April. Loans are 12% lower ytd than last year and 39% lower than in 2009. This would suggest that Chinese policy tightening is beginning to take hold.
  • Growth in Chinese industrial output (+13.3%) and fixed asset investment (+25.8%) remains robust and above market expectations, while retail sales (+16.9%) was modestly below expectations.
  • Chinese CPI inflation was at a three-year high of +5.5%, y/y in May. The rise in services inflation continues to offset the slowing of momentum in food inflation
  • PBoC hiked the commercial banks’ reserve requirement ratio (RRR) +50bp, that is a cumulative +550bp since the cycle began. Rate is now at +21.5%.
  • BoJ announced the creation of a small new lending facility, adding 500b yen to its existing 3-trillion yen facility that provides loans to banks at +0.1% for on-lending.
  • RBA Governor Stevens reiterated a bias to raise the policy rate in the medium term and acknowledged that the slightly restrictive monetary policy and fiscal policy are currently constraining the economy. He reiterated that inflation is still more likely to rise than fall despite the gains in the AUD and that further rates rises are need to curb price increases.



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