Forex Week in Review May 15-20

Developments with respect to Greece remain a source of stress for the markets. How will Greece find the €27bn it needs to fill its 2012 ‘funding gap’? Restructure, reprofiling? The market is trying to shape word definitions rather that reshape a quicker market solution for Greece. Before you know it we will have created a Lehman style contagion affair. Today’s Euro pullback appears to have been prompted by pre-weekend nervousness on peripheral finance issues and reports of heavy liquidation in Greek bonds that have coincided with the Spanish/Bund spread blowing out. It’s your typical ‘buy the rumor sell the fact’. It’s easy to create a lot of noise when liquidity is non existent on a Friday. Below are some of the highlights of the week:

EUROPE

• IMF names John Lipsky as interim Managing Director
• EUR headline inflation was unrevised at +2.8%, y/y, last month, but core-inflation surprised to the upside to +1.6%, y/y. Together with strong GDP numbers last week this clearly argues for further ECB tightening.
• Rightmove data showed UK property asking prices rising +1.3% this month, to the highest level since June 2008.
• Eurogroup chair Juncker conceded that Greek debt is currently at unsustainable levels and said that Europe would consider ‘reprofiling’ of Greek maturities, though only in the context of more spending cuts and asset sales from the Greek government.
• UK inflation, both headline and core, surprised to the upside last month. Headline inflation accelerated to +4.5%, y/y and core CPI jumped to +3.7% from +3.2%, y/y, in March, a new record high. Much of the spike was caused by airfare prices, up +36%, y/y.
• The letter from BoE Governor King to the UK Chancellor of the Exchequer again downplayed the above-target inflation. King continued to expect, in line with the inflation report, CPI to return back to target with the Bank rate moving in line with market interest rates.
• German ZEW economic sentiment was on the weak side, printing at 3.1 in May, down from 7.6 in April and continues the downward trend since February. The ZEW current situation assessment increased to 91.5 from 87.1.
• The BoE May minutes showed no change in the voting pattern despite some expectations of one less member supporting a hike. As at the last meeting, Weale and Dale voted for a +25bps hike and Sentance voted for a +50bps hike.
• UK jobless claims printed higher than expected at +12.4k vs. the flat consensus forecasted. The claimant count unemployment increased slightly to +4.6%, but the ILO unemployment was down to +7.7% from +7.8%.
• Strauss-Kahn resigns from IMF, France’s Lagarde possible successor.
• FT Deutschland reported that the ECB might cease to accept Greek sovereign debt if maturities were extended. Board-member Stark was quoted making similar comments at a public forum in Athens.
• UK retail sales surprised with a strong +1.2%, m/m read ex-gas, above the +0.8% forecast. It was the strongest increase in over a year,
• Spain-Germany 10-year spread exceeds April wides.

Americas

• Russia’s central bank (CBR) reported in its annual report that its previously disclosed increase in allocation to the CAD in 2010 came at the expense of the GBP, rather than lowering allocation to EUR or USD.
• Empire State manufacturing index extended its gains for a sixth-consecutive month (11.9 vs. 20.7), but at its slowest pace this year.
• Despite a weaker than expected TIC’s data (+24b vs. +57.7b), overseas demand remains relatively strong. China was seen as a net seller of US treasuries in March.
• Governor Carney stated that recent Canadian economic data continues to support the BoC’s near term outlook, noting that employment and inflation numbers were modestly stronger, while auto-sales and retail spending were a touch weaker. The Bank next meets on May 31st to determine their interest rate policy.
• US home construction fell unexpectedly in April, an indication that the troubled housing sector will remain a drag on ‘the’ recovery. Construction of homes plummeted -10.6% from March to a seasonally adjusted annual rate of +523k.
• US building permits came in weaker, falling to +551k from a downward revision of +574k in March.
• US manufacturing production fell for the first time in ten-months (+0.0%) last month, as Japans natural disaster disrupted the auto-industry. Industries used +76.9% of their capacity vs. a +77% reading in March. Manufacturing capacity utilization dropped -0.4% to +74.4%, ex-autos, then factory production gained +0.2% in April.
• In the FOMC minutes there was little different to what Bernanke commented in his post press appearance. The FOMC meeting showed that monetary policy tightening is still far down the line. Concerns about inflation were present, but with the dominating view still being rising energy costs are ‘transitory’.
• Canadian wholesale trade was weighed down by lower import prices (+0.1% vs. +1.2%) which provided for a disappointing report.
• US jobless claims fell for a second consecutive week (-29k to +409k), a tentative sign that the downward trend may have recommenced. The decline is being attributed to the ‘shake out of weather related problems, and supply shortages in Japan
• US home resale’s unexpectedly declined last month on widespread weakness (+5.05m vs. +5.20m), despite a downward revision to the previous month and the second contraction in three-months. What is also disturbing is that the month’s supply moved back above 9 (highest print in six months).
• For a second consecutive month the Philly Fed manufacturing index plummeted, falling from +18.5 to +3.9 in May.
• Canadian retail sales disappointed -0.1% and Canadian inflation numbers came in softer with CPI +0.3% vs. +1.1%

ASIA

• Japan core-machinery orders rose +2.9% in March, well above consensus expectations for an earthquake-induced 10% decline. This marks the third consecutive month of increased three-month momentum, but seems unlikely to fully reflect the impact from the mid-March earthquake.
• Australia reported that the number of home loans contracted -1.5%, m/m, in March, vs. expectation of a +2.0% rebound, to below +45k (weakest number in ten years). However, investment lending rose +2.1%, almost offsetting the -2.3%, m/m, contraction in February.
• RBA May minutes said that an appreciating AUD was helping to contain inflation pressures. However, the minutes also noted that higher interest rates may be required at some point if inflation was to remain consistent with medium-term goals.
• Australia reported weaker than expected wage cost growth in Q1 of +0.8%, q/q, vs. +1.1% expected.
• New Zealand input and output PPI rose to +2.2% and +1.7%, q/q, respectively. Consumer confidence rose to 103.2 from 101.4 in March, arresting the slide in confidence year-to-date.
• Japan Q1 GDP fell by -0.9%, q/q, weaker than the -0.5% consensus. The decline was even larger when taking into account that Q4 GDP growth was revised down to -0.8% from -0.3%, q/q, previously. This would suggest an increasing divergence in BoJ and other G10 monetary policy.
• New Zealand reported a larger budget surplus projection than the previous forecast easing concerns of sovereign rating downgrades.
• BoJ left their monetary policy and its asset purchase plan unchanged. Stable BoJ policy leaves the yen vulnerable as US front-end rates rise.

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