BBH CurrencyView: Euro Stabilisation Programme a Relief, for now


The US dollar and the yen are weaker across the board as the global market digest this weekend European Stabilisation Programme (see below). The scandies were the strongest performers in the G10 world (with the SEK and NOK up 2.8% and 2.6% respectively) while the euro pushed to a high $1.3094 by mid-euro session but lost momentum since, back just below the $1.30 mark. Cable was firmer, approaching $1.50 resistance despite the fact that we still do not have a UK government in place. Coalition talks are ongoing, with hope that a Cameron led coalition government will be formed in the very near future. BoE left policy on hold, a non event. EM currencies are stronger across the board, see EMEA outperforming on easing EZ concerns. PLN was the strongest performer, up 4.4% by mid-euro session. China unexpectedly reported a trade surplus in April (see below). Indonesia Q1 GDP was up 5.7% y/y (from 5.8% exp vs 5.4% in Q4). Germany’s March trade surplus at stronger than expected Eur17.2bn on 10.3% m/m soar in export growth.   

Global equity markets are surging post Euro stabilization mechanism programme, with European bourses up substantially mid morning (see DAX up 4.5%, CAC 40 up over 8%). French banks (highly exposed to Greek debt) outperformed in Europe. This comes after a strong Asia session, with the with the MSCI Asia Pacific index up by 1.4% (first daily increase in six days) and rises seen across the board. The Nikkei was trading 1.6% higher by the end of the session and higher close were also recorded on the Hang Seng (+2.5%), the Shanghai SE (+0.5%), the Kospi index (+1.8%) or again the S&P/ASX 200 (+2.66%) and the Taiwan index (+1.3%). S&P future points at strong open on WS. Crude oil prices have recovered from recent low, up 2.7% on the day.

Flight to quality trades are off (for today anyway) and this translated into sharp sell-off in the core European bond market, with periphery recovering from last week’s lows and outperforming. Confirmed buying of EZ bonds from BBK helping. Germany’s bund yields are trading 17bp higher (at 2.93%) while Greek yields were down 547bp.  10 yr UST yields up 16bp.   

Currency Markets                                                                                       

The European market has responded impressively to the Eur750bn European Stabilisation Mechanism programme announced this weekend. The euro has climbed back above the $1.30 mark, with further resistance found at $1.3115. The European equity market is trading sharply higher by mid European morning, with the CAC-40 up over 8% and the Spanish Ibex 35 index up over 10%. Greek 5 year credit default swaps have fallen to 657bp versus 915.5bp at Friday’s close, Portuguese credit default swaps are down to 263bp versus 425 at Friday’s close and the Spanish 5 year credit default swap has fallen to 157bp versus 238.6bp at Friday’s close. The 10 year Greek/German yield spread was trading at 464bp by mid euro session, the narrowest reading since April 22nd. So this w-e’s package has undeniably been welcome by the market, the question at this point is whether this Monday euphoria can be sustained. A few points are worth a mention at this point:

On the positive side, i) the emergency funding facility programme is large: the Eur750bn EU/IMF emergency funding facility (with EU Eur500bn in loan guarantees and credits as well as Eur250bn from the IMF) comes in addition to the Eur110bn rescue fund introduced for Greece and is of an unprecedented scale. ii) ECB QE measures are unprecedented and significant: various national European central banks (including the Bundesbank) have confirmed starting the buying of European government bonds this morning as the ECB started its QE programme. This is a sharp turn from last Thursday when the ECB President Trichet’s language suggested that QE was clearly off the agenda at this point.  iii) The rest of the G10 CBs involvement is important: the Fed announced temporary reactivation through January 2011 of its dollar swap lines with BOC, BOE, SNB, BoJ and ECB. This captures the international scale of the crisis and an international approach to trying to solve the crisis. On a more cautious note, iv) More details are required as soon as possible: the large funds and the fact that the EU managed to strike a deal this weekend comes as a major relief. However, the deal is still short of details and there will be various question marks building in the market over the next few sessions as to who pays for what and how quickly can each contributor deliver the funds if required. In this respect, there is a feeling of déjà vu: earlier in the crisis, a Eur45bn package was announced but when Greece made the official request, it took a couple of weeks for Germany in particular to get the all clear from the Parliament. This weekend’s loss at the NRW elections for German Chancellor Merkel can only make the process more difficult. v) ECB’s QE can be seen as transferring Greek risk from EZ banks to the ECB. Not a long-term solution. vi) structural, intra-euro competitiveness issues not addressed. Yet in the long-term, this is where the real problem lies and this morning’s German trade balance (with a surplus surging to Eur17.2bn from Eur12.7bn) confirmed major intra-European macroeconomic imbalances and can only reinforces this point. vii)Latest austerity measures (see Portugal and Spain) announced across the euro zone risk exacerbating the growth problem and in turn the debt predicament. viii) This also raises risks of social instability in Europe. Merkel’s coalition loss at the NRW elections this w-e is really a sanction vote against her handling of the EZ crisis and it also captures German tax payers’ discontent over the current crisis. A careful explanation of the importance of the package will have to be delivered to eurozone tax payers by head of states. ix) euro bears will also argue that all this comes too late.

In China, the April trade balance unexpectedly reported a surplus, at $1.68bn, versus a $0.55bn expected and following a $7.24bn deficit previously. Export growth was reported at 30.5% y/y (from 24.3%) while imports ran at a 49.7% yearly rate in April. Note that we have a very busy couple of days ahead on the Chinese data release front, with the April retail sales (expected at 18.2% y/y vs 18.0%) and April industrial production (18.5% y/y vs 18.1%) likely to confirm a very strong start to the second quarter. However, it is the April PPI and CPI data (also due tomorrow) that present a larger risk for the market. The April CPI y/y rate is expected to accelerate to 2.7% y/y (from 2.4%) while the April PPI yearly rate is seen at 6.5% from 5.9% -  both likely to rekindle monetary tightening talks, which would only exacerbate current market jitters, in turn favouring the risk-off trade, a supportive force for both the US dollar and the yen.

Upcoming Economic Releases                                                                       
America: Canada’s April housing starts, no major US release due today. Asia: Chinese April PPI, CPI, RS, IP.Events: Fed’s Kocherlakota to give a speech.


This was the BBH CurrencyView by Marc Chandler. Marc is the Global Head of Currency Strategy at Brown Brother Harriman. For more of BBH’s currency views, visit the BBH FX website here.

This material has been prepared by Brown Brothers Harriman & Co. (“BBH”) and is intended for information purposes only.  This communication should not be relied upon as financial, investment, tax or legal advice.  This communication should not be construed as a recommendation to invest or not to invest in any country or to undertake any specific position or transaction in any currency.  This information may not be suitable for all investors depending on their financial sophistication and investment objectives.  The services of an appropriate professional should be sought in connection with such matters.  The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete in its accuracy and cannot be guaranteed. Sources used are available upon request. Any opinions expressed are subject to change without notice. Please contact your BBH representative for additional information. BBH’s partners and employees may own currencies in the subject of this communication and/or may make purchases or sales while this communication is in circulation.

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