Market Preview: Rumors of Greek Aid Package Everywhere

BBH CurrencyView

• Dollar stronger on the day for the fourth day in a row.
• Stories are flying about a possible new Greek aid package, causing choppy currency markets.
• Swiss CPI well below expectations; Norway CPI above expectations

The dollar is mostly stronger this morning, with the exception of the Scandinavian currencies and CAD. EUR/USD is consolidating above the 1.43 level following rumors of a new deal for Greece by June and a well received 6-month bill auction. NOK is the best performer on the day rising 0.5% following a higher-than-expected CPI print. The MSCI Asia was flat on the day but European equity markets were up roughly 1% and S&P futures are up ½%. Commodity prices are mixed with gold and copper both up nearly 1% and oil down ½%. China announced a much higher than expected trade surplus, $11.4 billion vs. $3.2 expected. with exports increasing at a nearly 30% annual rate.

There are many official comments, stories and rumors regarding a new Greek aid package in the works. The euro price action is very choppy, in reaction to each story and in light of the uncertainty as to what is being considered. As of last Friday, it became clear that European officials agree that Greece will need new assistance, but what that specifically means is unclear. Greek auction today of 6 month t-bills went well, with the rate up from 4.80% at last to 4.86%, with more than the target amount sold, although bid to cover was a bit lower. Pressure on Greece is reduced today, with interest rates lower, off 82 bp in the 2 year and 32 bp in the 10 year, 5 year CDS off 143 bp and stocks up 1.5% and financials up over 4%. Stories include an aid package in the works of between euro 60 and 100 billion to be completed in June and Merkel’s comment that no package for Greece can be considered until the official assessment by the IMF, EU and ECB on Greek progress on reforms is completed in June. The euro decline that began with Trichet’s comments Thursday has led to a euro technical reversal on one important measure that we follow. For the first time in 3 months the 5 day moving average crossed below the 20 day average, which often confirms continuing weakness in a currency pair. These averages crossed yesterday for sterling which often precedes euro moves. French data this morning was negative, with industrial and manufacturing production both negative m-o-m. This highlights a discrepancy that we have been seeing between strong sentiment (eg, PMI) and weaker actual data. A move to 1.4500 would indicate that the position squaring following the ECB meeting Thursday has been unwound. Should Monday’s low at 1.4250 give way, then the next support level is the April low of 1.4150.

The CHF is amongst one of the worst performers on the day versus the dollar, plunging nearly 0.8% after reporting softer-than-expected CPI data. April prices came in at 0.3% y/y and only increased 0.1% m/m. With the SNB thought to be moving towards policy tightening, the sharp deceleration in prices may reintroduce the threat of deflation. The trade-weighted strength of the CHF (up nearly 6.2% since early February) is at least partially responsible at a time when many other nations are experiencing rising inflationary pressures. Indeed, this softer-than-expected data released prompted the CHF to selloff by 0.8% versus the dollar and 0.4% against the euro. Swiss bonds edged higher, with the yield on the 2-year down 4bps. While there were some seasonal distortions in the March data , the April inflation print shows more than a correction, indicating that the underlying inflation pressure is weaker than presumed. Taken together, incoming Swiss data has generally been consistent with the increased possibility that the SNB will hike its labor target rate from 0.25% at some point in Q3, though, should CPI continue to decelerate this will change expectations of a rate move in 2011 and thus likely weigh on the CHF. Elsewhere, Norwegian April CPI came in higher-than-expected, prompting the dollar to fall by 0.4% against the NOK (although, the data is distorted by a large rise in transportations costs due to the Easter holiday). The data will keep the Norges Bank on course to tighten policy, with the o/n OIS swaps implying a 50/50 chance of a hike at this Thursday’s meeting. In our view, the recent strength of the Norwegian economy along with the strong CPI, supports a strong case for a 25bps rate hike by the Norges Bank this week, even though it is unlikely that the bank will need to hike again until late in the year.