Kicking the “Cannes'” Down the Road

BBH CurrencyView

• Markets are cautiously optimistic ahead of Greek confidence vote, US payrolls and G20
• US private payrolls expected to increase by 125k; Greek headlines still likely to drive price action
• G20 unlikely to deliver much in terms of policy solutions; problems require national solutions

Markets are steady ahead of today’s risk events. The dollar is trading in a tight range against majors but European and Asian EM currencies are mostly stronger after yesterday pickup in risk appetite. At 1.383, EUR/USD is holding up above the 50-day MA, while USD/JPY remains locked into the 82 level over the last four sessions. Major European equity indices are up as much as 1% following the nearly 2% positive close of the S&P and the Nikkei indices, but have given up some of their earlier gains after the weaker German PMI and factory orders data releases. Dollar bloc currencies are under pressure following a plunge in Canadian employment (-54k vs. 15k expected) and a statement from the RBA, revealing downside risks to the growth and inflation outlook driven by the financial stress in Europe.

Today the news from Europe is likely to share the spotlight with the US October employment report. This is among the hardest numbers for the market to forecast, after all. There are few inputs and the inputs that are used to forecast the report generally track economic trends but at the same time frequently deviate on a month-to-month basis. The Bloomberg consensus is for the private sector to have added 125k private sector jobs in October, this is around the 3 and 6 month averages. The ADP report showed an increase of about 110k from the private sector. The weekly initial jobless claims fell between the Sept and Oct NFP survey weeks. The ISM manufacturing employment index slipped 0.3 points but held above 50. The ISM non-manufacturing rose to 53.3 from 48.7. The average weekly hours were likely flat while hourly earnings likely matched the Sept increase of 0.2%. With state and local government lay-offs continuing, government employment likely once again dragged down the headline number. Recently, relatively good US employment reports have seen the dollar decline as risk-on tactics dominate the market response.

Headlines from Greece are still likely to dominate price action ahead of the weekend. The political wrangling in Greece continues with the announcement overnight by Prime Minister George Papandreou that he will call off the referendum if the opposition agrees to the bail-out package. The opposition party appears to have little interest in a government of national unity, preferring to position itself against Papanderou’s strict austerity measures. They appear to be willing to negotiate but are still calling for Papandreou to step down and early elections. From here there seems to be two main scenario’s for tonight’s vote. One, Papandreou manages to come to an agreement with the opposition over a new government that could get the latest debt deal agreed. Two, if Papandreou loses the confidence vote, the president will lead negotiations for a transitional government and there will also be early elections. With several of Papandreou’s own lawmakers defecting this seems the most likely option. Either way an agreement will have to be found quickly, as Greece’s Finance Minister stressed that Greece needs the bailout funds by Dec. 15, and Merkel and Sarkozy have made clear that Greece will not see additional aid until it has fully backed the Oct. 26 deal. Looking ahead, while Greece is front and center now, the core problem for the euro zone is how to mitigate contagion to Italy. Italy’s 10-year yield generic yield remains near 6.2% and for policy makers to effectively backstop yields we will most likely need more aggressive action from the ECB or the G20.

No one should be surprised if the G20 fails to deliver anything beyond colorful comments by individual policymakers. Still, one can always be hopeful. Here are a few concrete things that could come out of the meeting, ordered by our view of likelihood of happening: (1) G20 could boost the IMF warchest ($391bn currently available) and perhaps create a new IMF “facility” which could support Italy and Spain. This would necessarily imply that countries such as Brazil, Russia and China would have a stronger say in how the money would be deployed; (2) They could get the IMF to increase, speed up or even soften the requirements associated with its short-term liquidity lines; (3) They may get a stronger austerity commitment from Italy; (4) Countries could make explicit bilateral commitments of support for the EFSF; (5) The increased pressure on China’s currency manipulation could (perhaps through horse-trading) get some concessions in CNY flexibility. For example, widening the USD/CNY band seems to be a low hanging fruit and a low cost concession for China which could be negotiated behind the scenes. All in all, though, we suspect that precious little is likely to be achieved, given some of the deep problems that face G20 countries requires national solutions.