BBH CurrencyView
- Dollar broadly mixed as the uncertainty over the Greek persist; German IFO beats expectations
- News of a Greek austerity deal with EU-IMF are positive but risk surrounding austerity vote remain
- China said efforts to stem inflation are succeeding; we continue to expect 5% CNY appreciation
The dollar is broadly mixed as the uncertainties over the passage of the Greek austerity package continue keep markets on the defensive, despite the news that Greece agreed on a five year austerity plan with EU-IMF inspectors. The euro fell back to recent lows ahead of $1.42 on austerity jitters after Greek PASOK lawmaker Rombopolous said he hasn’t decided on fiscal plan, with sterling following the euro after topping out ahead of $1.605. A move above the 200-dma at 1.6031 today could see more short covering up through buy stops at 1.607 on an intra-day basis. Global stocks are broadly higher with Asian equities advancing in part on the back of the sharp drop in oil prices and the positive (albeit tentative) developments in Greece. European stocks are advancing as well with the Euro Stoxx 600 up roughly 0.6%, led by the nearly 2% gain in materials following the strong German Ifo report, even though stocks have given back some recent gains as shares in Italian banks appear to have been suspended. The positive news development overnight and strong data are weighing on bunds with the 2-year up 2bps, although peripheral yields still remain under pressure. Elsewhere, oil prices stabilized after yesterday’s 4% drop, up 0.5%.
Late in the NY session yesterday some positive, albeit not final, news emerged suggesting Greece sealed a deal with the IMF and EU on a 5-year austerity plan. According to press reports, there was an agreement on new financing for Greece through 2014, although the final details have yet to emerge. The EU is scheduled to meet on July 3 to discuss further details of the new financing package and to approve the final details on July 11, even though these dates are likely to change depending on the progress of the negotiations. And while this is a positive development for the euro and in turn market sentiment in the short-term, there are two important risks that remain. Most importantly the Greek parliament needs to approve the EUR78bn in austerity measures to secure the new bailout package – the vote is set for next Tuesday. The successful confidence vote this past week increases the probability that the austerity measures will pass but such an outcome is not guaranteed, especially given a disgruntled opposition and growing public revolt. The other condition for the bailout is that Greek debt holders will maintain their support via a type of Vienna Agreement – which needs to be negotiated on a country-by-country basis to make it look as voluntary as possible. An infinite numbers of complications can arise from these trilateral negotiations between EU leaders, bond holders and rating agencies. All told, the key hurdle over the next week remains the austerity vote next Tuesday and indeed there is a long time between now and then and while news reports indicate Greek PASOK lawmaker Rombopolous may join the opposition against the austerity package (which would bring the expected votes down to 153 out of 300 and would raise the risk of an early election) markets have recently been scant to hold risk ahead of the weekend, which is likely to keep the euro on the defensive as uncertainty looms.
China’s Premier Wen Jiabao published a piece in the FT today discussing China’s trajectory through the crisis. The key line for markets was this, “China has made capping price rises the priority of macroeconomic regulation and introduced a host of targeted policies. These have worked. The overall price level is within a controllable range and is expected to drop steadily.” This follows yesterday’s news that a high level NDRC official suggested that monetary policy should refrain from using reserve requirements and instead focus more on rate increases – which would have a smaller impact on economic growth. As we have been discussing, there are growing signs that authorities may be starting to take their foot off the breaks. If this interpretation is correct, the likely reasons are that tightness in the interbank market is becoming disruptive and the need to ensure that the observed slowdown in economic growth does not go beyond what authorities want. Indeed, rates in local Chinese money markets have been rising steadily and much of the recent Chinese data has come in the weaker side of expectations, including PMI, exports and new loan growth. The perception that policy is changed was of the main factors supporting Chine equities over the last couple of sessions, up almost 3%. Indeed, the PBoC reportedly injected a large amount of liquidity into the system this week, part of which through reverse repo operations. The impact of this story in the rate of CNY appreciation is unclear. For now, we stick with our base case of continued appreciation at a pace of roughly 5% annualized.