Friday’s rumours of a coalition agreement in Greece has turned out to be exactly that; a story with no substance. Parties did meet over the weekend to try and hammer out an agreement surrounding a national unity government but to no avail and the euro has hit the skids once again.
In what has become a game of “I told you so” European central bankers have started to speak openly about the possibility of a country (this means you Athens) leaving the Eurozone. They never would have dreamed of saying so only a couple of months ago, for example, before the Greek debt swap in mid-March but now it is all the rage. Phrases like “amicable divorce” and “if it can be managed” are not phrases to engender confidence. There is still a long way to go however, as we would need to see treaty changes and further backstops to prevent contagion before Greece would be allowed to fall, or be pushed, on to its sword.
There was more election intrigue in Europe courtesy of regional elections in Germany. Angela Merkel’s CDU party took a bit of a kicking and according to the preliminary results will garner the least amount of votes since WW2. It is likely that this will be portrayed as an “anti-austerity” protest although we would view this as incorrect and instead believe that the main reason is frustration over the entire European situation and noises from Berlin that inflation could be allowed to ramp up in country. Needless to say, this further political uncertainty has helped to undermine things into the European day’s open.
China brought a disappointing week of economic data to an end by cutting its banks’ reserve requirement ratios by 50bps (0.5%) on Friday. Following the disastrous trade figures twinned with poor retail sales and industrial production numbers, the cut was the least that the PBoC could do. We expect further easing of this nature to occur throughout the year as growth continues to slow.
Focus will remain on Europe today in the form of bond auctions from France, Germany, Spain and Italy today. It seems like we’re stating the obvious by saying that the recent fears over a Greek exit will manifest in higher borrowing costs for the periphery while this is will be the first French bond auction with Francois Hollande installed as President. The auctions kick off from around 10am BST.
Elsewhere EU industrial production (10am) is likely to show further weakness in the continental manufacturing sector ahead of tomorrow’s lacklustre GDP number.
Indicative Rates Sell Buy
GBPEUR 1.2461 1.2490
GBPUSD 1.6051 1.6077
EURUSD 1.2865 1.2889
GBPJPY 128.43 128.71
GBPAUD 1.6080 1.6105
GBPNZD 2.0616 2.0644
GBPCAD 1.6108 1.6107
NZDUSD 0.7778 0.7791
GBPZAR 13.10 13.15
USDZAR 8.1584 8.1879
GBPPLN 5.3448 5.3713
EURJPY 102.90 103.16
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