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After the initial weakening of the single currency on the back of the weekend’s political developments in both France and Greece, the euro crawled back through most of Monday’s session, although volumes were naturally muted by the London holiday. In France, there is a new President keen to rebalance the agenda in Europe towards growth and away from yet more austerity. In Greece, there is a mad scramble to try and form a government from the results of the latest election, which at present looks to be a tall order. Now, the task of forming a new government has fallen to the leader of the Syriza party, who is seeking to re-negotiate the bail-out terms. Meanwhile, writing in the FT today, the head of the German Bundesbank (Weidmann) has, in no uncertain terms, made clear that the ECB is not set to bow to pressure from anyone to do more to help. Not surprisingly, he is clear about the limits of what the ECB can achieve and shows no signs of giving ground to any fresh-faced European leaders. Politically at least, we are heading for a turbulent few weeks in Europe.
Facing reality in France. As the battle lines are being drawn between the ECB and European leaders, so they are between Germany and the new French president. Much has been heard from Hollande regarding re-negotiation of the fiscal compact, together with a greater emphasis on growth, but the key is how much of this was just election rhetoric and how much is likely to be carried through in practice. Unsurprisingly, the first response from Germany yesterday was fairly steadfast, Merkel re-iterating that there was no scope to take apart the fiscal compact and rejecting the black and white division between growth and austerity. As always, the reality of the budgetary numbers and economic situation will, to a fair degree, curtail the promises and commitments of the election campaign. More than half of French public debt is held by overseas investors so, in reality, Hollande (and more particularly France itself), cannot afford a “war on finance” and France has always been epitomised by its verbal opposition to the “Anglo-Saxon” approach to finance, but also benefited from it greatly. The larger picture though will be determined by the extent to which France can ease back on austerity but still convince investors as to its resolve to maintain longer-term budgetary discipline which will be required to retain bond yields at levels consistent with debt-sustainability.
Aussie fast losing friends. For the Aussie bulls, the past week or so have been very tough. After threatening 1.05 late last month, the AUD dropped to near 1.01 yesterday, its lowest level for the year thus far. As we have been highlighting, it has been a combination of local and international forces that have sunk the currency. Last week the RBA surprised with a 50bp rate cut, and there looks to be more to come from the central bank – on Friday it published forecasts for both inflation and growth which were lower than previous estimates. Also, the RBA, just like traders and investors, is increasingly cognisant of the risks of a significant sustained downturn in Europe – last week’s data suggested the recession evident in the south of Europe would be deeper than expected. The release of trade data overnight has shown the widest deficit for over two years, which further dented sentiment on the Aussie after the modest recovery through the Monday London session.