This is gearing up to be a fairly busy week. Not only do we have FOMC minutes, RBA minutes, the first readings of August PMI for the Eurozone and China, GDP for Norway and the second reading of Q2 GDP for the UK, but Eurozone politicians are back from their holidays, which have increased the chance of headline risk.
The ECB to the rescue: not if Germany can help it
The weekend was full of reports and speculation about the next ECB meeting on September 6th. The German press reported that the ECB may discuss the prospect of capping bond yields – i.e., not allowing bond spreads between Europe’s periphery and Germany to rise above a certain level. The report said the Bank would discuss this proposal at the next meeting. This is a fairly radical idea for the ECB, and these reports have helped to lift the euro today, which earlier made a stab at 1.2370 – just below the top of its 30-day range at 1.2440. However, I am sceptical for a few reasons: 1, the Germans have been against buying bonds, and a cap on yield spreads could tie the ECB into unlimited bond purchases during periods of market volatility. The Bundesbank and a German finance ministry official have already poured cold water on the idea saying that they were not aware of an ECB plan to buy bonds at a certain level and that a level-based bond-buying programme was “very problematic” in theory. This weighed on the euro as we moved towards the middle of the European session 1.2280 in EURUSD remains a major support zone in the short term. 2, surely something like this would be only be acceptable to the ECB if the countries involved, say Spain and Italy, were to sign up to a bailout and the harsh terms attached to this. There is no sign that Spain will sign up to another bailout, and Prime Minister Rajoy has been very non-committal when it comes to accepting even more financial aid in recent months. Thus, the euro ‘s ability to rise when rumours surface of potential ECB intervention could be a false move, and the single currency remains at risk from a sell-off in our view.
Samaras’ charm offensive
Greece is also back in the picture. Its financing gap could grow again to EU 14bn from the initial estimate of EU 11bn this year and next due to the continued economic contraction. This is important, since Germany’s finance minister said at the weekend there can be no more bailouts for Greece. There seems to be a bit of a split developing (yet again) between Germany and France, with the French seemingly supporting more aid to Greece to keep it in the Eurozone, while the Germans don’t want to give the Greeks more funds. In the past discord between France and Germany (Europe’s de-facto leaders) has caused bouts of market panic. This week both the French and German leaders meet with the Greek PM Samaras thus risk assets could be sensitive to any sign of a rift between Hollande and Merkel on how to solve this crisis.
The Draghi put:
The markets are being driven by headline risk today as we wait for more interesting economic data later this week. House prices for the UK for August came in weaker than data for July; the annual rate fell to 2% from 2.3% last month. Construction data for the Eurozone fell 0.5% in June, compared with May, although the annual rate “improved” to -2.8% from -8.1% in May due to a statistical quirk. These are both second-tier data releases and the PMI data for the currency bloc released on Thursday and the Q2 GDP revision for the UK on Friday are more important from a markets perspective. As we get closer to the September ECB meeting and Federal Reserve Chairman Ben Bernanke’s speech at the end of this month then fundamental market drivers are likely to come back into focus. Last week the better tone to the US data contrasted sharply with the weak Eurozone economic picture. This could ultimately cause US Treasury yields to rise faster than their Eurozone (German) equivalent, which is EURUSD negative. For now though the chief euro driver remains credit risk and as long as the “Draghi put” remains on the table then the euro seems content to trade in a 1.2050 – 1.2450 range.
Data watch: The RBA minutes
Source: Forex.com and Econoday
One to watch: AUDUSD
It could be a big week for the Aussie dollar as the RBA minutes and the bi-annual RBA testimony to Parliament all take place in the coming days. The Australian Treasury last week said that the Aussie dollar was overvalued and the RBA should cut rates to try and limit upward pressure on the currency. This caused the Aussie to sell off. The Treasury has a big influence on the RBA as it is a government agency and the board contains members of the Treasury as well as economists outside of the government. The RBA’s duty as stated in law is to help the stability of the currency, thus if the RBA can argue that the currency is unstable it is allowed to act to limit its strength. The minutes and the testimony will be pivotal to see if the Treasury gets its wish and the central bank strikes a dovish tone.
We think the RBA will sound cautious, but not dovish and we expect it to remain in wait and see mode. Firstly the Bank is unlikely to justify weakening the Aussie because it is unstable – volatility in AUDUSD (according to the at-the-money options market) is at its lowest level since 2008, which weakens the argument that AUDUSD is unstable. Secondly, there have been signs that the Australian economy is picking up. China’s growth slump may have bottomed and AU retail sales, house prices and private sector credit have all picked up in recent months. Thus, the RBA may not be as dovish as some expect, which could cause the Aussie to rally. While we still think the Aussie is due a sell-off, we believe the trigger will be renewed concern caused by the Eurozone debt crisis and not Australia’s domestic picture. In the short term there may be further upside on the back of less dovish RBA minutes. After falling to 1.0410 last week the cross has picked up to 1.0450, a less dovish than expected reading of tomorrow’s minutes could cause the AUDUSD to rise to 1.0500 (200-hour moving average and the Tenkan line) and then towards 1.0600.
AUDUSD: Hourly chart