In a quiet session EURUSD has been trading in a fairly tight range between 1.2885 and 1.2965. Economic data has been thin on the ground today and this has led to a conviction-less market. We don’t believe this will last long, markets may be quiet this morning but it could be the calm before the storm – later this week Spain releases its 2013 budget and also the results of its latest round of banking stress tests. The outcome will be pivotal for the markets in our view. European stocks have been treading water in the last 10 days as the immediate effects of the ECB’s new OMT programme have worn off. It seems like the only thing that could propel markets higher is a formal request for financial aid from Spain, which would then trigger the OMT.
Bad = good for some in the markets
However, Spain and Germany both seem resistant to this idea as Merkel doesn’t want to ask her Parliament for more bailout cash after asking for banking bailout cash for Madrid only a few months ago. Thus it is not yet a certainty that Spain will request aid or that the OMT will ever get triggered. This is why the markets are eagerly awaiting Spain’s budget and banking stress test results later this week as bad news could force Madrid to request funds. So we may be in a situation where bad news from Spain causes the euro and other risky assets to rally and Spanish government bond yields to fall because of the anticipation that it will trigger the OMT.
The euro made a run at 1.2970 after lunchtime in the London Session after comments from the German Finance Minister who said that “the next step is banking union”. The may go some way to soothing fears that Germany is losing faith in the banking union plan after Merkel said that it won’t be in place by the Jan 1st 2013 deadline. It also shows how the market is willing to rally on the flimsiest news, and is driven by headlines at the moment.
A good example of this was a report that the ESM long-term rescue fund for the Eurozone may be able to invest in banking debt as it expands. However, there was little detail to accompany this such as what credit rating the banks would need to have before the ESM bought its debt and we still don’t know if the ESM will be enlarged from its current EU500bn. Thus, this information does not have major market-moving potential and was received with a whimper by the FX market.
The S&P cause a potential diplomatic nightmare for the SNB
Elsewhere, Switzerland was in focus this morning after rating agency Standard & Poor’s estimated the impact of the SNB’s EURCHF floor on other asset classes. It found that some of the euro the SNB has accumulated through maintaining the floor in EURCHF at 1.20 has been diversified into core bonds in the Eurozone. The SNB has spent a serious chunk of change buying German, French and Dutch government debt, approx. EU80 billion from January- July 2012. S&P said that in its view “this has significantly contributed to the declining yields” in the core government bond market throughout the first half of this year. This opens up a can of worms for the SNB and other central banks: essentially reserve diversification can cause the disruption of markets. So did the SNB exacerbate the widening of spreads between Spain and Germany, and Italy and Germany earlier this year? If yes, then is the SNB to blame for some of the wider stress in the financial markets that this caused? Could it have led to political and monetary changes in the Eurozone that were not necessarily needed? While we don’t think the SNB is that culpable, this report is a diplomatic nightmare for Switzerland and could invoke the ire of the Eurozone authorities, although so far there has been no comment form Brussels. In fact the report may not have passed SNB Chief Jordan’s desk this morning when he gave a well-publicised speech saying that the Bank would continue to support the peg and also that the franc should continue to decline in value in time.
US house prices – data to keep your eye on
US economic data released today showed that house prices rose by 0.44% in July, according to the Case Shiller index and the top 20 cities in the US saw prices rise 1.2% from July 2011 to July 2012. This is hardly stellar growth. However, this data is old. What will be more important is the development of house prices now that the Fed has started buying mortgage-backed debt as part of QE3. All eyes will be on whether this spurs house purchases pushing up prices in the medium-term.
One to Watch:
GBPUSD has been fairly well supported versus the dollar even as other markets have sold off. It had a mini-rally this morning as the dollar started to falter, however it ran into resistance at 1.6260. This pair is finding it increasingly difficult to make the last push and get above the 1.6295 level that would signal a fresh 2012 high. There are a couple of things I am watching. Firstly, I would not go long here until we get a convincing break above 1.6305 – only then would I have a bit more certainty that we are in a new paradigm and there could be another leg higher, potentially to 1.65, for this pair. Secondly, if we fail to close above 1.6260 tonight then I will be worried that 1.63 is a stretch too far for this pair and its failure to crack this level may signal a downward reversal. This is one to watch closely as right now its future direction seems to hang in the balance and we may find out in the next couple of days if GBPUSD is set to move higher or lower in the short to medium term.
GBPUSD: daily chart