FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Even though developments in the Eurozone have dominated proceedings of late, we expect the focus to shift to the US today as the labour market report is due, amid growing concern that the US economy is showing renewed signs of strain. Leading indicators and other payrolls reports have pointed to a soft print. Our economists lowered their forecasts to +125k nonfarm, +150k private and an unchanged unemployment rate at 9.0%. Market consensus has also dropped 20k in the past week and realistically any print above +150k would probably be welcomed by investors. The dollar could face headwinds on a positive surprise as risk-seeking would be supported and a disappointment could keep
QE3 fears alive, again to the detriment of the dollar. QE3 fears, though, could be mitigated in the weeks ahead should Fed officials reiterate the high bar needed for further easing. To compound the dollar’s woes, Moody’s also cautioned it could place US ratings under review for downgrade if there is no progress in coming weeks on the debt ceiling issue. That said, with the unresolved Eurozone situation and continued nervousness about a possible global growth slowdown, we could very likely see market participants shed risk ahead of the weekend, especially if talk of a fresh deal for Greece fails to materialise.
EUR
Rumours regarding a new rescue packet for Greece are abounding since it has become clear that there is an additional funding shortfall in the Greek budget. Even though IMF and EU had agreed on an aid packet worth a total of EUR 110bn., in the meantime yields for Greek bonds have more than doubled compared with May 2010 and Greece is unlikely to be able to return to the capital markets by next year as had originally been intended. Additional poignancy was added by the IMF’s threat to withhold payment of the June tranche if the financing for Greece for the coming 12 months could not be secured. The publication of the so-called troika’s (consisting of EU, IMF and ECB) report in which the three judge the progress of the Greek savings efforts will be an important mile stone in this context. The payment of the June tranche, which has so far been withheld, depends on it. The head of the Eurogroup Jean-Claude Juncker made it clear yesterday that the report, which is expected to be published over the coming days, will not contain any details on a further bailout packet for Greece. A solution is frantically being drawn up in the background. The different points of view of ECB (no debt restructuring), Eurogroup (Vienna initiative) and individual states (Germany: involvement of private investors in further Greece aid) are making an agreement on the additional aid packet even more difficult. According to Juncker it will take until the end of the month before a final decision will be taken.
JPY
Prime Minister Naoto Kan will remain in office. Following Kan’s announcement that he wanted to step down in the autumn or early next year at the latest he survived a vote of no confidence with a majority of 293 to 152 yesterday. The failed vote of no confidence is nonetheless unlikely to calm things down. The governing party DBJ (Democratic Party of Japan) remains split and the opposition is unlikely to give in so easily. As a result political uncertainty in Japan is likely to continue for some time, so that the yen will continue to be unsuitable as a safe haven in times of high risk aversion.
TRY
The list of difficulties faced by the Turkish central bank (CBRT) is not getting any shorter. Consumer price data for May is on the agenda today, these are likely to reflect global inflation developments now, showing a higher inflation rate than the previous month. The CBRT’s inflation target of 5.5% is unlikely to be reached. We therefore assume that the central bank will start a rate reversal over the coming months. The fact that it did not raise the minimum reserve requirements at the last rate meeting on 5th May is pointing that way. That does not mean that the central bank did not consider a tighter monetary policy to be necessary but signals that it is considering the use of its other monetary policy tools, i.e. key rates. This is good news for the lira. The local currency is however only likely to recover once risk aversion eases notably and the CBRT clearly communicates the rate reversal.
CZK
Czech retail sales for April are likely to shed some light on the current status of the economic recovery. Consensus expects 1.8% yoy growth. Only a clear surprise is likely to lead to the koruna breaching its current range as in May the central bank provided a clear dampener to excessive growth and rate speculation with its dovish inflation report.
SCHEDULE
Please visit GCI’s Economic Calendar for a schedule of market news and events.
