MacroScope

Euro will rally further, say the most accurate FX forecasters

The euro will rise even more, according to some of the top foreign exchange strategists who accurately predicted resilience in the common currency over the past year.

If it does, policymaking will get even tougher for Mario Draghi and the European Central Bank, who are already grappling with inflation at a four-year low and well below the bank’s target.

In 2013, the euro was the best performer among the majors, gaining almost five percent against the dollar, wrong-footing the consensus view in Reuters polls during that period.

The latest poll suggested once again that the euro is set weaken over the coming year in anticipation of a dollar rally as the U.S. Fed is widely expected to end its massive stimulus programme and hike interest rates next year.

While that makes sense as a logical explanation for currency moves, this course of events is so well understood by markets that it’s hard to imagine how anything other than a much earlier interest rate hike isn’t already priced in.

Greeks bearing bonds

Greece will sell its first bond in four years.

We know it will aim to raise up to 2.5 billion euros of five-year paper via syndication and wants to pay less than 5.3 percent – remarkable since only two years ago it was tipped to crash out of the euro zone and yields on 10-year debt peaked above 40 percent on the secondary market. They dropped below six percent for the first time since 2010 on Wednesday.

Athens has no pressing funding needs but wants to test the waters as part of its strategy to cover all its financing from the market by 2016. It still has a mountain to climb and may well need more debt relief from its EU partners to corral a national debt that is not falling much from 175 percent of GDP. 

But for all that, it’s a propitious time to borrow. Peripheral euro zone bond yields have tumbled this year, benefiting from wobbles in emerging markets, and now European Central Bank consideration of printing money has given bond prices a further lift.

A question of gas

Vladimir Putin will meet senior Russian government officials to discuss Russia’s economic ties with Ukraine, including on energy after state-controlled natural gas producer Gazprom said Kiev missed a deadline to pay a $2.2 billion bill.

In previous years, gas disputes between Moscow and Kiev have hurt supplies to Europe. The Ukraine government has said it would take Russia to an arbitration court if Moscow failed to roll back gas price hikes.

U.S. Secretary of State John Kerry accused Russian agents and special forces of stirring separatist unrest in eastern Ukraine, saying Moscow could be trying to prepare for military action as it had in Crimea. Armed pro-Moscow protesters occupied Ukrainian government buildings in two cities in the largely Russian-speaking east.

Ukraine inching back to the brink

Pro-Moscow protesters in eastern Ukraine took up arms in one city and declared a separatist republic in another yesterday and the new build-up of tensions continues this morning.

The Kiev government has launched what it calls “anti-terrorist” operations in the eastern city of Kharkiv and arrested about 70 separatists. Moscow has responded by demanding Kiev stop massing military forces in the south-east of the country.

Russia’s own forces remain massed just over the border and Ukrainian President Oleksander Turchinov said Moscow was attempting to repeat “the Crimea scenario”.

To QE or not to QE?

ECB Vice-President Vitor Constancio testifies to the European Parliament prior to attending the IMF Spring meeting in Washington at the back end of the week along with Mario Draghi and other colleagues. Jens Weidmann, Yves Mersch and Ewald Nowotny also speak today.

There has undoubtedly been a change in tone from the ECB, which is now openly talking about printing money if inflation stays too low for too long (no mention of deflation being the required trigger any more). Even Bundesbank chief Weidmann has done so.

Last week, Draghi made it sound as if really serious thought was being given to how to do it. He raised the prospect of buying private sector assets, rather than government bonds as other central banks have. The question is whether he is trying to talk the euro down or whether the central bank is now more alarmed, and therefore deadly serious.

Good news for Greece?

Unemployment is sky high, national debt is not far short of double the size of an economy which is still shrinking and its ruling coalition has a wafer-thin majority, yet there are glimmers of hope in Greece.

Having finally struck a deal with the EU and IMF to keep bailout loans flowing, Athens is preparing to dip its toe back into the bond market with a five-year bond for up to 2 billion euros.

The government has not said when the syndicated issue might be launched but having mandated banks for the sale the likelihood is sooner rather than later. It’s a remarkably quick return two years after a debt restructuring which was essentially a default.

Reasons to do nothing

It’s ECB day and the general belief is that it won’t do anything despite inflation dropping to 0.5 percent in March, chalking up its sixth successive month in the European Central Bank’s “danger zone” below 1 percent.

The reasons? Policymakers expect inflation to rise in April for a variety of reasons, one being that this year’s late Easter has delayed the impact of rising travel and hotel prices at a time when many Europeans take a holiday. Depressed food prices might also start to rise before long.

More fundamentally, they do not see any signs of deflation psychology taking hold, whereby businesses and consumers defer spending plans in the expectation that prices will cheapen.

Weidmann back in the spotlight

Euro zone finance ministers in Athens are joined by their EU counterparts outside the single currency area with work to be done on signing off on the final details of banking union and preparing a common line for the upcoming G20/IMF meeting in Washington. The elephant in the room will be the threat of deflation.

European Central Bank number two Vitor Constancio said yesterday that low euro zone inflation was a concern but predicted it would rise in April, having dropped to just 0.5 percent in March. There are good reasons to think so but either way it suggests the ECB – which has its monthly policy meeting tomorrow – is in no hurry to act.

As EU economics chief Olli Rehn pointed out, it’s not all bad. Low prices will increase disposable incomes so could help a demand-led recovery. But they won’t help rebalance the currency area’s economy and will certainly make still-high national debts harder to pay off.

Hollande’s search for an elusive winning formula

After a local election drubbing, French President Francois Hollande duly sacked his prime minister last night and tempered his economic reform drive, vowing to focus more on growth and “social justice”. A fuller cabinet reshuffle is expected today.

Interior minister Manuel Valls, anything but a left-wing firebrand whose appointment could stir unrest on the left of the ruling Socialist party, takes the premiership with a mandate to pursue cuts in labour charges for business but also tax cuts to boost consumer spending and employment.

Hollande said France would still cut public spending to pay for a 30 billion euro reduction in labour charges on business, part of a “responsibility pact” with employers he launched in January. But he said Sunday’s elections also showed the need for a “solidarity pact” offering workers tax cuts and assurances on welfare, youth training and education.

Is it time for the ECB to do more?

From financial forecasters to the International Monetary Fund, calls for the European Central Bank to do more to support the euro zone recovery are growing louder.

With inflation well below the ECB’s 2 percent target ceiling and continuing to fall, 20 of 53 economists in a Reuters Poll conducted last week said the bank was wrong to leave policy unchanged at recent meetings and should do more when it meets on Thursday.

And the pressure on the ECB to do more has mounted after the preliminary inflation estimate for March was published on Monday. The data showed inflation cooling down further to 0.5 percent, its lowest since November 2009.