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Focus Squarely on Europe: Spanish Bailout, Greek Elections Forthcoming

Focus Squarely on Europe: Spanish Bailout, Greek Elections Forthcoming

2012-06-11 08:00:00
Christopher Vecchio, CFA, Senior Strategist
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Now that the five central bank rate decisions are in the rearview mirror, attention turns back from stimuli hopes to the actual fundamentals driving global markets. With little Chinese or US data due, our focus this week lies mainly in Europe, in the post-Spanish bailout / pre-Greek elections world. Mainly, we find that we will return to headline trading in lieu of the light economic docket. What this means is that news about the Spanish bailout, rumors about the Greek elections, and sound bites from various key Euro-zone leaders (mainly European Central Bank and German government officials) will drive price action – we are entering a period of high market volatility.

06/13 Wednesday // 06:00 GMT: EUR German Consumer Price Index (MAY F)

Although Euro-zone inflation data is due this week as well, the key release is the German Consumer Price Index for May. This is the final release of this report. After estimates originally showed that economists believed inflation was coming in at 2.1 percent year-over-year in Germany, the initial reading showed that the rate of inflation had come down to 1.9 percent. Indeed, the Euro-zone crisis that has stoked deflationary conditions across the continent appears to be seeping into the German economy, which is actually positive for the Euro. German policymakers have been against cutting the European Central Bank’s key interest rate below 1.00 percent on concerns of higher inflation in Germany, but with price pressures obviously falling, it’s likely that the German leadership bloc softens its stance. The key pairs to watch are EURGBP and EURUSD.

06/13 Wednesday // 12:30 GMT: USD Advance Retail Sales (MAY)

The US economy has been churning out weak data in recent weeks, and the Advance Retail Sales report for May does not appear primed to offer any reprieve. According to a Bloomberg News survey, sales are forecasted to have contracted by 0.2 percent last month after growing by a mere 0.1 percent in April. The trend has been increasingly negative, with sales growth peaking at 1.0 percent in February and having declined every month since then. Considering the pent up expectations from more stimulus from the Federal Reserve, it is likely that a disappointing print spurs some risk-appetite, with the US Dollar selling off thereafter. If the print beats, expect the US Dollar to steady or enhance its gains. The key pair to watch is USDJPY.

06/13 Wednesday // 21:00 GMT: NZD Reserve Bank of New Zealand Rate Decision

It is widely expected that the Reserve Bank of New Zealand will leave its key interest rate on hold at 2.50 percent on Wednesday, according to a Bloomberg News survey. Over the past week, the likelihood of a 25-basis point rate cut has decreased, from 49.0 percent to 18.0 percent, and similarly, the number of basis points being priced out of the New Zealand Dollar has dropped from 44.0 to 21.0.However, in light of the recent International Monetary Fund Mission to New Zealand Report, it is clear that outside observers believe that the economy remains fragile amid a slow recovery from the earthquake last February in Christchurch, New Zealand. The IMF report noted that “domestic demand has remained soft as households and businesses continue to deleverage amid a weak housing market and an uncertain outlook. Elevated rates of unemployment, currently above 6 percent, and spare capacity have helped contain inflation.” We broadly expect the RBNZ to echo these sentiments in an effort to verbally “talk down” the Kiwi. The key pairs to watch are NZDJPY and NZDUSD.

06/14 Thursday // 12:30 GMT: USD Consumer Price Index (MAY)

In what has become a more closely watched print, the US Consumer Price Index for May poses an under the radar threat the US Dollar this week. As Federal Reserve policymakers have publicly debated the merits of a third round of quantitative easing, doves (those for more easing) have suggested that inflation is contained and not a threat to the US economy, while hawks (those against more easing) have suggested that inflation has already done enough harm to the economy. Both sides have points: core inflation (sans energy and food) is relatively sticky; but wage growth hasn’t kept pace with inflation, so purchasing power for consumers has been steadily decreasing. Forecasts show that prices are expected to contract by 0.2 percent on a monthly-basis from 0.0 percent m/m in April, while the y/y reading will show that price pressures have fallen to 1.8 percent in May from 2.3 percent in April. Stronger readings are bullish for the US Dollar; weaker readings are bearish. The key pairs to watch are EURUSD and USDJPY.

06/17 Sunday // --:-- GMT: EUR Greek Parliamentary Elections

This is the most important event on the docket the next week and has the ability to change the FX landscape dramatically going forward – and not just for a few hours, but for months. On May 6, Greeks hit the polls to elect a new government, but everything but that has been in place since. The New Democracy/PASOK contingent, the pro-bailout parties, only received approximately 40 percent of the vote; leaving Syriza and the far-left wing, the anti-bailout parties, with nearly 60 percent of the vote. None of the three top vote getters – ND, PASOK, or Syriza – were able to get the majority they needed to form a coalition government. Essentially, given the rhetoric out of Europe’s leaders (mainly European Commission and German officials), the upcoming vote on Sunday is “make-or-break” for Greece: if ND/PASOK gets enough votes to form a government, then Greece will remain in the Euro-zone; if Syriza takes top billing, then Greece will leave the Euro-zone (allegedly). Considering what happened after the last round of elections – the EURUSD dipped from its Friday close at 1.3082 to 1.2972 at Monday’s open – it is likely that a Syriza victory will shake confidence significantly. If ND/PASOK has enough seats to form a government, the Euro will rally; if Syriza has enough seats to form a government or there is another impasse, the Euro will fall. The key pairs to watch are EURGBP and EURUSD.

Rate Hike Probabilities / Basis-Points Expectations

Focus_Squarely_on_Europe_Spanish_Bailout_Greek_Elections_Forthcoming_body_Picture_1.png, Focus Squarely on Europe: Spanish Bailout, Greek Elections Forthcoming

See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, send an e-mail with subject line "Distribution List" to cvecchio@dailyfx.com

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