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Euro Gains Unlikely to Last After EU Officials Boost Bailout Capacity

Euro Gains Unlikely to Last After EU Officials Boost Bailout Capacity

2012-03-30 07:05:00
Ilya Spivak, Head Strategist, APAC
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Talking Points

  • Euro Gains Unlikely to Last After EU FinMin Summit Outcome
  • US Economic Data May Trigger Another Round of Risk Aversion

The Euro rose overnight as markets turned their attention to a meeting of Eurozone finance ministers amid hopes that policymakers will increase the size of the currency bloc’s war-chest for fighting the debt crisis by allowing the temporary EFSF bailout fund and the permanent ESM one to run concurrently. Such an arrangement was strongly opposed by Germany but some signs of compromise in officials’ commentary emerged over recent weeks.

The EFSF has €248 billion of its total €440 billion in lending capacity left unused. The ESM was envisioned to have a total lending capacity of €500 billion and to take over from the EFSF entirely. In this scenario, the final ESM would have a total size of €500 billion including the €192 already committed by the EFSF, meaning available lending capital of €308 billion (and a paltry increase of €60 billion over what is already left over in EFSF). This would amount to the least generous outcome and would likely result in aggressive downward pressure on the Euro.

By contrast, the most optimistic version would see the EFSF and ESM run permanently alongside one another. This would see the additional of the ESM’s €500 billion to the €248 billion left in the EFSF for total available capital of €748 (and a theoretical future bailout capacity of €940 billion after the already-committed €192 billion is repaid). Germany strongly opposes such a path forward, so the third option seems like the most probable outcome. In this scenario, the EFSF and ESM would run concurrently until the former temporary fund expires in June 2013, meaning Euro-area officials would practically have €748 at their disposal until then and €500 thereafter.

On balance, this third option has been the consensus option across financial markets for some time and so seems unlikely to generate meaningful upside potential for the single currency after the announcement crosses the wires, leaving the door open for a “buy the rumor, sell the fact” scenario. In fact, to some extent discussions about the size of the region’s bailout capacity are moot after the ECB provided regional lenders with close to €1 trillion in capital via its two 3-year LTRO operations, effectively shifting the firewall against contagion in the event of a default from the sovereign to the bank level. Indeed, €1 trillion was enough to buy all outstanding Greek, Portuguese and Spanish bonds before Athens completed PSI; it has room to stretch even longer in its aftermath.

This opens the door for Eurozone recession fears to return to the forefront as yet another debt-crisis distraction is left behind in the rearview mirror. An expected drop in Eurozone CPI against this backdrop may add sellers’ resolve, boosting the prospects of ECB rate cuts. The annual inflation rate is expected to hit 2.5 percent, the lowest in seven months. German CPI figures surprised lower earlier in the week as the oil rally lost momentum and more of the same seems likely here. Indeed, Brent crude in EUR terms is down nearly 3 percent so far this month.

Later in the session, the spotlight turns to the US economic calendar, with Personal Income and Spending figures as well as a final revision of the University of Michigan consumer confidence gauge in focus. The former two readings are expected to modestly accelerate in February, adding 0.4 and 0.6 percent respectively. The consumer sentiment gauge is also expected to yield a narrowly better outcome with an upgrade to 74.5 from the 74.3 reading originally reported. The Chicago PMI reading is also on tap, with a pullback forecast in March.

Most critically, traders are likely to look at the source of the increase in Personal Spending for signs that higher energy prices inflated outlay readings. In this context, an increase would be hardly indicative of a healthier consumer, particularly considering that the gap between income and spending aggregates is now at a whopping $2.3 trillion. This means US consumers’ earnings are falling short of their spending by levels unseen since 2008 in the heart of the Great Recession. Meanwhile the revision in the UofM confidence gauge would still amount to the first monthly drop in sentiment since August. All told, renewed risk aversion – an outcome likely to buoy the US Dollar as the currency regains its safe-haven properties – appears like a distinct possibility.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

21:45

NZD

Building Permits (MoM) (FEB)

-6.7%

0.0%

8.1% (R-)

23:01

GBP

GfK Consumer Confidence Survey (MAR)

-31

-29

-29

23:15

JPY

Nomura/JMMA Manufacturing PMI (MAR)

51.1

-

50.5

23:30

JPY

Jobless Rate (FEB)

4.5%

4.6%

4.6%

23:30

JPY

Job-To-Applicant Ratio (FEB)

0.75

0.74

0.73

23:30

JPY

Household Spending (YoY) (FEB)

2.3%

-0.5%

-2.3%

23:30

JPY

Tokyo CPI (YoY) (MAR)

-0.1%

-0.1%

-0.2%

23:30

JPY

Tokyo CPI Ex-Fresh Food (YoY) (MAR)

-0.3%

-0.3%

-0.3%

23:30

JPY

Tokyo CPI Ex Food, Energy (MAR)

-1.0%

-1.0%

-1.1%

23:30

JPY

National CPI (YoY) (FEB)

0.3%

0.0%

0.1%

23:30

JPY

National CPI Ex-Fresh Food (YoY) (FEB)

0.1%

-0.1%

-0.1%

23:30

JPY

National CPI Ex Food, Energy (FEB)

-0.6%

-0.9%

-0.9%

23:50

JPY

Industrial Production (MoM) (FEB P)

-1.2%

1.3%

1.9%

23:50

JPY

Industrial Production (YoY) (FEB P)

1.5%

3.7%

-1.3%

23:50

JPY

Loans & Discounts Corp (YoY) (FEB)

0.2%

-

0.0%

0:00

AUD

HIA New Home Sales (MoM) (FEB)

3.0%

-7.3%

0:30

AUD

Private Sector Credit (MoM) (FEB)

0.4%

0.3%

0.2%

0:30

AUD

Private Sector Credit (YoY) (FEB)

3.5%

3.3%

3.5%

1:35

CNY

MNI March Business Condition Survey

54.81

56.67

58.87

2:00

NZD

Money Supply M3 (YoY) (FEB)

5.2%

-

5.4%

4:00

JPY

Vehicle Production (YoY) (FEB)

19.7%

-

18.6%

5:00

JPY

Construction Orders (YoY) (FEB)

-1.8%

-

24.6%

5:00

JPY

Annualized Housing Starts (FEB)

0.917M

0.840M

0.822M

5:00

JPY

Housing Starts (YoY) (FEB)

7.5%

-1.1%

-1.1%

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

6:00

EUR

German Retail Sales (YoY) (FEB)

0.1%

1.6%

Medium

6:00

EUR

German Retail Sales (MoM) (FEB)

1.1%

-2.3%

Medium

6:45

EUR

French Producer Prices (YoY) (FEB)

4.0%

4.2%

Low

6:45

EUR

French Producer Prices (MoM) (FEB)

0.4%

0.6%

Low

6:45

EUR

Consumer Spending (MoM) (FEB)

0.2%

-0.4%

Low

6:45

EUR

Consumer Spending (YoY) (FEB)

-2.5%

-2.2%

Low

7:00

CHF

KOF Swiss Leading Indicator (MAR)

0.07

-0.12

Medium

7:00

EUR

Eurozone Finance Ministers Meet in Copenhagen

-

-

High

8:00

EUR

Italian PPI (MoM) (FEB)

0.6%

0.7%

Low

8:00

EUR

Italian PPI (YoY) (FEB)

3.3%

3.4%

Low

9:00

EUR

Italian CPI - EU Harmonized (YoY) (MAR P)

3.3%

3.4%

Low

9:00

EUR

Italian CPI - EU Harmonized (MoM) (MAR P)

0.2%

0.2%

Low

9:00

EUR

Italian CPI (NIC Incl. Tobacco) (MoM) (MAR P)

0.3%

0.4%

Low

9:00

EUR

Italian CPI (NIC Incl. Tobacco) (YoY) (MAR P)

3.2%

3.3%

Low

9:00

EUR

Euro-Zone CPI Estimate (YoY) (MAR)

2.5%

2.7%

High

10:00

EUR

Italian Hourly Wages (MoM) (FEB)

-

0.0%

Low

10:00

EUR

Italian Hourly Wages (YoY) (FEB)

-

1.4%

Low

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.3254

1.3394

GBPUSD

1.5893

1.6024

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

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