Daily Currency Briefing

July 5, 2011

How would the ECB treat a Greek default rating?

G10 Currencies
USD: In the US the trading week not only resumes a day late but also slightly tepidly at least where the data is concerned. New orders in the manufacturing sector is more a second tier publication in particular as it is highly volatile (and the information content therefore limited) with the May data being published today while it would be much more interesting to see whether June constituted the end of the soft patch, of the temporary period of weakness of the US economy. May has been and gone. Moreover - as is usual for a week when the labour market report is published everyone is waiting for the labour market report. Other data tends to be ignored. USA: Manufacturers new orders are too volatile to be a good indicator
Percentage change
Ulrich Leuchtmann +49 69 136 23393 ulrich.leuchtmann@commerzbank.com

6 4 2 0 -2 -4 -6 -8 Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Source: U.S. Census Bureau

EUR: The rating agency Standard & Poors once again clarified its point of view yesterday: a restructuring of Greek bonds as suggested by the French banks would result in a selective default rating. In that case the ECB would probably no longer accept Greek bonds (GGBs) as collateral. That seems to be the generally accepted point of view. Now there is the first speculation that the ECB might cave in after all and accept GGBs as collateral even then. There are three arguments in the debate: (a) In this case Greece would probably be able to regain a C to CCC rating pretty quickly. (b) Perhaps Moodys might stick to an acceptable rating for Greece. And (c): The ECB will not want to cause a liquidity crisis with those Greek banks that depend on ECB liquidity and have no other collateral. Or will it? This question is decisive for the FX market. In May 2010 the monetary authority in Frankfurt abandoned all previously sacred principles and accepted also GGBs with junk rating as collateral. By doing so it sent out the wrong signal to the markets. Everyone wondered what other principles it would be prepared to abandon to save Greece. Perhaps also the principle of price stability? For some time now the central bankers have been trying hard to regain the credibility they lost. If the ECB decided to accept GGBs as collateral despite the default rating for Greece some of the regained credibility might be lost once again. The ECBs attitude constituted a burden for the euro in May and June 2010. EUR exchange rates are less

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Daily Currency Briefing

susceptible to the Greek debt crisis than they were back then only because the ECB has changed tack. If the ECB went back to its former approach this resilience would soon end. ECB president Jean-Claude Trichets comments on the issue on Thursday will be decisive. AUD: It was still too early for a rate step today and nobody in the market had expected one either. In his explanation on todays rate decision RBA governor Glenn Stevens used a tone that was considered to be moderately dovish by the markets. He underlined that credit growth was modest (rather than quite modest in the June statement) and underlined (contrary to the June statement) that the underlying inflation rate has been in the bottom half of the target range. Moreover, Stevens sounded a bit more cautious on growth. Hardly surprising therefore that the aussie dollar, which seemed slightly overpriced following the appreciation last week anyway, came under pressure following the publication of the statement. It is nonetheless obvious that the RBA will get active sooner or later. Stevens himself had underlined the necessity of further rate steps not so long ago. In this context Q2 inflation data due for publication at the end of July was of particular significance according to Stevens. Currently no rate hike is priced in until year end. We expect that in case of high inflation data at the end of July rate expectations would be brought forward again pretty quickly. In our view it is not completely impossible that the RBA might resume the rate rise cycle as early as August. SEK: The Riksbank will raise key rates by 25bp to 2.0% today. This step is more or less priced in by the markets. The Monetary Policy Report is likely to be of greater interest, which will contain the central banks latest growth, inflation and key rate outlook. The central bank will focus on inflation expectations. It is concerned that the currently high inflation rate (3.3% in June) will lead to excessively high wage demands during the wage negotiations in the autumn. This would require a stronger tightening of monetary policy than previously projected. The Riksbanks recent company survey has slightly mitigated its concerns as it shows that on the whole there are no shortages on the labour market. Moreover the retail sector seems to be going through a period of weakness and the PMI eased in June. The hawks on the MPC are nonetheless likely to keep the upper hand. If the Riksbank adjusts the inflation outlook and rate path upwards we expect to see a notable upwards push in SEK. After SEK had recently benefited from the improvement of market sentiment EUR-SEK is likely to fall towards 9.04 in the case of an adjusted rate path, possibly aiming for the 9.00 level if market sentiment is also positive.
Antje Praefcke +49 69 136 43834 antje.praefcke@commerzbank.com

Emerging Market Currencies

RUB: Consumer price data for June will be published today. According to consensus a constant yoy rate of 9.6% is expected which is still a long way off both the central banks and the governments target of approx. 7%. Nonetheless Bank Rossi had left key rates unchanged at its last rate meeting signalling that it expected a fall in the inflation rate over the coming months. It projects a slightly lower inflation rate of 9.4% for June. Should it turn out to be correct it is likely to feel even more confirmed in its current rate break. As a result USD-RUB would once again turn upwards short term. RON: Discipline pays off. The Romanian government did display this virtue over the past year and is now able to reap the benefits of its austerity. The rating agency Fitch upgraded the countrys credit rating to BBB- from BB+. As a result Romania has made it to investment grade. At times when weak national finances are keeping the markets on their toes this is more than a glimmer of hope. So it is hardly surprising that EUR-RON once again eased back under 4.20. We assume that the leu will be able to defend this level medium term.
Thu Lan Nguyen +49 69 136 82878 thulan.nguyen@commerzbank.com

5 July 2011

Daily Currency Briefing

Todays Events
Time 08:30 08:55 09:00 09:30 10:30 15:00 Region Indicator SEK GER EUR GBP ZAR USA Rate decision PMI Services (Markit) PMI Services (Markit) PMI Services (Markit) SACOB business confidence Factory orders Period Jun Jun Jun Jun May Actual Our Forecast 2,00 Survey 2,00 58,3 54,2 53,5 +1,0 Last 1,75 58,3 54,2 53,8 85,8 -1,2 Direction Cross

mom

+1,8

Important Market Data

FX Current Change (%) Last trading day's high Last trading day's low FX Current Change (%) Last trading day's high Last trading day's low FX Current Change (%) Last trading day's high Last trading day's low FX Current Change (%) Last trading day's high Last trading day's low Forwards / Options EUR-USD 3M Money Market Rate (%) Bonds / Bond Futures Yield (%), Price Equity Indices Closing Change Change (%) Oil / Prec.Metals $ per unit EUR-USD 1,4478 -0,23 1,4578 1,4496 EUR-SEK 9,0717 -0,29 9,1146 9,0640 EUR-AUD 1,3554 +0,50 1,3564 1,3460 EUR-RUB 40,3163 -0,12 40,5458 40,3341 Fwd 3M -38,2600 EURIBOR 1,56 10Y Bund 3,02 EuroStoxx50 2870,19 -5,48 -0,19 Oil, Brent 110,90 EUR-JPY 117,35 +0,03 117,74 117,04 EUR-NOK 7,7521 -0,46 7,8041 7,7523 EUR-NZD 1,7467 -0,44 1,7590 1,7477 EUR-RON 4,1972 -0,95 4,2493 4,1951 Fwd 6M -82,1000 $ LIBOR 0,25 10Y T-Note 3,16 DAX 7442,96 +23,52 +0,32 Oil, Nymex 94,75 EUR-GBP 0,9023 -0,03 0,9068 0,9005 EUR-DKK 7,4591 -0,00 7,4622 7,4555 EUR-BRL 2,2494 -0,35 2,2680 2,2567 EUR-CNY 9,3611 -0,21 9,4228 9,3699 Fwd 12M -173,3500 LIBOR 0,20 10Y JGB 1,17 Dow Jones 12582,77 +168,43 +1,36 Gold 1495,10 EUR-CHF 1,2297 -0,12 1,2346 1,2303 EUR-HUF 263,47 -0,42 265,10 262,97 EUR-MXN 16,7732 -0,60 16,9417 16,8131 EUR-SGD 1,7772 -0,17 1,7871 1,7751 Vol 1M 10,20 LIBOR 0,83 EUR-CAD 1,3922 -0,13 1,3971 1,3904 EUR-CZK 24,280 +0,17 24,345 24,198 EUR-TRY 2,3419 +0,48 2,3500 2,3345 EUR-KRW 1543,0320 -0,22 1556,9562 1541,6399 Vol 3M 11,90 $ index 74,52 +0,22 74,40 74,11 EUR-PLN 3,9407 -0,08 3,9484 3,9359 EUR-ZAR 9,7549 -0,02 9,8197 9,7371 EUR-THB 44,1475 -1,09 44,7522 44,1511 Vol 12M 12,76

CHF LIBOR CAD LIBOR 0,18 1,18 10Y T-Note 10Y Gilt Bund Future Future 3,36 125,48 122,31 Nikkei 225 9972,09 +7,00 +0,07 Palladium 759,25 Zinc 2343,0 FTSE 100 6017,54 +27,78 +0,46 Platinum 1718,00 Tin 25640,0 1339,67 +19,03 +1,44 Silver 33,99

S&P 500

Industrial Metals Aluminium Lead Copper Nickel $ per ton 2460,5 2655,0 9411,0 23100,0 Sources: Bloomberg L.P., European Banking Federation, British Bankers Association, Dow Jones, Xetra, S&P, TSE, LSE, LME.

5 July 2011

Daily Currency Briefing

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