Risk FX Back Under Pressure as EZ Concerns Return

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Market Drivers July 18th, 2012
BOE minutes reveal rift
Risk selloff accelerates as EU session progresses on Asmussen comments
Nikkei off -0.32% Europe up 0.41%
Oil at $88/bbl
Gold $1579/oz.

Europe and Asia:
GBP BOE Minutes 7-2 on QE
GBP Claimant Count 6.1K vs. 6.2K
GBP Unemployment Change 8.1% vs. 8.25
GBP Average Weekly Earnings 1.5% vs. 1.4%

North America:
USD Housing Starts 8:30
USD Building Permits 8:30
USD Bernanke Gives Semiannual Report to US House 10:00
USD Beige Book 14:00
CAD BOC Monetary Policy Report 10:30

Risk currencies accelerated their selloff in morning European trade with euro and cable showing the most weakness as comments by ECB’s Asmussen weighed on the former while a split decision on QE hurt the later. In Europe European Central Bank Executive Board member Joerg Asmussen stated that Europe must integrate or face the prospect of falling apart.

In an interview to a German magazine Stern, Mr. Asmussen stated that, “There are only these two options. We cannot afford a permanent instability.” He added that further integration “would imply that a euro area authority would have competence to limit countries’ ability to issue debt and have intervention rights into national budgets, and to compel member states to correct their policies, be that in the fiscal, structural and financial fields.” Mr. Asmussen also highlighted the sharp division in economic performance between North and South, noting that, “I have not experienced [to this extend] over the last 10 to 15 years.”

Mr. Asmussen’s no-holds-barred comments sent euro sliding through the 1.2250 barrier as concerns over the EZ stability once again began to weigh on the market. Yesterday’s euphoria over the possible prospect of more QE from the Fed was short lived and the pair is once again under pressure as the market’s attention returns to the sovereign debt crisis. As many analysts have pointed out the European government debt markets are now acting in a bi-polar fashion with Finland the latest member to auction off debt at zero interest cost, while Spanish 10 year bond yields continue to hover at the uncomfortably high 6.75% level.

In UK Sterling fell in morning London trade today after the BoE minutes of the July meeting revealed that two members of the MPC voted against increasing asset purchases putting the prospect of further QE in doubt. Chief Economist Spencer Dale and Ben Broadbent, dissented on the issue of 50 Billion GBP of additional QE voting for unchanged policy.

The majority of members noted that, “On balance, and in light of the potential stimulus provided by the other recent and prospective policy initiatives, these members judged that an additional Stg50 billion of asset purchases was appropriate at this meeting.” However, Messrs. Broadbent and Dale disagreed stating that risk of inflation remained a threat while noting that current policy initiatives were sufficient to provide stimulus to the UK economy.

Both Mr. Broadbent and Mr. Dale may moderate their views in light of yesterday’s weak CPI data which showed that inflation pressures have eased to their lowest level in more than two years. Nevertheless, their hawkish stance has introduced an element of doubt as to whether the BOE will ease further for the rest of this year.

In North America the calendar carries only housing starts data and building permits data as well as eth second day of the Dr. Bernanke testimony to Congress. Unless, the Fed Chief strikes a much more dovish note, strongly hinting that the US central bank may act as early as September, risk assets will have a difficult time regaining their footing and euro may fall through the 1.2200 figure testing its recent yearly lows as the day proceeds.

Boris Schlossberg
Managing Director

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