Modest risk recovery makes sterling look vulnerable
O/N BULLETS
- SNB's Jordan 'very worried' about Swiss franc's rise
- Greek cabinet adopts new fiscal measures
USD
The USD is essentially sidelined as the market focuses on EU issues, although the risk impact of EU concerns is having a knock on effect on equities, risk, and consequently on the general performance of the USD. The USD index has continued to gain, but further significant gains from here depend on more negativity on the global economy, rather than just default gains because of loss of appetite for euros. At this stage, there is probably not sufficient data to justify this, so we would expect some stabilisation in the USD index below 76.50, which represents both the February low and the 100 day moving average. But a major risk downturn could still push the USD index up as far as the 78 area, which would essentially be equivalent to the recovery seen in November.
EUR
In spite of S&P putting Italy on negative watch on Friday, and Fitch doing the same to Belgium last night, there is no real news in the Euro-zone, in spite of the continued deterioration in sentiment. We will continue to watch Spanish and Italian yields as a barometer of sentiment, with the December high of 5.67% in Spanish yields looking like a key line in the sand. The main question is still whether the Euro-zone (and IMF) will be able to offer Greece the funds they need for the next year, but we will probably not know this for at least another month. In the meantime, IFO today seems unlikely to help the EUR after yesterday's weaker German PMI.
GBP
UK PSNB will probably be of more interest today than the largely discredited CBI distributive trades survey. Sterling was surprisingly weak yesterday, failing to gain much from EUR weakness, but an improving PSNB may help sentiment. Even so, it is hard to be enthusiastic about the pound when it only looks modestly attractive even from a long term value perspective (see spotlight below).
CHF
The CHF remains the purest barometer of Euro-zone sentiment, and hit a new high against the EUR yesterday. It is clearly stretched from a value perspective, and the authorities are concerned, but can do little after the failed intervention in 2009. A break back above 1.27 – which looks a long way away - is required to suggest the trend has turned. Having said this, it was trading 1.2650 on Friday, so things can change quickly.
Spotlight – Sterling not as cheap as it looks – At the beginning of 2001 GBP/JPY was trading around 170, having traded as low as 150 in 2000 at the bottom of the recession before this one (which wasn't even a recession in the UK). It looks as if sterling is at more attractive levels against the yen now. But inflation has eroded sterling's value, and in real terms GBP/JPY now is at an equivalent level to that at the beginning of 2001. Back then, sterling also had the advantage of 2 year yields around 5% above yields in Japan in nominal terms, and still almost 4% above Japan in real terms. Now, real 2 year yields in Japan are higher than in the UK. Of course, Japan has probably even more severe problems than the UK at the moment, but it is hard to argue that sterling offers the value now that it did then.
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