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Though yields on peripheral Eurozone government bonds have eased, following the ECB’s intervention, USD LIBOR remains elevated as uncertainties over the stability of the region’s banking sector lingers. Fitch’s downgrade of Spain’s long-term foreign and local currency credit rating to AA+, further emphasises the seriousness of the Eurozone’s debt crisis. Despite the implementation of strict measures to slash the budget deficit from 11.2% of GDP in 2009 to 6% in 2011, the rating’s agency believes that “the economic recovery will be more muted than that forecast by the government.” This sentiment is analogous with Spain’s compatriot PIGS nations who have enacted similar tightening measures to rein in unbridled fiscal deficits. The reality is that fiscal consolidation within these economies may well drag on regional growth, European demand and ultimately the global recovery.
EUR/USD remains poised at 1.23 inspite of the downgrade and appears to be trading in a 1.21 –1.24 range. The celebration of Memorial Day in the US means that international event risk is mainly concentrated in Europe today. Despite fluctuations in Eurozone headline CPI, owing to volatility in the energy price, today’s data should continue to reflect a deflationary trend in Eurozone core inflation, which is very likely to persist for the remainder of the year. Supporting this is exceptionally weak growth in regional credit and M3 money supply. Reductions in regional surveys of retail and industrial confidence, across several leading Eurozone nations suggests that the economy-wide Economic Sentiment Indicator should fall slightly in May, reflecting the negative impact of fiscal consolidation on consumer sentiment. Despite the deluge of European data, the figures are unlikely to provide meaningful support to EUR/USD, as markets consolidate positions ahead of pivotal US non-farm payrolls data on Friday. USD/ZAR should remain relatively subdued as a result and continue to meander in a 7.45 – 7.70 range.
THE CROSSES
- Having sustained mild gains EUR/USD remains pivoted at 1.23. With USD/ZAR stable at around 7.60, EUR/ZAR should continue to oscillate close to 9.33.
- The GBP appears calmer this morning following the weekend’s news that an influential minister in Britain’s coalition government was forced to resign. GBP/USD weakness may exert slight downside pressure on GBP/ZAR as a result.
- A more composed risk environment means that ZAR/JPY should remain above 12.00
| John Cairns | john.cairns@rmb.co.za |
| +27 (0)11 282 8656 | |
| Nema Ramkhelawan | nema.ramkhelawan@rmb.co.za |
| +27 (0)11 282 8519 | |