Euro, Sterling, Krona, Asian Central Banks

The euro’s resilience remains impressive. The news stream has soured in the last 48 hours or so, following the Greek downgrade by Moody’s,, the dropping of Greek bonds from a couple of industry benchmark indices, the haircut on Greek bonds the ECB is requiring, continued talk of some kind of financing package for Spain (the most recent in El Economista), and the new widening of peripheral spreads in Europe, the euro remains resilient.

The 5 and 20 day moving averages are set to cross higher today for the first time since April 21st. As long as the euro holds above the $1.2220 area and ideally the $1.2250 area, the recovery would appear to remain intact. The premium for euro puts over euro calls continues to decline and implied volatility has fallen from near 16.5% and is now back below 14%. Both these readings from the options market are consistent with the firmer tone in the spot market.

At the end of last week, the market shrugged off disappointing UK manufacturing output figures (-0.4% rather than a consensus forecast of a gain of a similar magnitude) and still extended sterling’s gains. Today the market appeared to shrug off the better than expected employment data. Sterling did turn higher against the dollar a couple of hours later with the help of purchases against the euro.

That said, the UK labor market recovery has been impressive. The unemployment queues have fallen for the fourth consecutive month and the 6th time in 7 months. The claimant count fell 31k in May and the April decline was revised to 32k from 27k.. Unexpectedly, the unemployment rate slipped to 4.6% from 4.7%. The better employment picture does not appear to be spurring wage pressure. The average weekly earnings are reported with a 1 month lag behind the claimant count and unemployment rate. In April then the average weekly earnings on a 3-month over 3-month year-over-year rate stood at 4.2% down from 4.3% in March. Excluding bonuses, the increase is 1.9% down from 2.0%. It may be understandable that the investors ignore the recent string of economic data from the UK.

The key focus is on next week’s budget presentation and today’s Mansion House speech will be scrutinized for clues. Lastly, note that the 10-year gilt spread over bunds has narrowed 12 bp over the past five sessions, which is reversal of the underlying trend. Anticipation of a combination of tax hikes and spending cuts may be encouraging the “buying the rumor” type of activity.

For portfolio managers that believe that debt and deficits are a key investment consideration, Sweden has much to commend itself. Sweden’s debt office official recognized significantly smaller budget deficits this year and next. This year’s deficit is now projected to be about SEK14 bln. In March it had forecast a SEK53 bln deficit. Next year’s deficit is now anticipated to be SEK8 bln not SEK37 bln. Total central government borrowing is put at SEK105 bln this year and SEK100 bln next year.

That said, Sweden failed to draw enough bids for today’s 29-year bond auction. Sweden sold only SEK675 mln rather than SEK 1bln that it intended to of the 3.5% 2039 bonds. Sweden’s bond market took the disappointment in stride. The 10-year yield is unchanged. The euro is about 0.3% higher against the krona today. This seems largely technical in nature. The single currency has been building a base for the past four sessions near SEK9.5450. Meanwhile, next month, Sweden’s Riksbank is expected to raise rates for the first time in the cycle.

Asian countries continue to look at ways to curb the volatility of their currencies. South Korea had announced measure to curb forward trading in the won over the past weekend. Today Indonesia announced measures that will try to achieve the same result, but with different means. The central bank argued it was not imposing capital controls as much as trying to manage the inflows. The measures involve lenghtening maturities of central bank bills and a minimum holding period of the bills. Separately, India indicated that it will impose a capital gains tax on equity transactions by domestic and foreign investors. Tehb purpose of the tax is to raise revenue.