Euro below 1.322 as Spain total registered unemployed reaches 4.7 mln

BBH CurrencyView

The US dollar is broadly higher paring some of its losses seen yesterday as asset reflation bumps up against fleeting technical momentum and mixed economic data. The euro is currently trading below 1.322 after steadily declining from 1.332. The dollar is rallying against the yen, up 0.5%, after Governor Shirakawa repeated the BoJ’s commitment to easy monetary policy until it becomes confident that it will achieve its 1% inflation target. Yet, he also noted that liquidity alone cannot defeat deflation. Sterling edged higher against the euro amid a combination of corrective euro action and underlying sterling support following a firm construction PMI print. Asian stocks posted modest gains, leaving them close to 7-month highs with the MSCI Asia Pacific index up 0.3%. The EuroStoxx 600 is flat; banks shares up 0.5%.

Spain unemployment claims increased 112,269 in February, with total registered unemployed reaching 4.7 mln and the pace of claims picking up. This comes after a pretty ugly Q4 jobless rate of 22.9%, and points to further deterioration ahead. What is more important to us is that EU leaders have told “member states under scrutiny” that they should be ready to pursue other austerity measures if needed. In other words, despite recession risks in much of the euro zone, members are being told to tighten their belts again. Spain is not unique, and given that it is going to have to revise its budget targets for this year in light of slower growth, so too will others. The debt crisis is by no means over given the negative growth/budget deficit dynamics in play, but the LTROs appear to have bought the euro zone some time as Spain and Italy 10-year yields remain below 5%. This has not prevented further softening of the euro, perhaps due to ongoing uncertainty about Greece ahead of the PSI announcement. Retracement levels from the February 16-24 rise in EUR/USD ahead are 1.3231 and 1.3170.

ECB reported that overnight deposits surged to a record €776.9 bln on March 1, up from €475.2 bln a day earlier. This would appear to reflect hoarding of the €529.5 bln in 3-year liquidity that was provided by the ECB earlier this week. However, balance sheet mechanics suggest this does not represent hoarding of LTRO cash since banks taking LTRO funds are different than the ones parking money at the ECB.

Over the past week CAD was the best performing currency in the G10 against the USD, also outperforming many EM currencies. CAD has also been one of the best performing currencies over the course of February. We consider this a function of two important drivers. First, as we recently highlighted, CAD is highly sensitive to oil prices and with Brent prices increasing nearly 12% over the past month it is not surprising that CAD has risen in kind. The rise in oil prices is still consistent with an improvement in demand, rather than a pure supply side shock that was seen during the Arab Spring. At this point, a rise in prices driven in part by demand shocks rather than supply shocks should be less negative for growth. As a result, the positive terms of trade are positive for CAD. Second, CAD is also outperforming due to its economic and trade links with the US. The US economy continues to grow above trend and is likely to continue to grow at a decent clip. Given that nearly 75% of Canadian exports are destined for the US market, this dynamic should remain supportive for Canadian growth. On the domestic front, today we will get the Q4 reading of Canadian GDP. The Bloomberg consensus is for a 1.8% q/q reading, well below the 3.5% q/q print seen previously. However, despite the potential for a deceleration in the economy we continue to expect the BoC to remain on hold at next week’s policy meeting and retain its neutral posture. Consequently, we expect CAD to continue to outperform, but we would recommend waiting for a pullback to 0.995 to position for further outperformance in the medium-term.

There are two important political events this weekend in the EM world, the presidential elections in Russia and the yearly Chinese National People’s Congress and Chinese People’s Political Consultative Conference (CPPCC). In China, one possible tangible outcome of the meetings would be a more explicit shift towards a looser approach to housing, in line with our view. Some local news reports overnight noted a sharp increase in real estate lending by China’s for big banks, while others mentioned a proposal to be discussed at the CPPCC for as much as a 30% discount on mortgages for first-time homebuyers. Consistently, the Shanghai index closed 1.5% higher led by gains of nearly 4% in the real estate sector. In Russia, the protests did little to undermine Puntin’s chances of winning the elections, but they may have a medium term positive impact for the country as it pressures authorities to increase accountability. In the short-term, however, the most likely outcome is that Putin will meet public discontent with increased fiscal spending. With oil prices still elevated and Russian fundamentals mostly on the strong side, we are inclined to view any selloff in Russia assets caused by post-elections protests as a buying opportunity.