The FX Global Call covers the main talking points from an 1100 GMT
news meeting involving DJ FX Trader editors in New York, London and
Singapore, as well as other FX hot spots when warranted.
By Michael J. Casey
1. The severe tension in Europe is evident in the starkly divergent
paths taken by different countries' short-term government debt markets
Tuesday. Spain auctioned 12- and 18-month T-bills at yields that were
a whopping 200 basis points higher than a month ago. With investors
demanding 5.074% to lend money for a year to that country's
government, up from 3.024% on May 14, it seems clear that the market
is starting to price in the risk of meltdown in the euro zone's
fourth-largest economy. By contrast, just outside the euro zone,
Switzerland sold three-month T-bills at -0.79% and Denmark sold
two-year bonds at -0.08%, the first time that country has sold
noninflation-linked paper at a negative yield. Essentially, no one
wants peripheral euro-zone debt, and everyone wants the safety of
being outside the euro zone.
2. Also adding to the gloom in the euro zone: a terrible reading from
Germany's ZEW survey of economists' expectations. It came in at -16.9,
compared with a forecast of 10.8, to post its lowest result since
October 1998. German economists are clearly becoming much more worried
about fallout from the euro-zone crisis spreading into Germany.
3. Despite all this, the euro did not fall out of bed. Partly that's
because of some rather spurious rumors that the European Central Bank
has started buying sovereign bonds again, but it's also because the
market is in a holding pattern as the Federal Open Market Committee's
two-day meeting gets underway Tuesday. There's mounting expectation
that the Fed will take some additional measures to maintain monetary
stimulus, but many believe this would come as an extension of the
existing "Operation Twist" program, through which the Fed sells its
holdings of short-term bonds and uses the proceeds to buy longer-term
debt, rather than an outright "quantitative easing" bout of monetary
expansion. It's not clear that in this highly stressed global
environment that anything short of another round of aggressive QE from
the Fed is going to do much to market confidence.
4. Still, hope springs eternal that policy makers will come to
investors' rescue. One source of such speculation is the G-20 summit
in Los Cabos, Mexico, which heads into its second day. Monday,
officials told us that a draft of the group's forthcoming communique
would say that the member nations are "committed to adopting all
necessary policy measures to strengthen demand, support global growth
and restore confidence." The real problem is that having spent up much
of their store of fiscal firepower during the last crisis, there's not
much political or practical room for maneuver, other than through
another round of monetary easing.
5. If the Bank of England has to join in another round of QE--as it
has already pretty much promised to do--it at least got some cover
Tuesday when U.K. inflation data came in on the weak side. The annual
increase in CPI fell to 2.8% in May from 3.0% in April.
6. Amid all this global angst, some investors seem to be hoping that
China can revive its role as the global engine of growth. The PBOC
said it bought a net 23.4 billion yuan ($3.7 billion) of foreign
currency in May, reversing from net sales of CNY60.57 billion in
April. The inflows appear to be driven by bets that the Chinese
central bank's recent move to cut interest rates will be effective in
stimulating the economy.
7. Meanwhile, less optimistically, foreigners are pouring into
Japanese government bonds. Data showed that the foreign ownership
stake in the JGB market rose by 23% to a record high in March. Though
foreigners still account for only 8.3% of the total, this increase
seems to reflect the continued demand for yen as a safe haven from the
crisis in Europe.
8. There's only one data item of note in the U.S. today: housing
starts and building permits.
(Michael Casey is managing editor for the Americas at DJ FX Trader, a
foreign exchange news service jointly produced by Dow Jones Newswires
and The Wall Street Journal.)
(END) Dow Jones Newswires
June 19, 2012 07:03 ET (11:03 GMT)
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