Uncertainty High, Dollar Firm

The US dollar remains mostly firmer against major and emerging market currencies.  Things are still up in the air.  Soft UK housing price data and BRC sales figures have gotten the chins wagging again about the possibility that the BOE extends its gilt purchases at Thursday's MPC meeting.  Wider than expected Australian trade deficit (A$1.59 bln vs A$754 mln--initially A$480 mln) has underpins speculation of a another rate cut next month after the surprisingly large 50 bp move last week. 

The gaps noted yesterday in the euro and Swiss franc have not been filled.  The gap in prices in the euro now extends from $1.3067 the high set in early Asia to $1.3080 the low from last Friday.  The gap in the dollar against the Swiss franc extends from CHF0.9195, yesterday's dollar low to CHF0.9185, last Friday's dollar high. 

In France, attention is turning to the formation of a new government and next month's parliamentary election, Greece continues to struggling to cobble together a working majority. Although Samaras was given a 3-day mandate, he returned it after a few hours.

Today it is the Left Coalition Syriza, the party with the second most votes turn. If Tsipras, the head of the party fails, the mandate will pass to Pasok, the Socialists.

Time is of the essence. First, May 15 is when the international bond, whose holders rejected the PSI comes due. It is a modest amount (~430 mln euros), but some decision needs to be made--pay out or not. Second, and more importantly, the EU expects Greece to outline new 11.5 bln euros in savings for 2013-2014. This seems to be the key to getting the next tranche of aid.

Thus far, from the Greek 2.0, funds have been paid for the PSI and partial bank recapitalization, but the other funds have not been paid out. Without new savings and no government it is not clear how the next tranche of aid can be negotiated. This in turn is important because reports indicate that the government may run out of cash by the end of next month.

One key difference now is that the lion's share of Greek debt is in official hands. Estimates suggest around three quarters of Greece's debt is held now by the ECB and IMF. If Syriza and Pasok fail to mold a parliamentary majority, new elections may be necessary. Meanwhile, Greek equities are consolidating at yesterday's steep declines. Bonds remain under pressure, though the bill auction went off with out a hitch and yields on the 6-month offering rose 14 bp to 4.69%, still below levels seen at the start of the year.

Stronger than expected German industrial production figures helped the euro hold above $1.30.  March industrial output rose an impressive 2.8%., more than 3 times consensus expectations and seems to contradict the weakness in the PMI.  This follows  a 2.2% rise in industrial orders reported yesterday.   The report overstates the strength of the German economy,.  The 30.7% rise in construction spending was likely weather-induced.  Still, this is not to deny the resilience of the German economy, where the output of capital and consumer goods rose 2% and 3% respectively. 

To sum up the situation, Germany  restructured after the Berlin Wall fell and went from the sick man of Europe to the uber economy.  If the Greek, Portuguese, Spanish and Italian euros are too rich, the German euro is too weak. 

In Italian local elections, Berlusconi's People of Liberty Party  and the Northern League (the latter is part of the opposition to Monti) was the largest loser and Grillo, an anti-euro candidate (5 Star Movement) may have been the big winner.     The results suggest that Monti's technocrat government will likely survive for the next year until parliament elections aer held next spring. 

Recall that one of the considerations that allowed Berlusconi to stay in power was the opposition could not coalesce around a single candidate.   Likewise, Monti's tenure is partly a function of the absence of an alternative. 

Norway reported unexpected decline in manufacturing output in March and this may increase on the margins speculation of Norges Bank rate cut this week.  Seasonally adjusted manufacturing output was expected to rise by 0.7% according to the Bloomberg consensus.  Instead it fell 0.5%, following the Feb decline of 0.7%.  The non-seasonally adjusted year-over-year rate stands at -0.8%, the first negative reading since last July.   The Norwegian krone is drawing some demand as its bond market is seen as a safe haven and could benefit from a surprise rate cut.   In addition, the inflation report later in the week is expected to show a substantial drop in the udnerlying rate.