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Positions in Europe: Long British Pound (FXB)

The German IFO business survey for April was published today. As we called for in previous weeks and mentioned in a note yesterday titled “Europe: Sweden Hikes Rate as PIIGS Tumble”, we expected to see a slowdown in the German survey numbers, and we got it. IFO reported:

Germany IFO Business Climate               110.4 APR    vs 111.1 MAR

Germany IFO Current Assessment           116.3 APR    vs 115.8 MAR

Germany IFO Expectations                      104.7 APR    vs 106.5 MAR

German IFO Business Survey Down - IFO

While one survey does not confirm a trend (and we tend to focus more on the 6-month forward-looking Expectations number), recent confidence numbers are in line with a slight slowing of high frequency data from Germany, including Services and Manufacturing PMI, as inflationary pressures gradually increase.

The capital markets of Europe’s stronger and fiscally sober economies like Germany, France, Sweden held relatively strong this week despite existing sovereign debt contagion fears, namely an outstanding bailout to Portugal and continued concern over Greece’s fiscal house. Equally, the EUR-USD trade has held strong, largely a function of the severe weakness in the USD, in our opinion. Our immediate term TRADE range for the EUR-USD is $1.44-$1.46.

German IFO Business Survey Down - EUR2

In other European news, German Finance Minister Wolfgang Schaeuble praised Mario Draghi, the favorite to take over as ECB President when Trichet steps down in late June, calling his qualifications undisputed. This sentiment is a clear inflection from the German camp (although German Chancellor Angela Merkel remains silent on her pick) that has largely voted against him, due in part to assumptions that he was a dovish-leaning puppet of Trichet, and preference for Bundesbank President Axel Weber. However, in February when Weber announced he would not run for another term as Bundesbank President, nor put his name in for the ECB job, his decision has left the German camp uncertain on who to back.

Fresh in the mind of Merkel, in particular, has been the baggage Draghi carries as Italy’s Central Banker (a state with a considerable load of public debt--2nd highest after Greece-- and scandalous headlines from the country's PM Berlusconi) and his 3-year stint at Goldman Sachs in early 2000 in which among other responsibilities he arranged currency swaps that helped Greece hide the extent of its budget deficit. 

There’s no question that Draghi comes with much international experience, including as Executive Director of the World Bank. While we can only speculate how he’ll direct monetary policy should he win the seat, it’s clear that given his affinity with Trichet we’d expect he’d follow through with Trichet’s hawkish interest rate stance to control rising inflation across the Eurozone. This again could be a positive for the common currency and global investment in the region.

Matthew Hedrick