Positions in Europe: Short EUR/USD (FXE)
The ECB meets tomorrow. We think there’s a high probability the ECB stays on hold to wait and watch the economic and political developments for another month ahead of Greek elections on 17. June.
Some observers have suggested a 25bps cut. We think it’s more probable that the ECB could signal a willingness to ease, but won’t cut. To this end, we wouldn’t be surprised if the ECB resumed some of its non-standard measures, including the Securities Market Program (SMP), which has been dormant for the last 12 straight weeks, but has purchased €212B of bonds on the secondary market since May 2010. However, we don’t expect yet another long term LTRO to be announced tomorrow.
One main issue at hand is that a rate cut alone won’t solve Europe’s sovereign and banking problems. The ECB, under Trichet and now Draghi, has stressed the need of governments to reduce their fiscal imbalances. And unlike the developing Hollande-Monti handshake in support of Eurobonds and the ECB doing more, Draghi has taken a very Bundesbank approach that fears unneeded ECB intervention, in particular measures that may spur inflation.
Further, we think the ECB wants to evaluate the outcome of the Greek elections on 17. June, and monitor the discussion around a fiscal union, Eurobonds, and a Pan-European deposit insurance, all of which are programs many months out if they are ever realized. These programs should be central to the Summits and meetings approaching later in the month, and should be critical for market sentiment.
Since the ECB’s last meeting on 3. May, data continues to contract and/or disappoint. The notable highlights are the declines in Manufacturing and Services PMI surveys for the month of May, the Eurozone unemployment rate that ticked up to 11% (a 17 year high), and Eurozone confidence figures that largely deteriorated month-over-month in May.
The EMU remains a compromised Union of states. However, we still believe that Eurocrats have a tremendous resolve to keep the Union alive with the existing member states. For specific questions on anything Europe, please contact me at .