Positions in Europe: Short France (EWQ)
ECB on Hold
On Thursday the ECB’s governing council convenes; we expect no change to the main interest rates. Our rate position is largely in agreement with consensus -- 44 of 48 economists polled by Bloomberg expect no change.
This position is grounded in recent data that is supportive of an “accommodative” hands off approach from Draghi – CPI came down over recent months and is resting steady at 2.0% Y/Y in FEB, exactly at the ECB’s targeted level. PMIs across the core fell in FEB vs JAN, but beat initial expectations. While the Eurozone unemployment rate ticked 10bps higher to 11.9% in the month, the rate has historically been higher than the U.S.’s and is tame compared to peripheral figures. In February Eurozone confidence figured improved, as did retail sales to -1.3% JAN Y/Y (exp. -2.9%) vs -3.0% DEC and industrial production improved to -2.4% DEC Y/Y vs -4.0% NOV.
Further, Draghi’s positioning has the added support from the conclusions of the Eurozone finance ministers meeting (on Tuesday), which was dovish, promoting a willingness to extend country deficit reduction targets due to the “pains” associated with austerity.
- Specifically, EU Economic and Monetary Commissioner Olli Rehn had this to say: “the economic strains may also justify in a certain number of cases reviewing deadlines for the correction of excessive deficits.”
- Of mention is that France’s deficit target of 3% looks to be pushed from 2013 to 2014.
While we think that investor sentiment is lower on the region currently due to concerns over Italy – as compared to the optimism in the back half of 2012 following the announcement of Draghi’s OMT –– we expect Draghi to keep his policy powder stowed on Thursday until there is a more meaningful flair-up in risk or greater change to the underlying data the bank tracks.
Broadly we think the uncertainty around the next Italian government will put downside pressure on the EUR/USD. Further, we think that given the power of social media and the strong popular support for Beppe Grillo’s Five Star Movement, his call for an online referendum on Italy’s membership in the EUR could put further downside pressure on the cross.
Our critical quantitative lines on the EUR/USD (which can be played via the etf FXE) are outlined in the chart below:
The most recent weekly CFTC data (from 2/26) shows a decided swing into a net bearish position on the EUR/USD, with a steady decline since a recent bullish peak on February 5th, which we think primarily reflects the uncertainty coming into the Italian election on February 24-25. We expect a long runway of uncertainty on the next Italian government, with the first semi catalyst not coming until March 15th when the presidents of the lower and upper houses are expected to be elected.