London Session: Hollande’s calls for a lower EUR fall on deaf ears

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By Kathleen Brooks | February 6, 2013 2:10 AM EST

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The ECB has kept a respectable silence, the German finance minister was shot down by Chancellor Merkel when he dared to mention the Japanese exchange rate, however two days before this month's ECB meeting and the French President Francois Hollande has waded straight into the debate.

In a speech earlier today he said that governments' should also have a say over FX policy and it shouldn't just be for the ECB to make decisions that affect the level of the euro. This is a bold statement - he is basically advocating a controlled currency, something the euro was designed to avoid.

Free-floating currency myth


Of course in reality free-floating currencies are a bit of a myth. US lawmakers "do not" intervene in the currency market, yet QE has limited dollar strength for the last 5 years, the Japanese and Swiss authorities intervene directly in the markets and the RBA and RBNZ often reference the strength of their respective currencies as being a hindrance to growth going forward. Hence, if the Eurozone is the last to the currency wars party it risks getting burnt.

Could the Eurozone economy become the casualty of the currency war?


Market sentiment has softened towards the euro since those infamous words form Draghi last summer, but the pace of gains really picked up in late 2012 when the new government of Japan made it a concrete policy to weaken the yen and try to boost growth. This is when the ECB's relatively hawkish stance combined with a stabilisation in the sovereign debt crisis turned out to be a potent mix for the currency bloc.

The ECB and its de-facto tightening


With almost comic timing, just as Hollande has been lamenting the strength of the euro the ECB's balance sheet shrunk to an 11-month low as Eurozone banks repaid LTRO loans. This is a de-facto tightening, which may be euro positive in the medium-term as other central banks like the Fed see their balance sheets' balloon (the Fed's balance sheet rose to $3 trillion last week).

Now that major central banks' interest rates are close to zero and are expected to remain unchanged for the foreseeable future, yields and their impact on FX are increasingly controlled by the relative size of central bank balance sheets. This is becoming a theme of 2013, and could make Thursday's ECB meeting particularly interesting. The dilemma for the ECB: it wants to show that things are stable in the currency bloc and that banks no longer need their emergency liquidity, but repayment of ECB loans is one of the things that might be contributing to a stronger euro and thus weighing on the future prospects for economic growth. However, if Draghi and co directly respond to Hollande's comments on FX policy at this week's meeting then it could threaten its credibility as an independent central bank.

Hollande tried to deflect economic criticism


Of course, Hollande's comments are deeply political. He is looking for something to blame for the weak French economy. French January PMI numbers show that it is even starting to under-perform some peripheral economies. Its service sector PMI for January was 43.6, the lowest level since 2009, and deep in recession territory. So rather than blame his own policies he has chosen to point the finger at the ECB and the euro. Hollande should avoid all phone calls from Berlin in the next few days...

Markets soothed by drop in Spanish yields


The markets have dispelled concerns about the end of the uptrend and recovered some of yesterday's losses. EURUSD basically ignored Hollande and concentrated instead on falling Spanish bond yields and rising stocks, it is back above 1.35, and 1.3460 now looks like a temporary low. Spanish bond yields are key to the better tone to risk sentiment today. The story about corruption charges and the Spanish PM have died down, if he isn't going to resign in the immediate days after the scandal than he will probably keep his job. Italian political woes are as bad as ever as Berlusconi races up the polls, this has been expected by the markets, and a Spanish crisis was not.

European stocks are higher, and the US markets are also expected to have a positive open. News that computer maker Dell will be taken private by its original owner has just hit the wires. It will be partially financed by a $2 bn loan from Microsoft. A quick debate round the office and we seemed to agree that Dell makes reliable computers and laptops that even survive gin and tonic spillages. So maybe there is some value there...

US ISM non-manufacturing is the data highlight later this afternoon, the market expects a slight moderation but for the index to remain in positive territory. In the FX space we expect ranges to persist into the ECB meeting, the Aussie looks vulnerable to another weak employment report, which is due on Thursday. If we do get weak data it could fall below the 1.0380 - 200-day sma- mark. The SPX 500 is likely to remain sticky at 1,500 - there is short term resistance at 1,505, which could attract some scalping interest.

One to Watch: Gold


Gold is above its 50-day sma, which opens the way to $1,700. Gold managed to rally along with the dollar yesterday (usually the two move in opposite directions of each other), which suggests the upward thrust in gold recently could have some real power behind it that may see it move to $1,700. $1,650 remains key medium-term support.

Chart: Gold daily



Best Regards,

Kathleen Brooks| Research Director UK EMEA |

d: +44.(0).20.7429.7924 | f: +44.(0).20.7929.2010 | M: +44 (0) 7919.411.957 | e:| w:

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