Greece under pressure

The USD has weakened and the euro strengthened, despite much attention around the Greek government d

(30.05.2011) The USD has weakened and the euro strengthened, despite much attention around the Greek government debt situation. A slide of weak US key macro data is the main driver behind the weakening of the dollar, which we expect to be reversed during the next months.

By Kjersti Haugland, Senior Economist at DNB Markets

The euro strengthened markedly on a broad basis during Friday's session, especially against the dollar, despite the failure of the Greek government to reach a consensus with the opposition regarding austerity measures. Several sources, including the Greek central bank governor and representatives from ECB, have continued to deny that a restructuring of the debt is underway.

Nevertheless: The pressure towards Greece increases as the release of the next loan tranch (12 bn euros) in mid-June approaches
. According to Spiegel magazine the group consisting of representatives from the EU, ECB and IMF, which has been in Greece to inspect the situations for the last weeks, has found that Greece has failed to fulfill any of the austerity criteria attached to the emergency aid plan. The explanation is a combination of insufficient cuts in expenditures and unexpectedly low tax income.

According to Financial Times a plan is under construction which entails an extreme degree of external governance, both when it comes to tax collection and privatisation. The Greek government has already committed to selling government assets worth 50 bn euros. According to the EU/ECB/IMF group the total attainable amount by selling government assets can be 300 bn euros, almost covering Greece's current debt obligation (330 bn euros). The pressure to sell off more than originally planned is certainly present.

There are clear signs of a certain slowdown in the impressive growth pace of the euro zone economy. The sentiment index, which sums up the sentiment within enterprises as well as households, declined from 106.1 in April to 105.5 in May. This was the third month of decline, but the index is still above its historical average. Enterprises are pulling the index down, while household optimism has edged up.

US macro data has consistently underscored the market's expectations lately, contributing to lower yields on US bonds and a weaker dollar. Friday's releases were also weaker than expected. Real private spending rose by only 0.1% m/m, while consensus according to Reuters was for a 0.5% rise. The core personal consumption deflator (Fed's preferred measure of underlying inflation) remains in record-low territory (1.0% y/y), while the total is pulled up by higher energy prices (2.2%).

Pending home sales fell by 11.6% m/m in April, instead of the expected -1.0%. The US housing market is clearly depressed, but we believe that the disappointment in other areas of the economy can be ascribed temporary factors, like bad weather, a sharp rise in energy prices and lately also some disturbances in the supply chain in the wake of the Japanese catastrophe. We therefore expect long government bond yields to rise and the dollar to strengthen going forward, as these adverse effects wane.

Important data coming up this week:
ISM-indices (manufacturing on Thursday, the service sector on Friday) and payrolls on Friday.

Other movements in the FX market: As an increasingly popular safe haven the Swiss Franc has reached new record levels, both against the dollar and the euro.

The Swedish krone weakened slightly against the euro after reports about somewhat weaker GDP growth than expected. Q1 growth came to 0.8% q/q, while consensus was for a 0.9% rise, and the Riksbank expected 1.0%. However, Q4 growth was upwardly revised, from 1.2% to 1.6%. All in all we do not expect these numbers to affect the Riksbank's view on the current situation in the Swedish economy, and all is set for further hikes in the next meetings in July and in September. We expect today's retail sales to show a solid 1.0% m/m rise, after several weak months.

Today's session will be marked by thinner trading, as UK and US markets are closed.