Euro Recovery Continues Ahead Of G7 Call, RBA Cut 25bps, BoC Next

Published 06/05/2012, 07:02 AM
Updated 03/09/2019, 08:30 AM
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Euro continues to recover against dollar and yen ahead of an emergency conference call between G7 finance ministers today. Canadian finance minister Flaherty confirmed there will be a call with counterparts from US, JP, UK, Germany, France and Italy. Flaherty noted that Europe is the "real concern" right now with some banks "undercapitalized" while other eurozone states haven't taken enough access to address the undercapitalization issue, nor are they building an "adequate firewall." And some G7 officials are worried that a bank run in Spain could have repercussions beyond the eurozone. A US Treasury official said that it's hoped to see "accelerated" actions from Europe to "strengthen the European banking system" over the next few weeks, including to a run-up to G20 meeting in Mexico on June 18-19.

German Chancellor Merkel said yesterday, before meeting with European Commission President Barroso, that there "needs to be an answer in the foreseeable future" on how European envisage the "political union along with monetary union." Merkel noted the need to have a "specific European supervision" on banks and these are "medium-term goals." Barroso explained that this may include a banking union with more integrated "financial supervision" and integrated "deposit guarantees."

S&P rating agency said that there 1-in-3 chance that Greece will exit eurozone after the election on June 17. S&P noted that such an event could be "brought about by Greece rejecting the reforms demanded" and followed by "suspension of external financial support." Such development would "hurt the country's economy and fiscal position over the medium term." Meanwhile, S&P doesn't expect other sovereigns to follow "having witnessed the resulting economic hardships and long delay in harnessing benefits from national currency devaluation" and European officials would "additional support to discourage further departures." For example, in such case, "ECB would respond vigorously to any sustained rise in borrowing costs for other sovereigns."

RBA cut rates by 25bps to 3.50% today as widely expected. The bank noted "further weakening in Europe and some further moderation in growth in China." Also, "financial market sentiment has deteriorated over the past month." Domestically, modest growth is expected to continue in the first part of 2012 but with "significant variation across sectors." And the bank concluded that "with modest domestic growth and a weaker and more uncertain international environment, the outlook for inflation afforded scope for a more accommodative stance of monetary policy."

Looking ahead, BoC rate decision will be a main focus. The Bank of Canada will likely deliver a much less hawkish statement after the meeting next Tuesday. The rapid deterioration in the global environment, especially the sovereign debt crisis in the eurozone, is expected to affect he recovery outlook in Canada. Moreover, the slowdown in China should have negative impact on the export sector of Canada. We expect the central bank to maintain the policy rate at 1% as the urgency of tightening has greatly reduced. More in BOC To Pause In June With Less Hawkish Statement.

On the data front, eurozone PMI services, retail sales, and German factory orders will be released. Later in the day, Canadian building permits will also be featured. But the major data to be watched is US ISM services which is expected to be steady at 53.5.

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