Well damp sibs don’t come much more blatant than the EU bank stress test; the build up, the hype, the excitement, the preparation and then a the announcement arrived at 5pm on Friday as promised. But it wasn’t one announcement as we had kind of expected; no it was a lengthy series of part announcements from the various central banks followed by an audible lull as traders tried to decipher the news. The news was that a total of 7 of the 91 banks had failed the test with Spain being the main area for concern. It is also worth noting that all 7 of the failures are already being supported by the governments involved so they are hardly likely to fail now anyway. The problem is that, as I mentioned last week, the tests really didn’t test the most important thing and that is whether these banks could withstand the fallout from a country within the EU defaulting on its debt. And with Spain being right at the forefront of that concern, finding out that 7 Spanish banks couldn’t handle more minor financial corrections was a real worry.
So the weekend activity was largely a case of adjustment as the US Dollar lost some of its lustre, the Euro weakened back to where it had been prior to the tests and the Pound had rather a good trading session on the back of those two moves. The Euro was also hampered by EU banks’ exposure to Hungarian debt and Hungary was warned by one of the credit rating agencies that is faces an imminent downgrade.
This week will start with Monday; you probably knew that but this is not just any Monday; this is the first opportunity EU, US and UK traders will have to set out their stall in light of Friday’s stress tests within a full trading day. We won’t obviously get announcements as to their views but the exchange rate movements will paint the picture for us and it will be very interesting to see if the scepticism over the value of the stress tests is borne out by weakness in the Euro. It has yet to get away from its recent ranges of just below US$ 1.30 and just below €1.20 against the Pound. A break of €1.30 would be a surprise but we may well see a test above €1.20 against the Pound as Sterling has had a very good weekend. That followed much stronger than expected UK economic growth in the 2nd quarter of 2010 but this is only the 1st estimate of that data and it is based on barley 40% of the full data set so let’s not get our briefs in a bunch just yet.
In other news, Canadian retail sales were a tad lower and inflation cooled to 1.7% making the Bank of Canada’s assertion that interest rates would not have to rise rapidly, a reasonable one. The Canadian Dollar is susceptible to fluctuating commodity markets though and those are fluctuating like a yoyo on a bungee strapped to a trampoline made of jelly. So we can expect volatility in the value of the Canadian dollar as well.
New Zealand interest rates will be decided this week and it is a fairly sure bet that the Reserve Bank of New Zealand will hike their base rate by 25 basis points to 3.0%. What traders will be most interested in though is the RBNZ’s view on the future path for inflation and growth. Expect volatility in the NZ Dollar as the week progresses. Both the NZ and Australian Dollars are stronger against the US Dollar this morning although not so against Sterling as traders took profit on Sterling selling over the weekend. Australian inflation data comes to us this week and will paint more of a picture of what we can expect from next week’s Reserve Bank of Australia meeting. The RBA had said it would await the results of the EU stress tests before talking about the future of Australian growth but I don’t think there is much to be gleaned from those so the RBA are largely on their own.
And, I don’t know about you but I only started watching Formula 1 again when Lewis Hamilton started in the group. Sadly he wasn’t a front runner at the weekend but the cynicism that used to be so prevalent in F1 reared its head again as the Ferrari team blatantly changed the outcome of the race. Felipe Massa’s face at the press conference was all the officials needed to see to know that wrong had been done but the signal that changed the race was as blatant as it could be, perhaps because the chief engineer who was asked to deliver the message was not happy to do so. $100,000 fine was a mere trifle. I hope they disqualify both cars as a penalty.