The failed attempt to form a new government in Greece has compressed the euro to well below EUR/USD 1.30...
Sign up for our free newsletter to receive weekly news from BONDWorld
Click here to register for your free copy
For professional investors and advisers only
For the time being, we confirm our short-term downside target of 1.25, although fears of a Greece potentially exiting EMU could hold further downside. We have not revised sterling upwards, as the Inflation Report was unequivocally dovish and the BoE has singled out the euro are crisis as the main downside risk to UK growth.
EUR – The euro has virtually reached our downside targets, finally dropping below EUR/USD 1.3000: it has broken through the first technical target at 1.2827 and has almost reached the second (1.2624). This all happened this week, on the failed attempt to form a government in Greece. Now new elections have been called on 17 June, and the markets are starting to fear that Greece could exit EMU. The G8 summit will also take on the Greek crisis. If no encouraging developments emerge, the euro risks weakening further: downside in the EUR/USD 1.25 area, a level confirmed as our central 1m projection. However, in light of the latest developments on the Greek front, increased risk of Greece actually exiting EMU has heightened the risk of a deeper decline of the euro, to below 1.25. It is no easy task to quantify the downside tied to such an event, as there are no historical precedents. However, an initial hypothesis could be a depreciation into the 1.25-1.18 range. This is because on occasion of the “first” Greek crisis in the opening months of 2010, the exchange rate plunged from 1.35 to 1.18 (punctual low on 7 June 2010: 1.1877) in less than two months, between April and June. Considering that the starting point of the recent downswing is more or less in line, we do not think it unreasonable to expect a similar movement. As regards next week, PMI, IFO and confidence indices will be released, all referred to May. Should the data surprise positively (although expectations are for the contrary) the euro’s current slide could temporarily stop, barring unfavourable developments on the crisis.
GBP – We have not revised upwards our projections for the pound as the Inflation Report revised downwards the UK economy’s growth projections, singling out the euro area crisis as the main downside risk. In his opening remarks, Governor Mervyn King let on that the BoE still hasn’t definitively closed the door on further quantitative easing. As a result, and given the decline of the EUR/USD, sterling corrected sharply, dropping from GBP/USD 1.61 to 1.56. Therefore, we have confirmed our 1m-3m projections, which allow for the possibility of a foray in the GBP/USD 1.55-1.50 range, mostly due in our view to (1) a drop of the euro below
EUR/USD 1.25, and/or (2) the announcement of a further expansion of the APF (next BoE meeting on 6-7 June). Next week, in the meantime, there may be room for a further weakening in the event of poor data releases (which include inflation, retail sales, the CBI survey of the industrial sector, and the second estimate of Q1 GDP) and BoE minutes (Wednesday) revealing a serious split on the APF.
JPY – The yen strengthened from USD/JPY 80 to 79 on mounting risk aversion tied to the Greek crisis. If sentiment does not improve, the exchange rate could attempt to reach USD/JPY 78. However, on Wednesday the BoJ will meet, and is ready to act to contain any further thrusts below USD/JPY 80.
The financial analysts who prepared this report, and whose names and roles appear on the first page, certify that: (1) The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures: The analysts who prepared this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.
This research has been prepared by Intesa Sanpaolo S.p.A. and distributed by Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for the contents of this report. Please also note that Intesa Sanpaolo S.p.A. reserves the right to issue this document to its own clients. Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both authorised by the Banca d’Italia, are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.
Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor.
This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. It should not be regarded as a substitute for the exercise of the recipient’s own judgement.
No Intesa Sanpaolo S.p.A. or Banca IMI S.p.A. entities accept any liability whatsoever for any direct, consequential or indirect loss arising from any use of material contained in this report.
This document may only be reproduced or published together with the name of Intesa Sanpaolo S.p.A. and Banca IMI S.p.A.. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. have in place a Joint Conflicts Management Policy for managing effectively the conflicts of interest which might affect the impartiality of all investment research which is held out, or where it is reasonable for the user to rely on the research, as being an impartial assessment of the value or prospects of its subject matter. A copy of this Policy is available to the recipient of this research upon making a written request to the Compliance Officer, Intesa Sanpaolo S.p.A., 90 Queen Street, London EC4N 1SA.
Intesa Sanpaolo S.p.A. has formalised a set of principles and procedures for dealing with conflicts of interest (“Research Policy”). The Research Policy is clearly explained in the relevant section of Banca IMI’s web site (www.bancaimi.com).
Member companies of the Intesa Sanpaolo Group, or their directors and/or representatives and/or employees and/or members of their households, may have a long or short position in any securities mentioned at any time, and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any of the securities from time to time in the open market or otherwise. Intesa Sanpaolo S.p.A. issues and circulates research to Qualified Institutional Investors in the USA only through Banca IMI Securities Corp., 245 Park Avenue, 35th floor, 10167 New York, NY,USA, Tel: (1) 212 326 1230. Residents in Italy: This document is intended for distribution only to professional investors as defined in art.31, Consob Regulation no. 11522 of 1.07.1998 either as a printed document and/or in electronic form. Person and residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers under rules of the FSA.
US persons: This document is intended for distribution in the United States only to Qualified Institutional Investors as defined in Rule 144a of the Securities Act of 1933. US Customers wishing to effect a transaction should do so only by contacting a representative at Banca IMI Securities Corp. in the US (see contact details above).
Trading Ideas are based on the market’s expectations, investors’ positioning and technical, quantitative or qualitative aspects. They take into account the key macro and market events and to what extent they have already been discounted in yields and/or market spreads. They are also based on events which are expected to affect the market trend in terms of yields and/or spreads in the short-medium term. The Trading Ideas may refer to both cash and derivative instruments and indicate a precise target or yield range or a yield spread between different market curves or different maturities on the same curve. The relative valuations may be in terms of yield, asset swap spreads or benchmark spreads.
Coverage Policy And Frequency Of Research Reports
Intesa Sanpaolo S.p.A. trading ideas are made in both a very short time horizon (the current day or subsequent days) or in a horizon ranging from one week to three months, in conjunction with any exceptional event that affects the issuer’s operations. In the case of a short note, we advise investors to refer to the most recent report published by Intesa Sanpaolo S.p.A’s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI’s web site (www.bancaimi.com) or by contacting your sales representative.
Source: BONDWorld – Intesa Sanpaolo – Research Department