The Nations Inside the EU

According to research by Pew
The nations inside the EU
Are starting to feel
The gist of the deal
Is not beneficial, who knew?

Today’s fight is over the banks
As Spain, France and It’ly close ranks
While Germans maintain
That they will abstain
Support for the others? No thanks

The euro is a bit softer this morning from yesterday’s close as the market reversed early gains in the wake of a much weaker than expected German ZEW Survey (released at 36.4, exp 40.0).  But the headlines in the papers are over the angst that is increasingly visible by the EU nations as they try to reconcile significant differences over how to deal with banking resolutions.  The sides remain the same, with Germany, Austria and the Netherlands insisting that a networked approach where each country deals with its own banking troubles is necessary and anything more than that would require Treaty changes.  Meanwhile, the bulk of the rest of Europe, notably France, Italy and Spain contend that if there is no common banking support agency, with participation by all nations, then it won’t work.  Of course this is the natural outcome given that the latter group is basically telling Germany that because they have the money, they have to pay, and the German’s are simply trying to hang onto their money.  I thought it quite interesting that the results of an annual Pew Research survey showed that belief that the EU has been a benefit to each nation has tumbled to well less than half the population, with some countries, like France down to 41% in favor (Greece is, not surprisingly, at 11% beneficial).  If the core population of the EU is not happy, just how long can they continue to support the single currency?  This is symptomatic of the underlying flaws in the euro that are likely to prevent significant strength any time soon.

As to the rest of the market, it has been a very unexciting day.  There has been little movement in the yen, and no news to drive things.  It seems to be consolidating its recent losses ahead of its next move.  I think 105 is in the cards for June, but for now, 100.50-102.50 is likely to contain us.

The pound is dull as well, with no data of note and only domestic policy discussions about banks and the potential EU referendum to keep business writers busy.

There was an article in the WSJ today about the AUDMXN cross, pointing out that many investors have been shorting AUD against the MXN all year as a proxy bet on the diverging economic outcomes of the US and China.  While early in the year it was certainly a great trade, and it has gained about 9% in value so far this year, my concern is that if the Journal is writing about it, the opportunity may well be ending.  Typically, when a trade idea hits the mainstream media, its run has ended.  While I do still like AUD lower, it is not clear to me that MXN will continue to show the strength as it has to date.

Finally, it seems that my brief discussion of Chinese data yesterday was on the mark, as a number of analysts have reduced their GDP targets for 2013, with the median estimate now 7.8%, down from 8.0% before.  Personally, I think we will have difficulty achieving that, and that the 7.5% level mentioned by Chinese Premier Li is more likely to be the end result.  With that in mind, I expect that we will see a slowdown in what had been a steady appreciation of the CNY as the rest of the year progresses.

Good luck

adf