Conflicting reports continued to emerge from European policymakers which kept the euro trading heavy this week. On the negative side, eurozone 'sources' said they expect IMF to pay next Greek aid tranche on basis of EU commitment to support Greece further out. IMF's Zhu said they are "very concerned" by Greece, and the situation has changed very dramatically in last 24 hours. Other sources suggested that Germany are pushing to delay second rescue package for Greece until September.
However, The EU Commission comments that Rehn still expects a decision to be taken in June on the next tranche of funding for Greece, while an agreement on a continuation of the Greek program to come in July. The Commission said it is working very closely with the IMF.

Greek PM Papandreou is attempting to reshuffle his cabinet. The PM plans to cut the number of deputy ministers and add up to 4 non-elected officials. The confidence vote is expected to take several days and will therefore take place on Sunday at the earliest, although reports are conflicting. The candidate who was to become the new Greek finance minister resigned from parliament. However, the balance does not change as the member will be replaced directly. Greek officials warn that the Greek government is now facing a loss of confidence from its own MPs and that a third deputy may resign soon

EU May headline inflation confirmed at 0.0 m/m 2.7 y/y, down from 2.8 y/y in April. Core inflation nudges down to 1.5% y/y from 1.6 in April. The ECB is unlikely to change its stance on monetary policy due to this.

The details behind the Spanish bond auction were mixed. Spain sells EUR1.5bn of 15 year bonds at a rate of 6.027% and bid to cover 2.57x. They also sell EUR1.3bn of 2019 debt at 5.352% and a cover of 2.1x. Alhough the bid-to-cover rates are reasonable, it seems the Spanish authorities perhaps scaled back the offering due to high yields. Direct comparisons don't really exist but they sold EUR2.5 bn of 2021 bonds on 19/05 at a yield of 5.395%. The 2019 rate is hardly attractive, but unsurprising given movements in peripheral market spreads in recent weeks. Simply put, the peripheral spreads are the high bond yields of the "at risk" eurozone regions relative to the benchmark German Bunds. The high yields are a reflection of risk for the bonds.

Greek Prime Minister George Papandreou will form a new government on Thursday and seek a vote of confidence from his party. Initial press reports had suggested that he had resigned to make way for 'national unity' government but this was denied and the focus will now be on tomorrows vote. Reports suggested that the opposition demand a renegotiation of the terms of the bailout as a condition for forming a coalition but these requests were deemed too severe for the PM.

Irish Finance minister Noonan says the government plans to impose losses on senior bondholder in Anglo Irish, and that it has support form the IMF.

EUR is over done for the near term and we anticipate a move toward 1.4330 before further selling.

SNB keeps 3m Libor target rate unchanged at 0.25% as expected. It also the holds 2011 GDP forecast at 2%.. The inflation forecast for 2012 is marginally lower at 1.0% from 1.1% earlier and at +1.7% from +2.0% earlier for 2013. These are minor changes. Swiss economist notes that the SNB acknowledged increased capacity utilisation and mentioned the danger of an overheating housing market. The mention of an overheating construction sector is new.

Hildebrand says SNB is concerned about exchange rate developments, however his colleague Danthine says selling forex reserves for Swiss francs not option at moment.

As we expect risk aversion to be a key driver in the coming weeks the franc will likely stay in demand versus currencies such as the EUR.

UK retail sales were weaker than expected at -1.6% m/m after +1.2% and expectations of -0.6%. Total retail sales were down 1.4% instead of -0.6% consensus. According to the ONS, the downturn was because of higher fuel prices and uncertainty over job prospects and pay.

BoE's King is not changing his stance. He is saying that a combination of tight fiscal/loose monetary policy is what is needed at the moment. He says they can raise rates when lending spreads tighten, but they are showing no signs of doing as such. He also points to prices driven by external factors once again, and therefore sees them coming down.

AUDJPY... We look to be buyers on moves toward 84.50 looking for small swings from the lows. Risk is a round of heavy selling in equities. A break below 84.0 we will look to accumulate long positions on the pair.

Source: UBS, Chris Lori, Reuters

Tags: EUR