Week Ahead & in Review: euro falls more than expected against the dollar

Week in review: Greece has started technical negotiations with its official creditors, in order to receive EUR7.2bn it’s due under the programme. Several European officials have warned that Greece will need to start implementing reforms to actually get access to the funds. Moreover, the situation of Greek public finances appears to have become rather difficult as a sharp drop in revenues has allegedly reduced the Government’s cash reserves very dramatically. According to the FT, the Government is pressuring the Social Security to hand over its cash to a fund with the Central Bank, in order to meet its obligations of wages and pensions in March and April. Meanwhile, the Government is due to repay a relatively large chunk of IMF loans this month. The start of the technical negotiations hasbeen marked  by Greek demands to receive reparations from Germany due to damages from WW2 and threats that may hamper their success.

On the markets’ front, the euro has fallen more than expected after the start of the ECB’s quantitative easing programme on Monday. Most analysts expected that the QE was priced in the exchange rate, after its announcement on 22 January, but the euro fell further this week to 1.06 dollars, from 1.13 at the end of last week. It’s unclear whether this trend will last in the short term, there is a possibility that the fall is unrelated to QE and may be due to renewed tension on the Greece/EU front. In the medium/longer run, the euro should be supported by the expected gradual pick-up in activity, on the back of QE, and lower oil prices. In any case, a lower euro should help further lift exports, which should be positive for the economy.

Turning to Portuguese data, in the quarter ending in January 2015, exports of goods increased by 0.9% and imports of goods decreased by 1.8%, when compared with the quarter ending in January 2014 (+4.8% and +2.5% respectively in the fourth quarter 2014). After a strong performance in Q4, this decline may be a temporary factor, which could be further related to the fact that new year’s fell on a Thursday in 2015, which may have prompted many people to take Friday off. In the euro area, January industrial production was down 0.1%mom but up 1.2%yoy (after 0.6%yoy in December).

Week ahead: The week is likely to be marked by further news on the technical negotiations between the Brussels group (formerly known as Troika)  and Greece. The Ukraine situation appears to have calmed down as the ceasefire is holding up, but the relations between the EU and Russia remain icy.

  • Tuesday 17 March:  EU general affairs meeting: Greece and Ukraine likely to remain hot topics through the week, if not at this specific meeting
  • Wednesday 18 March: Federal reserve meeting ends. No news expected, but more guidance may be given afterwards about when to expect the first fed fund rate hike, which is currently priced in for mid year.