Risk trends favored the greenback overnight it what could best be described as a healthy period of consolidation ahead a solid week of critical event risk. In addition to Thursday’s Federal Reserve policy meeting, we’ve also got influential themes coming across the Atlantic with this evening’s long-awaiting German Constitutional Court ruling on injunctions against the ESM. After Friday’s fall, the greenback was well bid against its risk counterparts with the Euro, Aussie and Kiwi leading the decline. The local unit took a leg-lower in the domestic session after China’s trade data, and support for greenback overnight saw downside momentum maintained and remains under pressure at current daily lows of 103.3 US cents. Likewise, the Euro was lower against its major counterparts, led by a fall in the EURUSD pair which eased to the downside of $US1.28 before finding support just above $US1.2750.
Meanwhile, a point of contention for markets remains Greece’s prospects of receiving its next tranche of bailout funds. The troika are back in Greece and taking part in a series of meetings with the Prime Minister and Finance Minister in effort to reach a consensus on proposed spending cuts needed to secure further aid.
It’s clear there’s a reluctance to carry risk assets higher given much of the positivity surrounding a favorable German court ruling and Fed’s QE3 is already priced in. It is also clear Mario Draghi’s grand rescue efforts unveiled last week could all be in vein should the German Constitutional Court rule the European Stability Mechanism to be outside the boundaries of German law. The ruling which is set to take place this Wednesday, may be the final hurdle in the ESM’s troubled inception, which is designed to serve as a 700 billion euro back-stop for European countries in need of financial assistance. If the court rules the plaintiff’s case untenable, this will then allow German President Joachim Gauck to sign the European Stability Mechanism into law, thus eliminating a critical hurdle, but if the court decides the plaintiff does indeed have a case, this will see temporary injunctions effectively veto the bailout fund at its birth, in-turn, triggering a fresh wave of negativity surrounding leaders ability to contain the crisis. Although a growing number of pundits believe the court will eventually rule in favour of the ESM, any conditions, limitations, or legal amendments may also pose considerable short-term risks to sentiment, given it is likely to see further delays before being ratified. Behind the case is thousands of German citizens, politicians, and the Die Linke or ‘left party’ in the German Bundestag who believe the ESM is unconstitutional given its places public finances at the mercy of other European countries at risk of a hard default and/or exit from the union. Germany is the largest contributor of the fund with a total stake of 27.14 percent with France representing 20.38 percent and Italy 17.91 percent.
Overnight there were reports of further possible delays after German politician Peter Gauweiler launched a further offensive over the European Central Banks potentially unconditional use of the fund in its bond buying operations. While also question the constitutional viability of the fund, Gauweiler stated the ESM “should only come into force when the ECB has taken back its self-awarded power as a hyper rescue-shield.” While the court may rule against the injunction from a constitutional perspective, it is also possible the court may further delay its ruling pending further consideration to Gauweiler’s latest anti-ESM initiative.
Local data on today’s docket includes the NAB Business Confidence and Conditions indices. While a less than inspiring print may exacerbate downside, we anticipate regional equities to remain a key barometer for the local unit before we hand over to Europe once again with further conjecture ahead of the ESM ruling likely to dominate. At the time of writing the Australian dollar is buying 103.3 US cents.