– G10 and Asian FX slightly stronger vs USD, Asian equities mixed
– UK retail sales are likely to only provide limited GBP support
– We have revised our USD “Fair Value” estimates stronger vs G10
– Australia and Sweden lead cross border M&A flows
What to watch for today
GBP: Retail relief. Our economists forecast retail sales rose 1.0%mom in April, above the consensus forecast of 0.8%. They point out that the BRC sales monitor registered a significant increase in sales growth for that month, although some of that strength reflected the timing of Easter which should be adjusted for in the official data. We would tend to fade resulting GBP strength as the sterling needs a run of unambiguously strong data before markets shift to pricing near-term BoE tightening again, in our view. We continue to look for a near-term break of 0.90 in the EURGBP cross. The CBI’s May industrial trends survey is also released today.
USD: Continuing to count claims. Jobless claims troughed at 375k in late February and subsequently surged to 478k highs in the last week of April, amid distortions from school holiday timing and supply chain disruptions. Last week saw an improvement to 434k and we agree with the consensus forecast that this week will see further improvement to 420k. Numbers in line or better than consensus should be supportive for risk trades, and the CAD and MXN in particular, in our view. To the extent US front-end yields rise in response, we would expect USDJPY to follow higher. However, we would note the potentially offsetting effect of soft USD cash rates resulting from the hiatus in T-bill issuance and would be cautious trying to trade USDJPY from the long side for the time being.
What happened overnight
The USD is broadly weaker in the Asian session, with EURUSD trading above 1.43 for the first time in 4 days. The Wall Street Journal reported that Dominique Strauss-Kahn has resigned as head of the IMF. Markets will likely focus on whether the new chief is able to work with the various European nations, in particular on the ongoing negotiations on Greece. While the FOMC minutes overnight showed participants discussing the Fed’s exit policy and would point towards policy tightening as the next policy move, we note that there has been no time-line discussed and the next policy move could still be some time away.
USDJPY is largely unchanged around 81.6, with markets largely ignoring the bigger than expected 0.9%qoq fall in Japan’s Q1 GDP compared to the 0.5%qoq consensus. The decline is even larger when taking into account that Q4 GDP growth was revised down to -0.8%qoq from -0.3%qoq previously. The weak Q1 growth data support our view of an increasingly divergence in BoJ and other G10 monetary policy. However, USDJPY remains very much a play on US rates at this time and is unlikely to see much upside until US front-end yields recover, in our view.
The NZD is outperforming as a larger New Zealand government budget surplus projection than the previous forecast eased concerns of sovereign rating downgrades. The AUDUSD traded slightly higher to 1.067, showing little reaction to a fall in consumer inflation expectations to 3.3% in May from 3.5% in April, a slightly lower average weekly wages growth of 1.0%qoq in February than the consensus forecast for 1.2%qoq, and Moody’s downgrading of 4 major Australian banks by 1 notch to Aa2.
Asian currencies are slightly stronger vs USD, led by the KRW. USDKRW is down 0.5% to 1,083 despite the 1.0% sell-off in Korea equities. The MYR and SGD have benefited from strong Q1 GDP data which point to continued policy tightening. Asian equities are mixed, with the Nikkei down 0.4% while the Shanghai composite index is flat.
SGD: Strong growth points to continued trend SGD appreciation. Singapore’s Q1 GDP growth was revised slightly lower to 22.5%qoq annualized from the initial estimate of 23.5%. Still a very strong number. Also the government has revised the 2011 growth forecast to 5-7% from 4-6% previously. This would still be above the long term growth trend of 3-5% and means the MAS probably needs to maintain the SGD NEER on a tightening path. With the SGD NEER is back to around 0.5% below the strong end of the policy band, according to our estimate, it may trade sideways around current levels over the next couple of weeks before resuming trend appreciation of 3-4%, in our view.
MYR: Malaysia CPI-inflation rose to 3.2% yoy in April from 3.0% yoy in March, in line with our economist’s forecast but slightly higher than the 3.1% yoy consensus forecast. This takes headline inflation within the strong half of the central bank’s 2.5-3.5% yoy target range. Food prices accounted for the bulk of the increase, but non-food price inflation rose to 2.5% yoy from 2.2% yoy in March. Our economists expect robust domestic demand to gradually push core inflation higher and they expect the central bank to hike policy rates another 50bp by end-year. Meanwhile, Malaysia’s GDP growth of 4.6% yoy in Q1 was slightly below the consensus forecast (4.9% yoy), but our economists estimate that this was still equivalent to growth of about 8% qoq annualised. Growth was broad based, with household consumption, fixed investment and exports rising 6.7% yoy, 6.5% yoy and 3.7% yoy respectively. Imports were up 8.7% yoy, driven in part by strong investment growth. We think that slowly rising inflation and strong growth momentum point to gradual tightening of monetary conditions via both central bank rate hikes and ringgit appreciation going forward.
Malaysia further liberalised the capital account yesterday as part of its ongoing plans to move towards full convertibility. The measures on direct investment abroad and inter-company loans liberalised flows on both sides of the capital account, and the impact is likely to be limited, in our view.
The measures are:
1) Direct investments will be exempted from the prevailing MYR50mn limit on investments in foreign currency assets.
2) Resident companies may borrow any amount in ringgit or foreign currencies from their resident and non-resident non-bank related companies.
3) The MYR5mn limit currently imposed on foreign currency trade financing obtained by residents from non-residents will no longer be applicable. Residents may obtain foreign currency borrowing, including foreign currency trade financing, up to the prevailing aggregate limit of MYR100mn for companies on a corporate group basis and MYR10mn for individuals.
Equilibrium exchange rates 2011 update
We have published our annual Credit Suisse Fair Value report for 2011 (download here – http://www.easyforexnews.net/uploads/2011/05/document-885613241.pdf).
Our key conclusions are:
– US dollar fair value estimates have been broadly revised stronger versus all G10 currencies compared to the 2010 estimates. The latest fair value estimates for the major pairs are EURUSD 1.16, USDJPY, 83.4, GBPUSD 1.56 (see Exhibit 1).
– The US dollar appears to be remarkably cheap against G10 currencies, but remains overall relatively expensive against a broad set of currencies, highlighting a wide cross-sectional dispersion of valuations (see Exhibit 2).
– At one extreme, high-yielding commodity-related currencies have reached record high historical levels. At the other, Non-Japan Asia currencies remain substantially undervalued.
– Most of the commodity-block overvaluation can be justified by the rally in commodity prices. Our commodity price augmented fair value estimates show that the commodity-related complex is moderately expensive.
– The Swiss franc is very expensive both on a bilateral and on a trade-weighted basis. Some of the Swiss franc crosses look particularly appealing from a value perspective. Specifically, we see good value in being long GBPCHF and SEKCHF.
Cross border M&A Update
We continue to monitor M&A announcements for signs that valuation extremes are beginning to drive equilibrating flows from expensive to cheap currency economies. Five months into the year, there is little evidence of a value bid in net cross border M&A announcements this year. Indeed, the favored destination for net M&A announcements so far this year has been the euro area, despite a somewhat expensive currency. Relative to GDP, Australia leads the pack despite having the most overvalued currency in the G10 amid continued demand for resource companies. On the other side of the ledger, the US has been the biggest exporter of M&A so far in 2011 despite having what we view as the cheapest currency in the G10. A very large disposition of a US subsidiary by a European corporate (which counts as a US outflow in our framework) is part of the story here, but even excluding this deal the US numbers would be significantly negative.
One economy with what we view as a cheap currency, Sweden, has seen significant net inbound announcements. However, this primarily reflects sales of European properties by a Swedish fund (which count as inflows in our framework) and should not be viewed as evidence of a value bid for Swedish assets. The two low-yielding surplus economies, Japan and Switzerland, remain consistent exporters of M&A flow, but not on a significant scale relative to their economies or current account surpluses.
Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS
| – G10 and Asian FX slightly stronger vs USD, Asian equities mixed |
| – UK retail sales are likely to only provide limited GBP support |
| – We have revised our USD “Fair Value” estimates stronger vs G10 |
| – Australia and Sweden lead cross border M&A flows |
| What to watch for today |
| GBP: Retail relief. Our economists forecast retail sales rose 1.0%mom in April, above the consensus forecast of 0.8%. They point out that the BRC sales monitor registered a significant increase in sales growth for that month, although some of that strength reflected the timing of Easter which should be adjusted for in the official data. We would tend to fade resulting GBP strength as the sterling needs a run of unambiguously strong data before markets shift to pricing near-term BoE tightening again, in our view. We continue to look for a near-term break of 0.90 in the EURGBP cross. The CBI’s May industrial trends survey is also released today. |
| USD: Continuing to count claims. Jobless claims troughed at 375k in late February and subsequently surged to 478k highs in the last week of April, amid distortions from school holiday timing and supply chain disruptions. Last week saw an improvement to 434k and we agree with the consensus forecast that this week will see further improvement to 420k. Numbers in line or better than consensus should be supportive for risk trades, and the CAD and MXN in particular, in our view. To the extent US front-end yields rise in response, we would expect USDJPY to follow higher. However, we would note the potentially offsetting effect of soft USD cash rates resulting from the hiatus in T-bill issuance and would be cautious trying to trade USDJPY from the long side for the time being. |
| What happened overnight |
| The USD is broadly weaker in the Asian session, with EURUSD trading above 1.43 for the first time in 4 days. The Wall Street Journal reported that Dominique Strauss-Kahn has resigned as head of the IMF. Markets will likely focus on whether the new chief is able to work with the various European nations, in particular on the ongoing negotiations on Greece. While the FOMC minutes overnight showed participants discussing the Fed’s exit policy and would point towards policy tightening as the next policy move, we note that there has been no time-line discussed and the next policy move could still be some time away. |
| USDJPY is largely unchanged around 81.6, with markets largely ignoring the bigger than expected 0.9%qoq fall in Japan’s Q1 GDP compared to the 0.5%qoq consensus. The decline is even larger when taking into account that Q4 GDP growth was revised down to -0.8%qoq from -0.3%qoq previously. The weak Q1 growth data support our view of an increasingly divergence in BoJ and other G10 monetary policy. However, USDJPY remains very much a play on US rates at this time and is unlikely to see much upside until US front-end yields recover, in our view. |
| The NZD is outperforming as a larger New Zealand government budget surplus projection than the previous forecast eased concerns of sovereign rating downgrades. The AUDUSD traded slightly higher to 1.067, showing little reaction to a fall in consumer inflation expectations to 3.3% in May from 3.5% in April, a slightly lower average weekly wages growth of 1.0%qoq in February than the consensus forecast for 1.2%qoq, and Moody’s downgrading of 4 major Australian banks by 1 notch to Aa2. |
| Asian currencies are slightly stronger vs USD, led by the KRW. USDKRW is down 0.5% to 1,083 despite the 1.0% sell-off in Korea equities. The MYR and SGD have benefited from strong Q1 GDP data which point to continued policy tightening. Asian equities are mixed, with the Nikkei down 0.4% while the Shanghai composite index is flat. |
| SGD: Strong growth points to continued trend SGD appreciation. Singapore’s Q1 GDP growth was revised slightly lower to 22.5%qoq annualized from the initial estimate of 23.5%. Still a very strong number. Also the government has revised the 2011 growth forecast to 5-7% from 4-6% previously. This would still be above the long term growth trend of 3-5% and means the MAS probably needs to maintain the SGD NEER on a tightening path. With the SGD NEER is back to around 0.5% below the strong end of the policy band, according to our estimate, it may trade sideways around current levels over the next couple of weeks before resuming trend appreciation of 3-4%, in our view. |
| MYR: Malaysia CPI-inflation rose to 3.2% yoy in April from 3.0% yoy in March, in line with our economist’s forecast but slightly higher than the 3.1% yoy consensus forecast. This takes headline inflation within the strong half of the central bank’s 2.5-3.5% yoy target range. Food prices accounted for the bulk of the increase, but non-food price inflation rose to 2.5% yoy from 2.2% yoy in March. Our economists expect robust domestic demand to gradually push core inflation higher and they expect the central bank to hike policy rates another 50bp by end-year. |
| Meanwhile, Malaysia’s GDP growth of 4.6% yoy in Q1 was slightly below the consensus forecast (4.9% yoy), but our economists estimate that this was still equivalent to growth of about 8% qoq annualised. Growth was broad based, with household consumption, fixed investment and exports rising 6.7% yoy, 6.5% yoy and 3.7% yoy respectively. Imports were up 8.7% yoy, driven in part by strong investment growth. We think that slowly rising inflation and strong growth momentum point to gradual tightening of monetary conditions via both central bank rate hikes and ringgit appreciation going forward. |
| Malaysia further liberalised the capital account yesterday as part of its ongoing plans to move towards full convertibility. The measures on direct investment abroad and inter-company loans liberalised flows on both sides of the capital account, and the impact is likely to be limited, in our view. |
| The measures are: |
| 1) Direct investments will be exempted from the prevailing MYR50mn limit on investments in foreign currency assets. |
| 2) Resident companies may borrow any amount in ringgit or foreign currencies from their resident and non-resident non-bank related companies. |
| 3) The MYR5mn limit currently imposed on foreign currency trade financing obtained by residents from non-residents will no longer be applicable. Residents may obtain foreign currency borrowing, including foreign currency trade financing, up to the prevailing aggregate limit of MYR100mn for companies on a corporate group basis and MYR10mn for individuals. |
| Equilibrium exchange rates 2011 update |
| We have published our annual Credit Suisse Fair Value report for 2011. Our key conclusions are: |
| – US dollar fair value estimates have been broadly revised stronger versus all G10 currencies compared to the 2010 estimates. The latest fair value estimates for the major pairs are EURUSD 1.16, USDJPY, 83.4, GBPUSD 1.56 (see Exhibit 1). |
| – The US dollar appears to be remarkably cheap against G10 currencies, but remains overall relatively expensive against a broad set of currencies, highlighting a wide cross-sectional dispersion of valuations (see Exhibit 2). |
| – At one extreme, high-yielding commodity-related currencies have reached record high historical levels. At the other, Non-Japan Asia currencies remain substantially undervalued. |
| – Most of the commodity-block overvaluation can be justified by the rally in commodity prices. Our commodity price augmented fair value estimates show that the commodity-related complex is moderately expensive. |
| – The Swiss franc is very expensive both on a bilateral and on a trade-weighted basis. Some of the Swiss franc crosses look particularly appealing from a value perspective. Specifically, we see good value in being long GBPCHF and SEKCHF. |
| Cross border M&A Update |
| We continue to monitor M&A announcements for signs that valuation extremes are beginning to drive equilibrating flows from expensive to cheap currency economies. Five months into the year, there is little evidence of a value bid in net cross border M&A announcements this year. Indeed, the favored destination for net M&A announcements so far this year has been the euro area, despite a somewhat expensive currency. Relative to GDP, Australia leads the pack despite having the most overvalued currency in the G10 amid continued demand for resource companies. On the other side of the ledger, the US has been the biggest exporter of M&A so far in 2011 despite having what we view as the cheapest currency in the G10. A very large disposition of a US subsidiary by a European corporate (which counts as a US outflow in our framework) is part of the story here, but even excluding this deal the US numbers would be significantly negative. |
| One economy with what we view as a cheap currency, Sweden, has seen significant net inbound announcements. However, this primarily reflects sales of European properties by a Swedish fund (which count as inflows in our framework) and should not be viewed as evidence of a value bid for Swedish assets. The two low-yielding surplus economies, Japan and Switzerland, remain consistent exporters of M&A flow, but not on a significant scale relative to their economies or current account surpluses. |