– AUD, KRW and MYR lead weakness vs USD, EURUSD back below 1.41
– We remain bullish euro despite data headwinds
– US data this week likely to be mixed with risks to the downside
What to watch for today
EUR: Soft data risk. Our economists forecast that manufacturing and service PMIs moderated in May, pushing the composite headline down to 57.4 from 57.8 in April, in line with the consensus forecast. If in line with our estimates, the data would still be consistent with strong growth and would not undermine ECB tightening expectations, in our view. The inflation outlook remains supportive on this front, as our economists note that inflation risks remain skewed to the upside (see European Economics: Inflation forecasts update, 20 May 2011).
TWD: Output softening. Our economist forecasts that industrial output rose 0.3%mom in April, vs a consensus forecast for a 0.7%mom fall. The recent slowdown in US and Chinese growth and supply chain disruptions in Japan may see output moderate over coming months. We think the CBC will react to a slowdown in output growth and a softer export outlook by continuing to fade TWD appreciation, particularly as the pace of CNY appreciation vs USD has slowed since the 9-10 May Strategic Economic Dialogue. We recommend using TWD as a funding currency.
What to watch for this week
USD: Data are likely to remain mixed this week, with risks to the downside. Our economists forecast that all three durable goods indices fell in April and came in well below the consensus forecast (data are due Wednesday). We expect the second Q1 GDP reading to be revised upward, driven by a mix of higher inventories and sales (data due Thursday). Jobless claims (Wednesday) are likely to extend their retreat of the past two weeks, which should provide a degree of reassurance that the labour market recovery remains intact in the US. PCE data on Friday are likely to show more of the familiar combination of rising headline and steady core price indicators.
This week’s data are likely to reinforce the view that the US entered a ‘soft patch’ in April. With front-end rates likely to stay heavy in the US near term amid a curtailed T-bill issuance schedule, we see scope for the USD to give back recent gains vs. key growth-proxy currencies. We remain long EURUSD and AUDUSD and short USDMXN as trade recommendations, looking to ride out volatility from softer April data and the ongoing discussions of the next phase of EU support for Greece.
EUR: A soft patch here too. This week’s data are unlikely to support the euro. Our economists forecast that the German Ifo moderated in May (Tuesday), in line with our forecast for a significant pullback in the flash PMIs on Monday. Discussions on Greek rescue plans are also likely to drag on this week, with no immediate deadline for resolution. Despite these headwinds, we think EURUSD is in the process of building a base and we see scope for renewed upside as markets grow more comfortable with the EU’s ability to avoid a systemically damaging scenario for peripheral bond markets in the weeks ahead.
GBP: No change. Our economists do not expect any revision to the second estimate of Q1 GDP growth of 0.5%qoq (Wednesday). Weaker industrial production in March has partially offset the better-than-expected construction output data, suggesting an upward revision, if at all, will be very modest. We remain of the view that the GBP needs a run of unambiguously strong data before markets shift to pricing near-term BoE tightening again. As such, we continue to look for a move higher in EURGBP towards our 0.91 target.
CHF: KoF moderation. The consensus forecast is that the Swiss KoF moderated slightly to 2.22 in May from the post-crisis high of 2.29 last month. While the current levels of the Swiss KoF are still consistent with very robust growth, there are signs that the strong CHF is starting to hurt export competitiveness. In addition, the recent moderations in German Ifo expectations suggest risk for the Swiss KoF is to the downside (Exhibit 1). We remain bearish the CHF against the EUR and also see value in short CHFSEK positions (FX Strategist – Looking for Value?, 19 May 2011).
NOK: GDP rebound. Our economist forecast that Norwegian mainland GDP at 0.8% qoq in Q1 (Tuesday) after a disappointing 0.3% qoq rise in Q4, in line with Bloomberg consensus. Solid domestic demand should be the main driver for the strong growth in Q1, while net trade should be flat. Such an outturn would be in line with the Norges Bank expectations.
SEK: Upside risks. We expect GDP rose 0.8%qoq in Q1 (Friday), broadly in line with the Riksbank’s forecast. We think this week’s growth data as well as the next round of inflation numbers will be very important for the Riksbank’s policy outlook. The Swedish economy grew very strongly in 2010, pushing output back to its pre-crisis levels. Moreover, according to our estimates, the output gap is likely to close in Q1. Although we expect relatively slower growth this year, such a strong performance puts upside risks to the tightening pace of the Riksbank. SEK remains one of our preferred longs in G10 and we continue to look for EURSEK to sell off towards our 8.60 target.
AUD: Mining boom continues. Private capital expenditure (Thursday) will be the key release this week. Estimates based on the last survey suggest capital expenditure could increase as much as 38%yoy in the next financial year. With an unprecedented pipeline of mining projects, surveyed miners expected investment to surge 55%yoy. The current survey will provide refined estimates over the same horizon and any positive surprise is likely to boost AUD. We remain bullish AUDUSD, forecasting 1.10 in three months.
NZD: Overlooking inflation expectations. We think the RBNZ will overlook any increase in the medium-term inflation expectations survey (Tuesday), as inflation is likely to return comfortably within the target band once the base effect of the GST tax hike is phased out in Q4. We continue to look for the RBNZ to reverse the move lower in the OCR only in Q1 2012 and target AUDNZD higher in the meantime.
MXN: No change. Mexico’s central bank is widely expected to leave its policy rates unchanged at 4.50% on Friday.
What happened overnight
The dollar is firmer as concerns over the euro zone have led to renewed risk aversion. AUDUSD is down almost 1% to a three-day low of 1.057 while USDJPY traded slightly higher to 82.0 despite US yields remaining depressed. Asian currencies are broadly weaker, led by the KRW and MYR. Asian equities are down 0.5-2% following the fall in US equities on Friday.
EURUSD has traded back below 1.41 on the back of further bad news in the euro zone peripheral countries. Reports that Spain’s governing socialist party suffered heavy losses in regional and municipal elections on Sunday have raised concerns over the planned reduction in Spain’s budget deficit. S&P lowered Italy’s sovereign credit rating outlook to negative from stable late on Friday and Norway’s government has reportedly suspended its €30mn European Economic Area grant to Greece.
SGD: Moderation in CPI inflation. CPI inflation fell to 4.5%yoy in April from 5.0%yoy in March, partly due to the housing and utilities rebates in April and base effects. With inflation easing slightly, we think the SGD NEER, which is about 0.8% below the strong end of the policy band according to our estimates, may range trade around current levels or even weaken slightly over the next several weeks. This would mimic the price action after the MAS recentred the policy band in April 2010. However, inflationary pressures remain elevated and the Singapore government recently revised up its GDP growth forecast to 5-7% in 2011 from 4-6% previously. As such, we expect the MAS to ultimately keep the SGD NEER on a trend appreciation of about 3-4% per annum.
PHP: Further tightening? The Philippines’ central bank deputy governor, Diwa Guinigundo, said on Friday that GDP growth in Q1 was likely “robust” and that the BSP will consider this at the next policy meeting on 16 June. This suggests that the central bank may be getting more comfortable that growth has recovered and hike its policy rate 25bp at the next meeting. The key issue in our view is whether the BSP starts soaking up liquidity to lift peso interest rates. Twelve-month USDPHP NDF implied yields are currently only 0.5%. The BSP also said that it is not considering capital controls, in line with our view that it will rely on FX intervention to resist rapid peso appreciation and to cap peso volatility. We understand that the BSP may have been selling USDPHP around 43.4 today.
Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS