G10 Currencies
EUR-USD: The recovery in EUR-USD continues. In the process the 1.44 mark was breached on a sustainable basis once again. The FX market continues in the same mode: difficulties in the Eurozone are taking a back seat while the focus is on the US economic data. And that is not a good situation for the USD to be in at present. Recent US data has all been disappointing. It therefore seems clear: should the weakening of the US economy, which is becoming apparent, be confirmed further a change of direction on the part of the Fed towards a more normal monetary policy would move into the even more distant future.
The ISM index and ADP employment survey due today are the first data heavyweights of the week. For the ISM markets expect a notable fall from 60.4 to just above 57 points. As a result the index would still be signalling a strong expansion in the manufacturing sector but a disappointing result can nonetheless not be excluded. This applies even more to the ADP: at increases of between 125k and 200k analysts’ estimates are very close together and not far off last month’s result (179k). As EUR-USD has recently reacted very sensitively to weaker US data we would not recommend short positions ahead of the publication today. From a technical point of view things are looking a little different. There is no major support for the pair before 1.40, while the upside is limited by the high of 11th May (area around 1.4440). Should today’s data cause this area to be breached there would be further scope on the upside towards 1.4570 though.
Liquidity in Greece is getting tighter and tighter. As the fifth tranche of the EU and IMF aid packet amounting to a total of EUR 12bn. was not paid on 30th May the Greek Finance Minister Giorgos Papaconstantinou has now been warning about a “catastrophe”. At present EU Commission, ECB and IMF representatives are debating whether the country has done its homework and thus fulfils the conditions for the payment of the tranche. The result was postponed repeatedly and will now be published “in the coming days” according to EU Commissioner Olli Rehn. From the current point of view the payment of the tranche seems very likely – a solution that would probably provide further support for EUR-USD.
AUD: As expected the flood and storm catastrophe put considerable pressure on the Australian economy in Q1. Real GDP fell by 1.2% qoq following a rise of 0.8% the previous quarter. The result almost completely confirmed the consensus expectation of -1.1%. We expect to see a strong recovery in Q2. As a result the natural disaster is not going to cause more than a dent even if that means that the result for 2011 is unlikely to reach more than the 2% mark. This is unlikely to put pressure on the aussie though. First of all markets react mainly to the qoq data and today’s reaction in AUD-USD demonstrates that market participants had clearly expected an even stronger collapse. The analysts’ expectations had varied between -0.1% and -2.0%. Once it became obvious that the worst expectations were not being confirmed AUD-USD was able to appreciate by approx. 60 pips. In the end this is expression of the market relief that the catastrophe led to a rise of the trade deficit – caused by weak exports this is reducing the yoy result by approx. 2.1 percentage points – while the domestic economic activity remains intact. That means that the Reserve Bank of Australia will continue its rate hikes in the near future. Even if the RBA will want to wait for the economic effects of the massive flooding and is likely to accept a rise in inflation rates due to higher food and energy prices the stronger wage pressure in the second half of 2011 is likely to lead to rate hikes up to approx. 5.50%. So the aussie is likely to remain in demand.
CHF: In Q1 the Swiss economy grew by only 0.3% qoq clearly disappointing market expectations of 0.7%. The strong Swiss franc is not the reason for the slowing growth though. On the contrary: the export sector was extremely strong with a growth of 5.7% qoq. Reason for the weakening growth is likely to have been a weak domestic economy. While private consumption only increased by 0.2%, investments and public consumption even declined by 0.3%. We expect to see stronger growth in Switzerland over the coming quarters. For monetary policy that means: following weaker GDP and moderate inflation data a rate hike on 16th June is becoming increasingly unlikely, and we stick to our forecast that a first rate step will take place in September. Market expectations of an imminent rate hike are therefore going to be disappointed. This is likely to put some renewed pressure on the franc, in particular if the ECB verbally prepares for a new rate step in July. The potential for a recovery in EUR-CHF is however likely to be limited, first of all as it is still uncertain what will happen in connection with Greece and secondly as the US economy is weakening increasingly which is likely to dampen market sentiment.
Emerging Market Currencies
ZAR: Q1 GDP recorded a notable rise – contrary to expectations – kick-starting an appreciation of the rand against the US dollar. With an annualised growth rate of 4.8% the economic recovery seems to be even stronger than previously assumed by the central bank (SARB). The bank had forecast growth rates of 3.5% for the whole year while we expect a more optimistic 4.2%. The rising inflation and the better than expected economic growth point towards the normalisation of monetary policy beginning sooner rather than later. The positive rate outlook combined with the fall in risk aversion therefore suggest further rand gains.
CNY: Reuters reported yesterday that China’s regulators plan to shift CNY 2-3 trillion of debt off local governments. The burden will be shared between the central government and the major banks. Part of the debt will also be shifted to newly created companies, while private investors will be welcomed in projects previously off limits to them. Beijing will also lift a ban on provincial and municipal governments selling bonds. In response to the global financial crisis Chinese banks dramatically increased lending, with a large amount going to local governments. The Reuters article claims that Beijing estimates that local governments have borrowed around CNY 10 trillion. Many China bears have predicted a banking crisis on the back of loans to local governments turning sour. The total amount that is being written off is substantial as a percentage of GDP at around 5%. The clean up will reportedly take place between June and September this year. With this measure concerns over the banking sector will be eased which is positive for risk sentiment as well as CNY. The release of May PMI this morning points into the same direction. Although the index declined, at 52 it was however still able to beat expectations of 51.6. Accordingly USD-CNY recorded a new low.
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