– European currencies lead slight rally vs USD, Asian equities up 0.2-0.7%
– AUD down modestly after minutes reaffirms RBA on hold until further notice
– Focus on Greek parliament vote today
What to watch for today
EUR: Greek confidence vote. The new unity government headed by Greek PM Papandreou will face a vote of confidence today, probably at around 9pm GMT (midnight local time). The view of our own economics team and most analysts is that the Greek cabinet will survive this vote. Although a successful confidence vote would be consistent with a modest recovery in risk appetite, it would still not fully remove uncertainty about the 28 June vote on austerity measures.
In European data, markets are likely to focus on the Zew survey. Our economists expect the ZEW economic sentiment indicator fell from 3.1 in May to -3.0 in June. While markets are more likely to focus on the Ifo and PMI data later in the week, a decline in the ZEW would be consistent with expectations for softer manufacturing data in June. While we remain bullish EURUSD heading into Q3, we believe this week’s data and events will remain difficult for the currency to navigate.
CAD: Retail bounce. Our economists project a 0.7%mom rebound in the retail sales headline in April with the core up 1.0%mom, following the disappointing 0.0%mom and -0.1%mom readings in March. Following very weak US data over the past few weeks, we think the April data in Canada are likely to be somewhat overlooked. We remain short CADJPY in our cash model portfolio, as a hedge against our pro-risk long positions in EURUSD and AUDUSD.
CHF: Focus on mortgage growth. Mortgage growth should be the key element of today’s release of money and credit data. We think an acceleration in mortgage growth meaningfully above its recent trend rate of 5%yoy would lead markets to again expect monetary tightening. But the Swiss National Bank would likely respond to property market strength with new macro prudential measures rather than interest rate hikes, in our view.
What happened overnight
What stands out for us is how poorly the USD continues to trade. News overnight about Greece was only modestly positive and Asian equities are up less than 1%, yet EURUSD has rallied to as high as 1.4384 and the dollar has weakened almost across the board.
Focusing on Greece, the news from yesterday’s meeting of euro area finance ministers was net positive. EU finance ministers continued to express general support for new financing for Greece and decided to exempt Greek, Irish, and Portuguese paper issued after the creation of the ESM in 2013 from making the ESM a senior creditor. However, the EU has still delayed a decision on the next tranche of loans to Greece to 3 July and the IMF has seen fit to warn that the EU needs to commit to a new financing program for 2012/13 in order for the IMF to participate in the July disbursement. Additionally, Fitch warned today that a voluntary rollover of Greek debt would still be characterized as an event of default.
Importantly, Exhibit 1 shows that EURUSD has traded surprisingly well given the sharp increase in market pricing of EUR tail risk. We note that EURUSD 25 delta risk reversals traded slightly more put over today even as EURUSD rallied. We think the price action reflects just how fundamentally weak the USD is. No yield, its own fiscal crisis – Fitch also warned today it would downgrade the US unless the US Congress raises the US debt ceiling – a large current account deficit, and no growth. It also reflects the move in interest rate spreads against the USD shown in Exhibit 2.
All of this leads us to maintain our outlook for the USD to weaken again into the late summer. If the euro area does pull together on Greece, as we expect, and our economists are right that global growth will begin recovering in July, we will probably look back and think this period was a great, albeit tough, period to sell dollars. However, we accept that the calendar for Greece and the macro data release lags mean that we are probably still a month away from a definitive turn toward renewed USD weakness.
In Asian markets, Asian high yield credit has weakened sharply again, led by concerns about a leading Chinese forestry firm. This has yet to produce any signs of contagion outside the high yield credit space.
China fixed USDCNY lower to 6.469, a new low and longer-dated NDFs compressed further. The spot move seems to reflect general USD weakness given that our CNY trade-weighted index fell on the day.
AUDUSD has traded the minutes of the Reserve Bank of Australia’s June meeting surprisingly well. The AUD initially fell 0.8% on the release of the minutes, but has recovered about half of this. We note that the AUD OIS curve is now pricing 6bps of RBA cuts over the next year, in contrast to a statement in the RBA minutes that another policy rate hike was likely.
AUD: The board minutes for June reaffirm a noncommittal RBA. In reaction, AUDUSD fell 0.6% to 1.055 and the market pricing for RBA rate hikes over the next 12 months fell 7bp to -6bp. The RBA cited growing concerns in Europe, downside surprises in US data and deterioration in non-mining related industries as giving the board enough reason to remain on hold until further notice. The minutes were also less explicit than RBA Governor Stevens’ speech last week on emphasising upcoming data like the CPI report. Our rates strategist now thinks the RBA is unlikely to hike in August unless inflation and employment surprised on the upside and the situation in Greece clears up sufficiently for a powerful rebound in risk appetite (AUD Rates Blast – RBA board minutes for June, 21 June 2011). This suggests that AUDUSD is likely to trade sideways to slightly weak until we see a significant upturn in the data and lead markets to start pricing in RBA tightening again, in our view.
PHP: Moderation in balance of payment surplus. The Philippines’ balance of payment surplus narrowed to $217mn in May from $1.1bn in April. The widening trade deficit from higher oil prices is eroding the steady inflows from overseas workers’ remittances. With the electronics sector still sluggish given slowing US growth, the trade deficit is unlikely to narrow. Modest FX inflows should allow the central bank (BSP) to keep USDPHP trading sideways until signs emerge of a recovery in exports and economic activity in H2.
Slowing emerging markets (EM) industrial production. Our EM economic team points out in their new report that the latest PMI readings suggest a further slowing of the EM world’s sequential IP growth in May and June. While they think that sequential growth will stabilize or rise in the coming months, the evidence on this is less than conclusive at this stage. This, in addition to the recent stabilization of global commodity prices, suggest that EM inflation has likely topped.
Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS