– European currencies lead slight weakness vs USD
– Bernanke acknowledges soft patch, but no new stimulus yet
– Flash China PMI points to a sharper slowdown in Chinese growth
– Flow data continue to reinforce the USD’s vulnerability
What to watch for today
EUR: An anticipated slowdown. Our economists expect the flash PMIs to moderate further in June, printing 54.5 on the composite headline, 53.6 on manufacturing and 55.0 on services, below the consensus forecast. Recent data, including the Zew survey on Monday, pointed to an abrupt slowdown in the pace of expansion, reflecting the softer than expected tone of US data in May and June. While the data, if below expectations, could undermine expectations of further ECB tightening, we expect markets to remain focused on politics surrounding the Greek debt issue and on the EU leaders’ summit in Brussels over the next two days. German officials yesterday specified that no decision for private debt holders’ involvement is expected at today’s meeting.
USD: Jobless claims. Our economists expect jobless claims to print 415K this week, roughly in line with last week’s 414K. Over the past few weeks, US data have been disappointing for the most part and we would view market expectations as skewed to the downside. We remain short CADJPY in our cash model portfolio in anticipation of an extended ‘soft patch’ in US data, and as a hedge against our pro-risk positions in AUDUSD and EURUSD.
CZK: On hold. The Czech central bank (CNB) is widely expected to keep rates on hold at 0.75% today. While inflation rose 0.5%mom in May, CNB comments indicated very little of that was domestically driven. Our economist expects inflation pressures to remain subdued for most of the year, which points to CNB matching ECB rate hikes at best. Without interest rate support and constrained by the current account deficit, we remain neutral on the CZK.
TRY: Unchanged. Our EM economists expect the MPC to keep the one-week repo rate unchanged at 6.25% today. The measures announced by the banking regulator on Saturday also support these expectations. We do not expect a material change in the MPC’s language in the absence of a further weakness in the exchange rate in the run-up to the meeting. We remain bullish on TRY, targeting USDTRY at 1.51 in three months.
TWD: Output Resilient. Our economist forecasts that industrial output rose to 8.7%yoy in May, much higher than the consensus forecast for a fall to 4.6%yoy and from the 6.9%yoy print in April. Export orders from the US, EU and Asean have been robust and that should support output. But the fall in US ISM new orders causes some doubt on sustainability. With inflation still tame, we think Taiwan’s central bank will focus on protecting export competitiveness in the very near term and fade any rapid TWD appreciation.
What happened overnight
News flow overnight looks increasingly likely to conspire with today’s European PMIs to extend the dollar’s overnight rally. Markets have reacted to the dovish tone in Fed Chairman Bernanke’s press conference by selling risk assets and buying USD, particularly vs European currencies. EURUSD is down about 1% from the 1.444 peak in early NY trading to around 1.431 currently. AUDUSD traded slightly lower to 1.055, a decent performance given the weak flash China PMI print and another soft Conference board leading index reading. In contrast, the NZD is outperforming amongst the majors with NZDUSD rising to a 7-day high of 0.817. Asian currencies opened weaker vs the USD, led by MYR and PHP, but have traded sideways since. PBoC fixed USDCNY higher for the first time in five sessions, while Asian equities are down 0.2 – 0.8%. The exception is the Shanghai composite index which is up 0.4%.
The message from the Fed yesterday is that despite recent US economic weakness the Fed plans to end QE2 and is not ready to entertain the possibility of QE3. That implies risk pricing needs to remain skewed significantly to negative outcomes. The Fed is clearly willing to allow a much more significant deterioration in the US economy before it returns to a pro-active monetary stance. (See What to read below).
CNY: Flash PMI falls. The HSBC flash China PMI fell from 51.1 to 50.1 in June, with new orders and employment edging just below 50. As Exhibit 1 shows, this suggests that the official PMI will fall at least in line with seasonal patterns, if not more. A greater than seasonal fall in the official PMI for June, i.e. more than about one index point, would be bad for risk in general, but particularly negative for the AUD where positioning remains significant.
EUR: In European politics, Greece’s opposition leader vowed to vote against the government’s new fiscal austerity measures. That probably will not prevent the budget’s passage, but it will raise concerns that the program will be difficult to implement and potentially unstable.
SGD: Inflation remains elevated. CPI inflation was unchanged at 4.5%yoy in May, much higher than the consensus and our forecast for a moderation to 4.1%yoy. A 3.1%mom rise in housing costs was a core driver. The high print for May suggests that the CPI will likely stay above the top of Singapore’s central bank’s (MAS) 3-4% forecast range over the next few months. We expect the MAS to keep the SGD nominal effective exchange rate (NEER) on an appreciating path and would view dips in the NEER towards the mid-point of the policy band as an opportunity to put on SGD longs.
What to read
USD: US FOMC review. Given that deflation is unlikely to be an issue, our US economic team thinks a new large stimulus program is highly improbable in the months ahead. Their view on the course of monetary policy is unchanged. Fed officials are likely to remain in an uncomfortable holding pattern at least through early 2012, when some modest balance sheet adjustments are possible. Actual interest rate hikes still appear to be over a year away.
China: Investors remain sanguine on China. Our equity analyst note that the majority of participants in our China Investment Conference expect 8-9% GDP growth in China and only a 10% fall in property prices this year, and 47% of respondents also said they would buy Chinese equity now. Also, in a new survey by our China team, 58% of respondents said that they expect inflation to rise (admittedly, the sample size seems a bit small). See the equity Asian Daily for more details.
US flow update
Balance of payments data released last week showed the US continues to struggle to attract quality financing for a still-large current account deficit. The sum of net FDI and net private sector portfolio flows fell in Q1 after increasing in Q3 and Q4 of last year. These quality flows continue to provide a de minimis fraction of the US current account deficit, implying that the US remains reliant on some combination of short-term carry-seeking flows and reserve manager accumulation. With US yields remaining at unattractive levels, private sector investors are unlikely providing much in the way of short-term financing and reserve managers are likely providing a disproportionate share. These passive buyers on dollar weakness tend not to bid up the clearing price of the dollar, particularly because they are also actively diversifying into other reserve currencies.
Meanwhile, TIC portfolio flow data for April show appetite for US securities remained limited heading into Q2. The data showed a pickup in foreign appetite for US equities in that month to $18bn, the strongest levels since last September. However, foreign investors continued to liquidate corporate bond holdings, and US investor appetite for foreign stocks and bonds remains a steady offset to foreign inflows.
While the dollar can trade firmer in periods of risk aversion or elevated concerns about the stability of the Euro system, the flow data continue to reinforce the dollar’s vulnerability in more normal market environments.
Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS