– Majors and Asian currencies in tight ranges, Asian equities up 0.3-1.2%
– US durable goods and German Ifo likely to disappoint
What to watch for today
USD: Durables up but still disappointing. Our economists expect the May durable goods data to bounce 0.5%mom in the headline and ex transportation readings, and 1%mom in core capital goods. These estimates are below the consensus forecasts. As such, we expect little relief from the growth concerns that have weighed on market sentiment this week. We continue to favor tactical short CADJPY positioning as a play on weaker US data heading into July while looking for a recovery in US activity later in the summer.
EUR: More bad macro news. The Ifo survey of German manufacturers is likely to fall to 113.0 from 114.2 in April, with the expectations index dropping to 105.5 from 107.4, according to our estimates. Both would be larger drops than the consensus expects. If in line with our forecasts, the data would likely raise concern about Germany’s ability to provide the euro area with enough growth to facilitate their fiscal consolidation programs and weaken pricing for ECB rate hikes. We see EURUSD as vulnerable in the near term as data continues to undermine confidence in the global recovery in the near term.
What happened overnight
Asian equity markets have rallied smartly, but FX has traded essentially sideways. Equities seem to have focused on the late session bounce in US equities and positive news on Greece. The press reported that Greece and the EU/IMF have reached an agreement on new financing for Greece through 2014, although few details have yet to be released. The Greek government has committed to €5.5bn in additional revenue and spending measures and to pass the new budget package by the end of this month (a parliamentary vote is expected by 28 June). The EU is scheduled to meet on 3 July to discuss further aspects of the new financing package and on 11 July to approve the package.
However, EURUSD, AUDUSD, and USDJPY have been stable around 1.426, 1.053 and 80.5, respectively. We continue to think the near-term risk is that markets will increasingly focus on concern about the global macro slowdown as uncertainties about Greece ease.
Asian FX: oil impact. Oil consumption as a percent of GDP in Asia ex-Japan is greatest in Thailand, Korea, and Taiwan, while China, the Philippines, and Hong Kong are the three lowest consumers, on our estimates. The largest net importers of oil are Korea, Taiwan, and Thailand. Our economist notes that although lower oil prices will help a bit with the India inflation story, the main driver has been economic overheating and high wage growth, not oil, so the outlook for RBI rate hikes should not change much unless oil price plummets from here.
CNY: Policy tightening to continue?. Chinese Premier Wen Jiabao wrote an open letter about China’s role in the global economy in today’s FT. The press has focused on a part of the letter in which Wen asserts that China’s measures to control inflation have succeeded and that inflation will fall H2 2011, even though this was hardly the thesis of the letter. Nonetheless, we think this may add to pressure on China’s central bank to ensure that inflation does indeed fall in H2. With the China Daily simultaneously running a story that inflation is likely to have risen in June, it seems to us that the authorities are likely to continue tightening monetary conditions in line with our economist, Dong Tao’s, forecasts for further interest rate and reserve requirement hikes. .
IDR: Potential rating upgrade. The Wall Street Journal reported that Fitch Ratings commented that Indonesia’s ratings could be upgraded if inflation eases. Our economists expect Indonesia’s CPI inflation to fall further from the current 6.0%yoy to 4.5%yoy over the next couple of months. This is not the first time that Fitch has made positive comments on Indonesia. We note that a one notch upgrade would put Indonesia’s sovereign bond into investment grade and would expand the pool of investors. This would give a boost to Indonesia government bond and add to appreciation pressures on the IDR. We remain bullish the IDR looking for USDIDR at 8,400 in three months.
KRW: Softening consumers. Korean consumer confidence fell 2 points to 102 in June and remains far below the levels in 2010, implying that domestic demand remains fairly soft. This suggests that the BoK will be gradual in its policy tightening and that it will continue to keep USDKRW in a range around current levels until we see a rebound in global growth.
THB: Election update. Most recent local polls have the Pheu Thai (PT) Party (headed by ex Prime Minister Thaksin’s sister) as taking the upcoming 3 July Thai election by a land slide. Our equity strategists argue in their latest report that the market reaction to such a result would first be negative. However, longer-term political development could prove positive or negative. The main negative being that the anti-PT groups could call on the military to take power.
In the event of renewed political turmoil, precedent suggests that the Thai central bank (BoT) would use its $177bn FX reserves to manage potential THB weakness. Also our economist’s analysis shows that baht weakness due to politics tends to fade rapidly and that the THB is more sensitive to oil prices. This suggests that political uncertainties are likely to constrain the ability of the THB to appreciate if we do get a bounce in risk appetite and growth into the late summer, as we expect. The baht is likely to continue underperforming the stronger Asian currencies like the SGD and IDR, in our view.
What to read today:
Position for euro curve steepness. Our macro strategists recommend adding EUR 1yr, 5s30s steepeners. The euro area lead indicators are adding to market concern over a slowdown in growth. Combined with the International Energy Agency’s (IEA) announcement of a release of oil reserves into the market, they continue to see scope for the EUR rates curve to catch up with the steepening already seen in the US and UK markets. See report here.
U.S. DOE/IEA to release 60mn bls. This is the first time that the US has released oil from its strategic reserves due to supply shortages in other parts of the world. Our commodity team thinks the US is ready to inject additional supply in the coming months if need be. The recent price correction remains in line with their current Brent price forecast of $110/bbl in Q3 and $100/bbl in Q4. See report here.
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