– G10 currencies modestly weaker vs USD, Asian equities up 1%-2.8%
– Fed signals exceptionally low rates through mid-2013
– BoE inflation report likely to signal more dovish bias
What to watch for today
GBP: More dovish. Our economists expect the Bank of England Inflation Report to signal a slightly more dovish bias. Although market expectations for policy rates have eased somewhat, there are several factors likely to lead the MPC to lower its inflation forecasts on a two- to three-year horizon: 1) distress in European bond markets, 2) evidence of slow growth in the first half of the year, and 3) weaker cyclical indicators pointing to poor activity in the second half of the year. That may provide further evidence that the committee’s bias is moving towards contemplating further easing. These factors lead us to expect UK yields to remain negative for sterling. If the ECB succeeds in capping peripheral yields and the EUR remains stable, we see scope for EURGBP to rally to our three-month 0.91 target.
NOK: Unchanged. Our economists expect the Norges Bank to keep rates on hold at 2.25% versus the consensus forecast for a 25bp hike. The rates market is pricing in close to a 50% chance of a 25bp hike. At the last meeting, the executive board pre-announced a hike for this month on the back of a better assessment of the economy. While domestic data flow since the June meeting has been supportive of further tightening, the external environment has deteriorated significantly. This has pushed front-end interest rate differentials in favor of the NOK as markets have cut expectations of monetary policy tightening elsewhere. In the unlikely event of a rate hike, it will likely be paired with a dovish statement, in our view. We think that the NOK is vulnerable to an intensification of the euro area peripheral stress and further risk liquidation.
What happened overnight
The Asian session has been mixed. Asian stocks rallied, following Wall Street after the Fed signaled that it will keep the fed funds target rate at current depressed levels at least through mid-2013. Our economist thinks that the Fed may announce more policy accommodation, perhaps even before Fed Chairman Bernanke’s August 26 address at Jackson Hole, if the outlook continues to weaken (see US Economics Digest – FOMC Decision: Exceptional is the New Normal, 9 August 2011). Our US interest rates strategists expect bullish pressures on US rates in the belly of the curve, and think that the Fed’s announcement will lead to an increase in the volatility of expected inflation (see US Interest Rate Strategy Flash – Bernanke to Markets: I’ll Be Back, 9 August 2011).
The USD is slightly stronger in the Asian session, with the NZD and CHF leading the G10 currencies weaker. EURUSD traded down to 1.435 while AUDUSD drifted lower to 1.034, weighed down by the 3.5% fall the Westpac consumer confidence index in August. EURCHF pushed higher to 1.039. The yen is outperforming amongst the majors with USDJPY trading lower to 76.8. USD/Asian crosses opened lower but drifted higher. Asian equities are mostly up 1%-2.8% following the rebound in US stocks overnight. The exception being the Singapore stock market, which is down 0.8% after returning from a bank holiday yesterday.
CNY: Strong exports. China’s exports rose a stronger than expected 20.4%yoy in July, pushing the trade surplus to a new high since January 2009 of $31.5bn. This is consistent with the bounce in exports around the region for July, partly driven by the rebound in Japanese production. But, with the ISM new orders at sluggish levels, we should see export growth slowing in coming months, in our view.
China’s central bank (PBoC) fixed USDCNY down 168 pips to a record low of 6.4176 today. We estimate that the pace of CNY appreciation vs the USD has been running at a 12.2% annualised rate since 1 August. With inflation remaining at a persistently high 6.5%yoy, it points to PBoC having to maintain a tightening stance, including CNY appreciation, in our view. Also, in periods of stress, the PBoC tends to at least peg CNY to the USD to serve as a nominal anchor for the economy. This time it has continued to appreciate the CNY vs the USD, showing its intent to curb inflationary pressures and, to an extent, push the CNY as a reserve currency. Furthermore, ahead of US Vice President Biden’s visit to China next week on August 17, the widening trade surplus may lead to more political pressure from the US. We remain short 3m NDF in our cash recommendation portfolio.
PHP: Sluggish exports. Exports fell 10.2%yoy in June, much weaker than the consensus forecast of -5.3%yoy but better than our expectation of -12%yoy. This still leaves exports at very depressed levels and suggests that the manufacturing sector is sluggish. With inflation stabilising, we think the BSP will only tighten monetary conditions gradually.
SGD: Slight rebound in GDP. Final Q2 GDP was a better than expected -6.5%qoq annualised vs the initial print of -7.8%qoq annualised thanks to stronger service sector growth in June. With the service sector keeping inflationary pressures elevated, MAS is likely to keep the SGD appreciating on a trade-weighted basis, in our view. The SGD is also likely to benefit from ‘safe haven’ flows near term which have pushed the 6-month SGD swap offer rate fixing into negative territory for the first time. However, the uncertain external outlook means the MAS will probably continue to limit the appreciation of the SGD near term. We understand that the MAS may have been buying USDSGD around 1.208 today.
Intervention watch. The dovish turn taken by the FOMC yesterday increases the likelihood of intervention by the MOF and the SNB, in our view. With front-end US rates plunging to all-time lows, USDJPY is likely to remain under pressure, biasing the JPY nominal effective exchange rate higher. Exhibit 1 shows that, on a TWI basis, the JPY is already at levels that attracted intervention in March and last week. The SNB is also likely considering intervention in CHF, in our view, as the market for CHF has grown increasingly one-way and dysfunctional. EURCHF implied front-end vols are well above the 2008 highs, and the high CHF levels have pushed the MCI considerably higher (Exhibit 2), causing monetary conditions to tighten.
The G7 statement released over the weekend suggests that G7 countries would not object to unilateral intervention, but did not say anything explicit about the possibility of joint intervention. Even in the event of a joint intervention in either currency, we remain skeptical about its medium-term success. With US rates at all-time lows and extended evidence of peripheral stress in Europe, surplus countries are likely to struggle to recycle their current account balances. Markets are likely to act on these expectations, selling USDJPY and EURJPY on rallies.
What to read today
In the latest Strategy Snapshot, our global strategists argue that, in the absence of a more powerful policy response, we will continue to see bull flattening in US, German and Japanese rates, downward pressure on growth sensitive commodities and most global equity markets, and upward pressure on gold. For FX, our current thinking is less enthusiastic about trying to sell the CHF or the JPY immediately. We fear that it will take some time for the market, and particularly the Japanese and the Swiss themselves, to trust European policy action sufficiently to give up wanting CHF and JPY as insurance policies against policy fatigue or mistakes. See report here.
Click here to read the full report:
http://www.easyforexnews.net/wp-content/uploads/2011/08/document-905261241.pdf
Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS