Sarkozy/Merkel came up with little new. SNB could disappoint today but not this week end. The move by the biggest Swiss retailer to force a pass-through of the high CHF seals its fate + Cross Asset piece on Asia.
We have all known for a long time that it is very hard to teach an old dog, new tricks. Yesterday’s Sarkozy/Merkel meeting reinforced the sense that they are struggling to ‘get ahead’ of markets. We don’t know what kind of financial transactions tax they might contemplate, but the underlying message is depressing – the Eurozone’s leaders pin pretty much all the blame for the system’s woes on wicked speculators. A flawed structure is exposed by an explosion in public sector indebtedness and when investors flee, speculators are blamed.
It is a measure of the energy leaving the markets however, that we awake to EUR/USD barely changed this morning and dollar generally mildly weaker across the board. For now the storm has passed and there’s plenty of market commentary to tell me about how low rates are helping equities, helping corporate bonds, helping refis, or just generally pouring oil all over troubled waters. We will probably see major currency pairs stay mostly in their ranges.
The UK does have solid news to contend with however, in the form of labour market data. Higher inflation, a wobbly economy, civil unrest, and still we have EUR/GBP in an 87-89 range, GBP/USD 1.62-1.65-ish. We look for an uncomfortable 22K increase in unemployment, and anything worse than that would surely see a further round of doubts emerge about whether the Government’s commitment to fiscal austerity in the face of slow growth, is realistic. There isn’t much upside to GBP from today’s figures, but there is a risk of weakness. MPC minutes are also due.
It would be a mistake to read much into local trends, but it’s no huge surprise that Spanish seasonal discounting is at unprecedented levels. Ultimately, Europe will see inflation fall very sharply from here, but today’s flash CPI carries more upside than downside risks. Does that act as a reminder that the ECB would like to hike rates further, even if all around them, mayhem has been ruling and markets have priced hikes right out? It is certainly worth bearing in mind that, as volatility ebbs out of the market, the ECB still wants to ‘normalise’.
In Switzerland, we have a key meeting this morning between the economics minister and key members of the Bundesrat. Some sources say that the SNB will also be present. Sources in Basel say that the EURCHF peg was cleared once the legal experts of the SNB determined that the peg was legal. A subsidy for the hard hit tourism industry was set for discussion and new leaks this morning from the Tages Anzeiger say that it will be 1.3bn CHF. The third item for that meeting are said to be measures to deal with a potential bubble in the housing market. Yields on bonds will simply go far more into negative territory so that mortgages will be virtually free for good credit risk.
One would presume that they could restrict purchases to residents in Switzerland such as Permits B and C. It used to be the case and was a remnant from the early ‘80s when capital controls were in action. Finally, the tradition is for pegs to be announced over the week-end when markets are closed as it gives times for institutions to adapt their systems, so no panic if it isn’t done today. The SNB has already been in discussion with banks and the bids by Swiss Banks in t/n, 1w EURCHF forwards as well as corresponding EURCHF vols will give you an indication.
Swiss retailer Migros has reduced sharply its prices, helped by Coop’s move earlier in the week to remove products of manufacturers who were not passing on the gains from a stronger Swiss Franc. With 95% of the retail market together it is one very large scale deflationary shock to the system pushing yields into negative territory. This virtually seals the fate of the Swiss Franc by forcing them to peg to the EUR.
The US has only PPI data to contend with. SPX is holding in a range for now and with less news should go on doing so. Industrial production was flattered by a weather-induced sure in energy output and by a correction in autos, but good data are good data and the likelihood that core PPI is up 0.1 won’t hurt either. If we are SPX watching rather than EUR/CHF-watching, ‘ higher-beta FX should be OK.
New Cross-Asset research on how the stock market tumult affects Asian assets: This morning the Asian research team published a ten page cross-asset report on Asian monetary policy, and its impact on the rates, commodities, equity and credit markets. We expect Chinese policy to soften at the margins, but are not looking for rate cuts. We expect Korean rates to start rising again from November. A lack of supply will keep commodities underpinned, and this in turn should put pressure on the long end of the Korean curve. We recommend buying 5yrx5yr Korean forwards. By contrast, equities should rally in China, India and Korea after a long period of underperformance, and we like Chinese insurance companies, Indian autos and Korean banks. Finally, the marginal softening in Chinese rates will not be enough to support credit, in our view. We still see Australian iTRAXX contracts going to 250bp over the next 3mths, from 151bp this morning.
Click here to read the full report:
http://www.easyforexnews.net/wp-content/uploads/2011/08/sg-forex-daily_1101017e.pdf
Societe Generale
FX Strategy Daily