– AUD and KRW lead sell-off vs USD, Asian equities down 1.2%-3.3%.
– US data this week likely point to slow growth but no support yet for QE3
– Italian and Spanish bond auction in focus
– Credit Suisse conference call today: The Future of the Euro
What to watch for today
EUR: Italy production check. We expect Italian industrial output to disappoint expectations, with weak internal and external demand resulting in a third consecutive monthly decline. Data in line with our -0.3%mom estimate would be below the +0.2% consensus and could add to concern about Italy’s capacity to meet fiscal targets. ECB President Trichet speaks today following a regular meeting at the BIS.
What to watch for this week
USD: Steady inflation, softer growth data. Core CPI should remain at 1.8%yoy (Thursday) in August, according to our economists. While this could support fears of resistance to further easing within the FOMC, our economists expect soft retail sales (Wednesday) and consumer confidence (Friday) to provide evidence of softer growth momentum. This week also brings us the first round of September data, with the Empire and Philly Fed manufacturing surveys out on Thursday. Finally, we expect a 0.2%mom print on the August industrial production report on Thursday, down from 0.8%mom in July.
EUR: All about bonds. Italian and Spanish bond auctions are likely to be the highlight of the week in Europe, as bond spreads to Germany near all-time highs even as outright levels of yields stabilize. Italy will be auctioning instruments within the 5-9 year maturity range on Tuesday and Spain is set to issue 8-9 year paper on Thursday. Of the two, we believe markets will focus on the Italian issuance, especially since Italian spreads and outright yields are now above the Spanish equivalent. Furthermore, Italy already postponed several auctions in the month of August and faces €43.7bn worth of redemptions in the month of September. A successful auction outcome could bring provide some near term support for the euro.
The European data calendar is light this week, with euro area July industrial production on Tuesday the main focus. We expect a strong monthly gain of 1.3%mom given the strength in German and French orders this past month. However, our estimates are below consensus and, with sentiment surveys and PMIs having deteriorated sharply in August, markets are unlikely to extrapolate from solid July data.
GBP: Data-dependent policy watch. With a rising possibility that the Bank of England could re-embark on a program of quantitative easing, this week’s UK statistics are likely to be important in framing expectations for policy in coming months. Our economists expect CPI inflation to remain stable in August (Tuesday), at 4.4%. While still high, this could ease some MPC members’ concerns about continued acceleration of inflation. The labour market statistics are likely to be poor (Wednesday). On the ILO measures, our economists expect unemployment to see a significant (70K) increase in the three months to July, while employment should be flat over the same period. That would leave the unemployment rate stable at 7.9%.
GBP has been a beneficiary of the re-intensification of peripheral stress and the decision by the Swiss to put a floor under EURCHF. We think this provides a cushion against building expectations for BOE QE2.
CHF: No change. We expect no change in the SNB 3-month Libor target rate at its meeting on Thursday, following the implementation of a floor under EURCHF at 1.20 this past week. We remain of the view that the SNB will be successful in preventing CHF strength. For details on our thoughts, please refer to FX Strategist – CHF: Floor under EURCHF – sell EUR crosses.
CAD: Stronger manufacturing. Our economists expect a 0.8%mom rebound in manufacturing sales on Thursday from -1.5%mom in June. Higher auto production should be the main reason following the Japan supply disruptions. Overall, though, the CAD is likely to trade with a degree of risk premium given the US data flow this week.
NZD: On hold. We expect the RBNZ to keep its overnight cash rate unchanged Wednesday and tone down its message on the needs for imminent normalization given global growth downgrades and rising external uncertainties. Although the RBNZ’s tightening bias should ultimately support the NZD, deteriorating global sentiment will continue to weigh on NZD in the near term, in our view. Business PMI and ANZ consumer confidence released next week will also be important.
INR: RBI expected to hike as inflation remains sticky. We expect WPI inflation (Wednesday) rose to 9.6%yoy in August from 9.2%yoy in July, in line with the consensus forecast. The persistence of inflation will likely lead the Reserve Bank of India to hike policy rates 25bp on Friday. This will put the RBI at or very close to the end of its hiking cycle, in our view, and we note that INR has tended to rally after the end of rate hike cycles. However, our constructive view on the INR remains contingent on an improvement in broader risk sentiment.
SGD: Retail sales likely to soften. Our economist expects retail sales growth fell to 7.7%yoy in July from 10.9%yoy in June, lower than the consensus forecast of 8.8%yoy (Thursday). The decline in retail sales may support growing expectations for MAS to shift to a neutral SGD stance in October, but inflation remains elevated above 5%yoy and is unlikely to ease. While the risk to our positive view has risen given slower US growth, we think the worst case is that MAS slows or halts appreciation, rather than depreciates the SGD as it has in past US recessions. As such, we would view another 0.6-1.0% of pullbacks as attractive levels to re-enter SGD longs.
What happened overnight
Asian markets resumed Friday’s sell-off with China, Korea, and Taiwan closed for public holidays. Asian equities fell 1.2%-3.3% today and the AUD and KRW are leading currency weakness against the USD. Negative headlines out of Europe have continued to weight on risk appetite.
EURUSD fell to a low of 1.3495, weighed down by negative euro zone headlines. Moody’s said that it may downgrade three of the largest French banks this week. Der Spiegel wrote that Germany was preparing for the impact of Greek restructuring on German banks in two scenarios, with Greece in or out of the EMU. On a positive note, Greek Finance Minister Venizelos announced a new property tax and a one month salary cut for elected officials aimed at ensuring Greece meets its 2011 and 2012 budget deficit targets.
AUDUSD fell below 1.04 despite Australia’s trade surplus remaining at a robust AUD1.8bn in July. USDJPY is largely unchanged around 77.5 despite large Japanese manufacturers turning more constructive in Q3. The BSI survey showed a rise in the index from -22.2 in Q2 to +6.6 in Q3. USDKRW surged to 1,095 in thin liquidity with the onshore markets in Korea, China and Taiwan closed for the mid-autumn holiday.
The G7 Finance Ministers meeting produced no new policy action or indication of support for joint intervention in the FX market. In contrast, press reports suggest that the big picture message from the G7 meeting is that policy is highly constrained and governments are focused on their individual national interests rather than policy coordination. The G7 statement made no mention of Japan’s August intervention. We read this as leaving Japan open to intervene again, but clearly on its own, not with help from the US or Europe.
CNY: Robust trade, easing credit. The trade sector remained resilient in August, with export and import growth rising to 24.5%yoy and 30.2%yoy, respectively. The strong import performance led to a narrowing of the trade surplus to $17.8bn from $31.5bn in July. Money supply growth continues to slow, with M2 growth falling to 13.5%yoy in August from 14.7%yoy in July and is the lowest print since April 2005. New loans have also slowed to CNY548.5bn in August, with the average so far in Q3 falling to CNY520bn from an average of CNY640bn in Q2. The money and credit data point to inflation having peaked while the trade data suggest growth has moderated in line with the government’s estimate.
What to read today
In our latest FX sales survey: Investors’ risk appetite has remained weak, although sentiment has improved modestly from the lows in the last few weeks. Forty percent of investors surveyed continue to cut risk positions, while the rest have turned more neutral on risks. Investors appear most bullish on AUD, NOK and USD and most bearish on CHF and EUR. The NOK looks to have gained traction as the new ‘safe haven’ alternative post the SNB decision to fix a floor to EURCHF. Views on EUR and USD are very mixed as both are featured on investors’ most bullish and most bearish currency lists. In terms of flows, our sales team notes net buying of USD and net selling of CHF.
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Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS