– Eurogroup cancels 13 October meeting about Greece
– The AUD and KRW lead sell-offs, Asian equities down 0.4%-5%
– RBA opens door for policy rate cuts
– Bernanke to testify to the Joint Economic Committee
What to watch for today
EUR: Policy in focus. EU finance ministers meet in Luxembourg, but, with no immediate deadline, we do not expect the meeting to yield major policy news. ECB president Trichet and BOE MPC member Miles speak today, ahead of respective rate decisions on Thursday. We expect the BOE to resume QE and expect the ECB to extend liquidity provisions by announcing a new six-month LTRO. A 25bp cut remains a possibility, but we believe it will be a close call. We continue to view EURUSD as vulnerable towards our technical target of 1.3050.
USD: Bernanke’s testimony. Fed Chairman Bernanke testifies on the economy to the Joint Economic Committee today at 1400 GMT. Our economists expect him to emphasize downside risks to the economy and state that all policy options remain on the table. But he is likely to stop short of the specific signals of future action.
What happened overnight
The USD traded essentially sideways at close to its ten-month high, while Asian equities softened more modestly than Wall Street. Although KOSPI fell 4.9%, most other Asian equity markets are down less than 2%. EURUSD has remained close to the lows recorded in late NY trading around 1.318 following Eurogroup head Jean-Claude Junker’s cancellation of the 13 October Eurogroup meeting because the Troika report on Greece would probably not be ready by then. The AUD is underperforming amongst the majors and is down to 0.948 after the RBA opened the possibility of future rate cuts.
The KRW and IDR are leading Asian currencies’ weakness vs the USD. USDKRW traded to a high of 1,208 before somewhat meaningful Bank of Korea intervention pushed it slightly lower to 1,203. Intervention by Malaysia’s central bank has managed to push USDMYR down to 3.213 from 3.238. We also suspect that Singapore’s central bank intervened in USDSGD around 1.320. This would be the second time that the MAS has intervened to cap weakness during the recent sell-offs at what appears to us to be just above the bottom of its policy bands. This helped pushed the SGD nominal effective exchange rate (NEER) up 0.3% from the morning’s low. We estimate that the SGD NEER is currently trading about 2.5% below the center of a +/- 3% policy band.
AUD: Reserve Bank of Australia signals scope for rate cuts. The RBA concluded its policy statement by describing its current policy stance as appropriate, but nonetheless opened the door to rate cuts with the earlier sentence that “An improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary.” The AUD rates market increased the pricing for rates cuts at the 1 November meeting by 18bps to 44bps.
We read the RBA as still being heavily dependent on how the crisis in Europe affects global growth over the next month. A European policy response in the next few weeks that produces a recovery in risk appetite and tightening in FRA-OIS spreads for Australian banks might bias the RBA to remaining unchanged. Continued European dithering that weighs increasingly on the growth outlook would probably lead the RBA to cut.
We think markets will probably increase pricing for rate cuts and weaken the AUD further over the next couple of weeks. European policy seems unlikely to reveal a grand solution to sovereign credit stress until mid-October at the earliest given some parliaments have not yet approved proposed amendments to the EFSF’s powers. Against this background, and with the ongoing deterioration in the new orders component of the global PMIs announced yesterday, markets will likely have to increase pricing for worst case scenarios for growth.
On the data front, Australia’s building approvals surprised higher and rose 11.4%mom in August while the trade surplus widened to AUD3.1bn in August from AUD1.8bn in July.
CNH: Potential CNH support. Reuters reported that Chinese policy makers may ask Hong Kong’s central bank to set up CNH swap lines with large banks in Hong Kong in order to maintain adequate CNH liquidity. Also, China’s central bank may pay a higher interest rates to BOC HK for CNH deposits. The interest rates on CNH deposits are currently around 0.7%. If the reported measures go through, they would likely create higher demand for CNH and help to narrow the spreads between USDCNH and USDCNY. USDCNH currently trades at around 2% premium over USDCNY.
KRW: Inflationary pressures eased. CPI inflation fell to 4.3%yoy in September from 5.3%yoy in August, below the consensus forecast for 4.5%yoy. Core inflation also dropped to 3.9%yoy from 4.0%yoy in August. The moderation in inflation should give Korea’s central bank more room to keep the won weak and Korean exports competitive.
What to read today
FX Metrics update
In our latest update on our FX Metrics styles, we note that the intensification of the systemic risk triggered a sharp widespread decline in performance in September, with the exception of the Value portfolio. Value G10 recorded a sharp gain of 6.4% as the deleveraging process drove rich commodity currencies towards their fair value. For details, please refer to FX Metrics – Gravity towards fair value amid deleveraging.
Global PMIs: Mediocre growth. Our economists argue that the sum of PMIs around the world still looks consistent with our expectation that the global economy will muddle through heightened financial and economic uncertainty. But growth in many countries is still likely to be at an unsatisfactorily slow pace.
– USD: Equity redemptions. Our US economics team note that the net outflows from US equity funds have intensified over the summer. The outflows in June through August 2011 were comparable to those during the depths of the financial crisis in 2008.
New commodity forecasts: Near-term weakness. Our commodity team argues in their latest report that the risk reward remains negative in the short term. However, many prices are likely to trough in 4Q, before resuming their decade-long upward trend in 2012. They forecast Brent crude will average $100/brl in Q4 2011, Q1 2012 and Q2 2012 before rising to $110/brl in Q3 2012. Gold is forecast to average $1,700/oz in Q4 2011 before rising to $1780/oz in Q1 2012 and $1900/oz in Q4 2012.
Click here to read the full report:
http://www.easyforexnews.net/wp-content/uploads/2011/10/document-804513740.pdf
Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS