– Greek call for a referendum hurts risk appetite and strengthens the USD
– RBA cuts 25bp as expected
– October China PMI fell 0.8pts to 50.4
– US ISM likely to edge higher, other G10 PMIs a tad softer
– UK GDP growth likely to rebound but stay weak
– We recommended shorting USDJPY on intervention
What to watch for today
PMI roundup – softer. Manufacturing PMI data are due out today for Switzerland, Sweden and Norway. The consensus forecast is for a 47.7 print in Switzerland from 48.2 in September and a 47.2 reading in Sweden from 48.1 in September. The Norway PMI on the other hand is expected to remain in expansionary territory at 53.7, down from 54.8 in September. A softer Swiss PMI would further justify the SNB’s accommodative policy. PMI data will also be important for the SEK as the Riksbank has become increasingly data dependent and lowered its forecasts for inflation and growth outlooks in the latest monetary policy statement.
GBP: Better-than-expected Q3 GDP growth, but still weak. Our economists expect GDP rose 0.5%qoq in Q3, stronger than the 0.3%qoq consensus forecast, after an unusually weak Q2. The consensus forecast is that the manufacturing PMI fell from 51.1 to 50.0 in October. We remain bearish the GBP but have turned more cautious in expressing further QE risk through GBPUSD shorts, given renewed USD selling pressures. We continue to hold option structures geared towards GBPCAD downside in our derivative portfolio.
USD: Firmer ISM. The US manufacturing ISM is likely to inch higher from 51.6 to 52.5 in October, according to our economists, slightly above the consensus forecast. The softer-than-expected Chicago PMI slightly increased the downside risk to our forecast. If in line with our expectations, the data would further our expectations that the economy will avoid a recession, likely with positive impact on risk and currencies geared towards US growth. Asian currencies have historically appreciated in the two to three quarters following troughs in the US ISM, led by the KRW and the IDR. For details, see our 12 October 2011 report, Returning to Asian FX – trade with the central banks.
What happened overnight
The USD has rallied further as Asian equity markets followed late US market weakness in response to the Greek government’s surprise referendum call. Greece’s Prime Minister Papandreou announced a vote of confidence in his government for later this week, which, if it succeeds, would allow him to call a referendum later this year or early next year on the latest austerity programme for Greece. The clear risk in our view is that a vote against the government or the referendum would raise new concern about Greece’s membership of the euro area. Against this background, yesterday’s intervention by the Japanese government increases the likelihood that the USD will rally broadly and that EURUSD would fall more sharply than recently if euro area stress rises anew in the short term. The intervention arguably removes the sole remaining risk-off hedge other than the USD from currency markets and implies continued range trading in the majors.
EURUSD dropped to a low of 1.3792 in Asian trading after a fall to just below 1.3850 in late US trading. With this EURCHF has dropped to 1.2146, its lowest level in almost a month. AUDUSD has retraced to 1.0447, losing 0.8% in the wake of the Reserve Bank of Australia’s widely expected 25bp interest rate cut today. The Australian cut marks an important turning point towards reconvergence of G10 monetary policy with US policy. We expect the ECB to follow suit by the end of the year. This will likely limit the extent to which the USD can weaken against the majors, barring significant new policy stimulus from the Fed.
USDJPY has been essentially flat at 78.00-78.50. Asian currencies are weaker against the USD across the board with most of this coming at the Asian open in most cases. China fixed USDCNY slightly higher at 6.3293 today versus 6.3233 yesterday. We have seen no Asian central bank intervention today.
AUD: RBA cut rates, moves to more neutral policy stance. The Reserve Bank of Australia (RBA) cut the cash policy rate by 25bp to 4.5% as widely expected. In the policy statement, the RBA concluded that a more neutral monetary policy stance would be appropriate to maintain growth now that inflation is likely to stay within its 2-3% target over the next two years. The RBA noted that while financial conditions have eased, overall conditions remain tighter than normal and the AUD is still at historically high levels. Our Australia interest rates strategist, Jarrod Kerr, estimates the neutral policy rate at around 4.0-4.5% and that the RBA is likely to cut by another 25bp in Q1 2012. However, he thinks that will be the end of the cutting cycle and that current market pricing of around 88bp in cuts by June 2012 is excessive. These cuts are likely to constrain AUDUSD upside, but we do not see significant downside given recently better data out of the US and resilient growth in China.
CNY: October PMI fell. The Chinese PMI fell 0.8pts to 50.4 in October, much weaker than the consensus forecast for a rise to 51.8. New orders were down to 50.5 from 51.3 in September and new export orders dropped to 48.6 from 50.9 in October. The PMI suggests the Chinese economy is still slowing although we note that the PMI’s correlation with industrial production growth has been poor. Nonetheless, the PMI outturn supports our economist, Dong Tao’s, view that the PBoC may ease policy and that the government may introduce some new fiscal stimulus by year-end. We note that the China Daily reports that the government has raised VAT thresholds to help small businesses. .
KRW: Slower inflation and weak trade data. Inflation fell to 3.9%yoy in October from 4.3%yoy in September, lower than the consensus forecast of 4.2%yoy. Export growth was weaker than expected at 9.3%yoy in October, about half of the 18.8%yoy in September. However, the trade surplus widened to $4.2bn from $1.6bn in September as import growth weakened more than expected to 16.4%yoy from 29.3%yoy in September. The moderation in inflation and trade surplus allow Korea’s central bank to manage won appreciation on a gradual pace, in our view.
IDR: Inflation fell in October. CPI inflation moderated to 4.4%yoy in October from 4.6%yoy in September, largely in line with our economist’s forecast. This should see Bank Indonesia cut its policy rates by another 25bp at its next policy meeting on 10 November. Export growth rose a strong 46.3%yoy in September, helping to keep the 12-month rolling trade surplus at $31bn. However, with bond yields already at rich levels, it reduces the incentives for fresh portfolio inflows into Indonesian government bonds to support further IDR appreciation, in our view.
THB: Inflation rose slightly. Thailand CPI inflation increased slightly to 4.2%yoy in October from 4%yoy in September, but much lower than the consensus forecast of 4.5%yoy. We do not think that the Bank of Thailand will cut rates to boost growth unless the post-flood rebound disappoints. This is because the central bank does not view interest rates policy as the best tool to combat such growth shocks. We have shifted our USDTHB forecast for end-2011 higher to 30.8 from 30.2 as the likely collapse in exports and increase in import demand in Q4 is likely to flip the current account into a deficit in the very near term (see Thailand’s post-flooding growth, rates, and FX outlook: A wave of changes, 27 October 2011).
What to do
Sell USDJPY
We favor using official intervention in USDJPY as an opportunity to establish new shorts. We would not be surprised to see another round of USD buying this week but recommend selling rallies to 79.30 with a stop set at 81 and a 75 target. In derivatives space, we recommend taking advantage of the rich USDJPY wing pricing to buy short-dated USDJPY downside seagulls. The risk to the trade is increasing and potentially unlimited the further USDJPY trades above 80.50 at maturity (only if the sold call knocks in at 82.25).
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Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS
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