– Currencies and Asian equities mixed
– Swiss October trade data in focus
– US Q3 GDP growth likely revised lower but details stronger
What to watch for today
NOK: Downside risk to growth. The consensus forecast is for a 0.7%qoq rise in Q3 mainland Norway GDP, slightly below the Norges Bank forecast of 0.8%. However, the market is likely to focus on the recent fall in leading indicators and downside risks to future growth. Although Norway is likely to skirt a recession, our economists expect it to experience a significant slowdown around the turn of the year as a result of the contraction in the euro area. We doubt the ability of the NOK to perform well in an environment of slowing European growth and risk aversion, and we added a CADNOK topside structure to our derivatives recommendation portfolio last week. The risk to the trade is potentially unlimited.
CHF: Trade data update. Switzerland reports the first full month of trade data for October after a floor was established for EURCHF in early September. Evidence of weakness in Swiss exports would support expectations that the SNB might adopt further measures to weaken the CHF, offsetting the impact of yesterday’s stronger-than-expected mortgage growth data. We continue to like the CHF as a carry-efficient funding vehicle for tactical USD longs thanks to negative-implied rates and an effective peg to the euro during periods of euro weakness. We hold a USDCHF topside seagull in our derivative recommendations portfolio. The risk to the trade is potentially unlimited.
USD: GDP revised lower, better details. Our economists believe Q3 GDP will be revised lower from 2.5%qoq to 2.3%qoq today, but with positive developments in the details. We expect an upward revision to final sales, with a revision lower to inventories. This combination would bode well for a strong reading in Q4, according to our economists. The FOMC minutes may provide further indications on the prospects for additional easing measures.
What happened overnight
Currencies and Asian equity markets mixed. The Nikkei is down 0.2% while the Sensex is up 1.1%. G10 currencies traded in a relatively tight range. EURUSD is largely unchanged around the NY closing levels of 1.3485 while AUDUSD rose slightly to 0.985. The yen underperformed slightly with USDJPY spiking to a high of 77.34 after headlines suggested that the BoJ may buy foreign bonds to weaken the yen.
The INR and IDR are underperforming other Asian currencies despite BI intervening in spot FX and verbal intervention by the RBI. USDINR rose to a new high of 53.73, prompting RBI comments on more measures to stem the weakness. The PHP is outperforming, with USDPHP falling to a 7-day low of 43.3. Inflows related to MSCI re-weighting and seasonally strong remittances are supporting the peso, while we understand that positions in the PHP are relatively light.
JPY: Japan’s Finance Minister Azumi dismissed calls from Japanese politicians for the Bank of Japan (BoJ) to intervene by buying JPY50trn of foreign currency bonds. Azumi says that this would be against the current concept for intervention. Note that intervention in Japan is funded through t-bills issuance by the MoF but executed by the BoJ. The Nikkei also suggested in a report that the Government Pension Investment Fund and Post Bank should buy more foreign bonds as an intervention alternative. As we highlighted in yesterday’s daily, increasing repatriation due to very low yields abroad and poor risk appetite should continue to support JPY appreciation.
NZD: Inflationary pressure eased. The RNBZ inflation expectations fell to 2.8% over two years in Q4 from 2.9% in Q3 and to 2.7% over one year from 2.9% in Q3. The easing in inflation supports our view that the RBNZ will keep the official cash rate unchanged until June 2012.
INR: More measures to help the rupee? India’s central bank’s (RBI) deputy dovernor said today that the RBI is weighing the possibility of taking action to stem the weakness in the INR. Bloomberg reported that there’s speculation that the RBI may increase its bond buyback program to INR1trn ($20bn). Our EM Asia rates strategist expects a figure closer to INR300-500bn. However, we think this will continue to be vulnerable to continued European credit stress. Also, market participants are likely to view the RBI’s $280bn FX reserves as insufficient to reverse the rupee’s weakness.
What to read today
– USD: Super Committee “failure” put stress on US sovereign ratings. Our US interest rates strategists do not think the ratings agencies are likely to take action in the near term based on their recent reports and statements. But certain Congressional actions – particularly repealing the already agreed budget sequestration – could dramatically increase the probability of negative ratings actions. See report here.
– US Economics Digest: Our US economist argues that the Fed’s zero-interest-rate policy (ZIRP) is starting to introduce a new and different set of problems to the economy. There is evidence that ZIRP is posing a significant challenge to the profitability of traditional financial business models by reducing the rewards of maturity transformation.
Click here to read the full report:
http://www.easyforexnews.net/wp-content/uploads/2011/11/document-930267241.pdf
Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS