– IDR leads Asian FX weakness vs the USD, equities down 0.6-2.3%
– Likely mixed US IP and Fed survey, limited impact on risk sentiment
– SNB likely to keep 1.20 EURCHF floor
– Further deterioration in euro area PMIs to weigh on the EUR
What to watch for today
USD: Industrial output to fall, Fed survey to improve slightly. We expect industrial production (IP) fell 0.1%mom in November after a solid 0.7%mom increase in October, below the consensus forecast of 0.1%mom. The consensus forecast is for the Philadelphia and New York Fed surveys to improve a bit further from last month’s levels. Our economists expect jobless claims to increase to 400k this week from 381k last week, with holiday effects keeping this data series volatile at this time of year. The Q3 current account data and October TIC report will provide a bit more insight into the financing of the US current account deficit in those periods. We remain of the view that there is limited scope for incremental misses or upside surprises in US data to drive big swings in market sentiment now.
CHF: We expect the SNB to maintain the EURCHF floor at 1.20 at its quarterly policy meeting today. Although the SNB should continue to emphasize deflation risks and CHF overvaluation, we believe that the SNB needs to see a deeper, more prolonged fall in growth and a clearer trend of deflation to justify further efforts towards franc devaluation. For now, we believe it prefers verbal intervention over a formal increase of the lower bound for EURCHF, which could require renewed FX intervention.
Our model for Swiss MCI shows that monetary conditions in Switzerland have eased steadily over the past couple of months, albeit from relatively tight levels. This argues for the SNB to keep the floor unchanged in December rather than rushing to alter policy. We therefore look for an unchanged peg and very low delivered volatility in EURCHF well into 2012. We currently hold a short three-month EURCHF volatility swap in our derivatives model portfolio as an expression of this view (for details, see the SNB preview section in our FX Weekly update, 8 December 2011).
EUR: Soft flash PMIs. Our economists expect the manufacturing PMI flash estimate, fell roughly another point in December, while the services measure should give back some of November’s rise. We expect the EUR to come under pressure versus the USD, JPY and GBP this week following the underwhelming support provided by the ECB and EU summit last week.
ILS: Inflation in focus. Our economist forecasts inflation to rise slightly in November due to energy prices to 2.8%yoy from 2.7%yoy in October, in line with consensus. Nevertheless, inflation has already fallen from the peak of 4.3%yoy and our economist expects further moderation towards the 2% central inflation target in 2012. This should allow further rate cuts if growth deteriorates, and with global risk appetite still highly vulnerable to stress in Europe, we remain bearish on ILS.
What happened overnight
Risk sentiment remains on the back foot. Asian equities sold off following the more than 1% decline in US stocks overnight, led by the Taiex (-2.3%) and the Sensex (-1.5%). Price action in FX has been subdued so far with a slight pro-USD bias. EURUSD is holding on to yesterday’s move below 1.30. The NZD is underperforming amongst the majors with AUDNZD rising to 1.3240 as the Business NZ PMI fell 0.8pts to 45.7. The IDR is leading Asian currency weakness versus the USD with USDIDR higher to 9170 while USDINR continues to creep higher to 54.2.
CNY: The HSBC flash PMI rose 1.3pts in December to 49, in line with the seasonal trends. This still leaves manufacturing output in contraction territory. We note that the HSBC PMI gives more weight to SMEs while the official PMI takes into account the stated-own companies which have not been as affected by the lending constraints. This suggests to us that growth continues to slow but may not be heading into a hard landing.
SGD: Retail sales surprised higher. Singapore retail sales rose a much higher-than-expected 8.5%yoy in October versus the consensus forecast of 1.3%yoy. The robust domestic demand highlights still elevated inflationary pressure. The latest government measures to cool the property markets and target slower GDP growth of 1-3% are likely to have an impact on inflation much later. As a result, we expect the MAS to maintain its current gradual SGD appreciation stance.
What to do
– Trail stops in USDSEK. With our long USDSEK recommendation is more than 2% in the money we are trailing our stop to entry at 6.8562. We continue to target 7.50.
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Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS