– AUD surged as RBA unexpectedly kept rates on hold at 4.25%
– BoJ performed stealth intervention in USDJPY in Q4 2011
– German output likely to surprise stronger
– We recommended buying USDCHF in cash and options as euro risks rise
What to watch for today
EUR: German industrial production (IP) could surprise stronger. Our economists expect that IP rose 0.5%mom in December, up from -0.6%mom in November. Our estimates are stronger than the consensus forecast for a flat reading. The stronger-than-expected December German factory orders yesterday suggests that risks for today’s data are to the upside. The Greek premier is scheduled to meet today with the three leaders of the ruling government regarding the implementation of additional fiscal measures needed to secure the second EU/IMF bailout.
TWD: Trade likely still sluggish. We expect that exports fell 2%yoy and imports fell 4.0%yoy in January, keeping the trade surplus at $2bn. This is much stronger than the consensus forecast for -17%yoy and -16.7%yoy, respectively. We note that Taiwan’s exports have been lagging the recovery in US ISM, which suggests to us that the central bank will remain biased against TWD strength unless we see exports recover more meaningfully.
What happened overnight
The AUD and USD gained vs other G10 currencies. AUDUSD surged to a high of 1.0811 after the RBA unexpectedly kept rates on hold at 4.25%. EURUSD traded lower to 1.310 from the high of 1.3142 in late NY trading. The yen is underperforming, with USDJPY rising to 76.7 after Japan’s Ministry of Finance revealed that it conducted five stealth interventions in USDJPY, up to JPY1trn in total, during Q4 2011.
Asian currencies are mixed. USDINR is down slightly to 49.9 while USDIDR is up slightly to 8900. The PBoC fixed USDCNY 8pips higher to 6.31160. Asian equities are mixed, with the Shanghai composite down 1.7% while the Taiwan Taiex is up 0.3%.
Reuters reported that St. Louis Fed President James Bullard, not a voter, said that the Fed should start raising interest rates next year. He argued that many years of near-zero rates will do little to return economic output to pre-recession levels and risks causing “disaster”.
AUD: The Reserve Bank of Australia (RBA) surprised and kept rates on hold at 4.25%. The consensus forecast was for a 25bp cut. AUD short-end yields surged post the RBA announcement, with the rates curve bear flattening 7-10bps. The policy statement highlighted the improvement in funding markets, while the central bank expects inflation to remain in its 2-3% target range over the next 1-2 years. This suggests that the RBA has decided to conserve ammunition with conditions improving. Any further policy stimulus would require a trigger that is likely external, in our view.
PHP: CPI inflation eased to 3.9%yoy in January from 4.2%yoy in December. With inflation easing and growth sluggish, we expect the BSP to cut policy rates by 25bp at the 1 March meeting.
INR: India’s GDP growth slowed to 6.9%yoy in the Q1 advance print. Sluggish industrial production fed through to slower growth while the agriculture sector was soft as well. With growth slowing and inflation easing, we think the RBI is likely to start cutting rates in Q2, possibly as early as April.
NZD: New Zealand wage inflation accelerated for private sector workers. Private sector wage inflation rose 0.7%qoq in Q4 after a 0.5%qoq increase in 3Q. Average hourly earnings were flat at $24.6.
GBP: UK BRC like-for-like retail sales fell 0.3%yoy in January, much weaker than the 2.2% yoy increase in December.
What to do
Buy USDCHF as Euro risks rise
– We are adding USDCHF long exposure to our cash and derivatives recommendations portfolios as a funding-efficient way of expressing a bearish view on EURUSD. We think risk/reward for EUR shorts is attractive as we approach a hard deadline for reaching a new Greek bailout deal and private sector participation. With EURCHF trading close to the 1.20 floor established by the SNB, USDCHF longs are a more efficient way of expressing a bearish view on EURUSD thanks to very low CHF funding costs.
– In spot, we are targeting a move higher in USDCHF to 0.9600 with a stop loss at 0.9100.
– In options, we recommend buying USDCHF topside seagulls – buying two-month USDCHF 1×1 0.9450/0.9700 call spreads versus selling two-month USDCHF 0.8700 puts. The risk to the trade is potentially unlimited the further USDCHF trades below 0.87 at expiry.
Click here to read the full report: European FX Daily
Credit Suisse
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