Further Risk Aversion
Another wave of risk aversion swept the FX markets on Thursday. There were limited specific catalysts, but ongoing concerns over the global growth outlook, particularly after some mixed data out of China, alongside few signs of further Fed stimulus have kept demand for the dollar elevated. China reported June new yuan loans at CNY919.8 bn vs CNY910.0 bn forecast. While the initial headline prompted a jump in risk, the devil was in the detail as the composition of the loans was poor. Medium-to-long term loans were only 30.7% of the total, down from 34% last month, and our EM strategists consequently hold a cautious view on the outlook for China. Investors were clearly disappointed by the lack of urgency stressed by the Fed who, while stressing risks to the downside, did little in the way of signaling further easing. Indeed only a “few members expressed the view that further policy stimulus would likely be necessary”. The Bank of Japan fine-tuned its easing program at today’s policy meeting but, crucially, stopped short of delivering any net new balance sheet expansion. The target for T-bill purchases via the bank’s Asset Purchase Program (APP) was raised by JPY 5 trn, but the target for 3m and 6m loan provision was reduced by an identical amount. USDJPY jumped 40 pips, before giving back all gains within minutes. We see no reason to change our USDJPY forecasts on this occasion, but we do recognize that the BoJ’s purchase facility has become vulnerable to mission creep, and we remain on alert for future changes that could quite easily produce a yen-negative outcome. The BoJ also cut its 2012/13 core CPI forecast to 0.2% y/y (from 0.3% previously), but left the forecast for the following year unchanged at 0.7% y/y. Australia’s employment report for June disappointed on a number of fronts: overall employment fell -27k (cons. 0k) and the job losses were entirely of the full-time variety. The unemployment rate ticked higher to 5.2% as expected although the participation rate also dropped slightly. Our Australia economists conclude that the data – and the recent relapse in leading indicators of employment – suggests the unemployment rate will rise further and so they stick to their forecast that the RBA will cut the cash rate again by 25 bp in August, assuming Q2 CPI is low enough..
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