Soft China Data
Risk traded on a soft tone overnight after some soft data from China. The trade balance came in at $25.15 bn vs $35.0 bn cons, with exports growing just 1.0% y/y vs 8.0% expected. Further, new yuan loans in July were just CNY540.1 bn vs CNY700 bn expected. AUD came under pressure with the data releases, though the RBA gave a more hawkish assessment than market expectations, revising their end-2012 GDP to 3.5% from 3.0%. Underlying inflation by end-2012 has also been lifted to 2.5% from 2.25% which UBS economics views as a hawkish move, assuming they haven’t changed their assessment of carbon impact. The policy statement also said that “it is possible that the persistently high level of the exchange rate may be more contractionary for the economy than historical relationships suggest.” Our readthrough of this is that they are beginning to build in a structurally higher AUD into their estimates (indeed their working forecast was raised to 1.06 versus the dollar), so they may allow this to do some of the modest tightening work for them. That is not to say the RBA needs to start hiking rates by any sense, but UBS economics views this statement as a signal that the RBA now sees underlying inflation as having troughed. Yesterday, hawkish commentary from Bank of Canada Governor Carney overnight saw the CAD gain across the board Thursday in New York. Carney noted that the Canadian economy is in a “very different place” than its peers, and that withdrawal of some of the monetary stimulus may become appropriate as the economy grows consistently above the trend. In a thin market, EURCAD dropped steadily as investors diversified away from the EUR and into to a ‘safer’ CAD. In fact, Carney noted that besides strong fundamentals, there is an “element of safe-haven premium” supporting CAD. Relatively weak Canadian data today – June trade deficit CAD1.81 bn, the widest in 21 months, July housing starts -13.6k – did not deter CAD bulls. Risk in general remained soft due to mixed data in the US and a lack of major headlines from Europe. Greece’s Deputy Finance Minister Staikouras said that the government would present its budget plan – to reduce deficits by EUR11.5 bn – to the EU by Sept. 14, and hoped that the next tranche of bailout funds would come “right after” a positive review by the Troika. Reuters reported that most of the cuts would come from layoffs, salary and pension cuts. US jobless claims dropped 6k last week to 361k, taking the four-week average down 9k from a month earlier. The June trade deficit narrowed by $5.1 bn, with exports up 0.9% m/m and imports down 1.5% m/m. EURSEK slid to 8.23, a record low. Swedish Finance Minister Borg said the government has room in its budget to support further stimulus. He added it is too early to call Sweden a safe haven, and it remains to be seen how a strong SEK will affect the export sector. There is limited sign of any verbal intervention, with Borg calling the trend in krona appreciation a normal market development.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank