Dollar Rebound Continues
Risk traded on a soft tone overnight, with the AUD and EUR extending their losses. The composite PMI indicator in the Eurozone was slightly softer than expectations at 45.9 (manufacturing above but services below). This was driven by a combination of weak prints in France and resilient ones in Germany. A Spanish auction was relatively well received and the Tesoro sold a total EUR4.799 bn against the target range of EUR3.5-4.5 bn. Both bonds tailed (which Spanish bonds have a tendency of doing) but the fixed income markets showed a fairly muted reaction, a function of short-term relief that the bonds were taken well by the market but longer-term uncertainty surrounding the time-frame for any potential bail-out application. UK August retail sales were marginally stronger than expectations on a MoM basis, falling by just -0.2% m/m. The annual rate at 2.7% was however in line with expectations because of downward back-data revisions. Norges Bank Governor Olsen gave a speech outlining the current state of the domestic economy and monetary policy implications. He mentioned the growing imbalances in the domestic economy, the problems with currency strength and the two-way risk for rates over the next few months. They have some rate hikes pencilled in for next year, but this will largely be a function of where the i-44 trades and external developments. However, Olsen also said the bank could intervene if the krone deviates too much from fundamentals. He added that this is not a good long-term tool, and that rates must be used first. While this is a stated policy tool for the central bank, we have rarely heard Olsen comment on it in public. We have previously argued that a combination of rate hikes to address domestic imbalances and some sort of policy to control FX appreciation and curb deflation would be a possible long-term strategy for Norges Bank. For now it is clear that it doesn’t see this as a viable long-term tool, but the fact that he is bringing it to the markets’ attention is an interesting development. Earlier, Antipodean currencies were pushed around overnight by mixed data releases, references to currency strength by politicians, and some unfavorable press coverage. New Zealand GDP came in considerably stronger than expected at +0.6% q/q (cons. 0.4%). However, our New Zealand economist doubts the stronger print will prompt the RBNZ to hike sooner than previously indicated, given there is enough uncertainty about the global outlook to suggest that the RBNZ will leave the OCR unchanged for some time yet – perhaps until the H2 2013. Next, a private sector flash estimate for China PMI nudged ever so slightly higher to 47.8 (prev. 47.6), but there was little reaction as all the attention was focused on an article in the Australian Financial Review suggesting that Australia’s triple-A rating could be at risk if AUDUSD does not fall in line with weaker commodity prices. An S&P analyst was quoted saying “We could lower the ratings if external imbalances were to grow more than we currently expect, either because the exchange rate no
longer adjusts to terms of trade movements, the terms of trade deteriorates quickly and markedly, or the banking sector’s cost of external funding increases sharply.”
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