USD gives back gains as risk stabilizes
What happened overnight
– French business confidence a bit better than expected
– PBoC fixed USDCNY to new record low of 6.2891
– Fed’s Bullard sounds a hawkish note
The USD and JPY have given back some of Thursday’s gains as risk appetite stabilizes, with NOK and NZD posting strong bounces. EURUSD, which held up well in Thursday’s risk shakeout, has rallied back up to 1.3294 highs, with the EURJPY, EURAUD and EURCAD crosses continuing to squeeze higher. In Asia, the PBoC fixed USDCNY 113 pips lower to a new record low of 6.2891 and this helped nudge USDMYR and USDSGD slightly lower to 3.08 and 1.263, respectively. Equity market performance has been mixed in Asia and Europe so far, while the S&P future is flat. However, peripheral sovereign markets have continued to lose ground, with Italian 10-year yields up another 6bp and well-above 5% again. Treasury yields are fractionally lower from Thursday’s close, despite hawkish comments from Fed President Bullard.
French business confidence rose to 96 in March from 92 and above consensus for 93. The positive surprise is at odds with the weak PMI print yesterday. However, our economist notes that the series tends to lag the PMIs and the strength could be more reflective of the PMI pick up in February. We think the growth outlook remains poor for the euro area, particularly in the key peripheral economies, and this will force very accommodative ECB policy to be maintained well into 2013. The EUR has been supported this week by pressure on EUR funded risk trades, but we think EURUSD is likely to trade back below 1.30 as these positions are cleared.
Speaking at the Credit Suisse Asia Investor Conference, St. Louis Fed President Bullard said monetary policy may be approaching a turning point. Bullard questioned whether the US output gap is as large as many estimate. He asserted the Fed should be cautious about stepping up accommodation as the economy rebounds and that it may have to begin tightening before 2014. We note that he is not a FOMC voter this year and the core of the Committee has seemed reluctant to open to the door to earlier removal of accommodation. Reaction in rates markets has been muted. Still, markets are increasingly inclined to price more upside risk for US yields, and German-US 2-year yield differentials have begun to widen out again in the USD’s favor after tightening sharply last week.
GBP: The Nationwide consumer confidence index declined to 44 in February from 47 in January.
Singapore CPI inflation fell to 4.6%yoy in February from 4.8%yoy in January, lower than the consensus forecast for a rise to 4.9%yoy. The bulk of the 0.3% (nsa) month-on-month decline in CPI was due to lower transport costs, likely due to the lagged impact of lower COE prices in December and January. However, March COE prices rose 25% from the January trough. We expect CPI inflation to rebound above 5%yoy over the coming months. This implies the MAS will likely keep the SGD NEER on its current mild appreciation path at the mid-April meeting, in our view.
The Conference Board Leading Economic Index for China increased 0.8%mom in February to 227.2 following a 1.5%mom increase in January and a 0.8%mom increase in December.
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FIXED INCOME RESEARCH & ANALYTICS