Still strong Chinese activity data eases fears of sharp slowdown just as a RRR hike reduces fear of a more serious monetary tightening which would hurt AUD shorts.
Europe headed towards deal with most closer to being on same page but beware disappointment: play EURUSD via options and look to leg into AUDCHF longs
Still strong UK CPI amid softening house prices suggests EURGBP longs may be tricky, though short GBPSEK has merit.
From the Asian session, risk was “on” with the recovery in SHCOMP notable, the fodder for which were Chinese retail sales and IP coming in at still decent consensus estimates, and casting aside China growth skeptics who had feared a disappointment in IP in particular. At the margin, this could ease fears of one major pillar of support to global growth i.e. China slowing, even as US data (note US retail sales later today) still paint a real somber picture on headlines. While Chinese inflation still looks worrisome, the authorities less aggressive response (China hiked RRR by 50 bps to 21.50% in European session) suggests that there is scope for asset prices (read SHCOMP) to rise from the ashes, in turn harming recently put on AUD shorts. Recall that China started the accelerated RRR hiking cycle in November, having hiked by 4.40 percentage points since then. The current level is incidentally a full 4.5 percentage points over the RRR peak seen in the prior monetary policy tightening cycle (which ended mid-2008). To us, this reinforces the view that Chinese officials may be preferring to use less growth harming tightening measures. Perhaps they are also relying on inflation easing in H211, which defacto would make real policy rates move higher, without the need to take their lending policy rate substantially higher. Taken together with the rising chance of a “private-creditor friendly” Greek solution (more below) is somehow reached, we flag the potential for long AUDCHF in the next 1-2 weeks. AUDCHF- now 0.8930- eyes retracement resistance at 0.9060.
While developments regarding Greece are still choppy and driven by headlines, we have had some positives. Eurozone Finance Ministers will meet in Brussels this afternoon in an attempt to bridge the gap between the ECB and the EU politicians ahead of the main EcoFin on June 20. Signs are emerging that the momentum is swinging the ECB’s way, with Olli Rehn saying that an agreement on the basis of the Vienna initiative — which he feels would not lead to a credit default — is in the pipeline. In the outside chance that a plan (centered on a voluntary debt rollover) is agreed to today, then EURCHF could rally hard retracing the plunge seen over the past 8 weeks. However, one has to allow for potential uncertainty about how investors could be persuaded, and indeed whether Germany is ultimately willing to drop its proposal for a bond swap. So we continue to opt being long EURUSD gamma (see today’s market focus), and have started to wonder if the super intense CHF bid of the past two months atleast retraces in the next few weeks.
Though we dislike GBP fundamentally, the still high UK CPI print (despite moderating PPI) and recently overextended dovish BoE bets suggests that EURGBP can still be vulnerable having dismissed 50-dma support (now 0.8809) yesterday. But we are also aware of the deteriorating asset price outlook with unexpected slippage in house prices (RICS today). Hence we suggest short GBPSEK as a promising alternative now ideally positioned at the top of a 10.00-10.40 range. While Swedish CPI today came in a touch softer, SEK could regain some lost ground as fears of a global IP slowdown taper off somewhat. Moreover, the SEK can still be seen an attractive “fiscal safe haven” alternative to the overly extended CHF. The only risk to such a trade remains rising market volatility which hurts carry trades. However, this risk has diminished somewhat after today’s risk-positive Chinese developments, making us more comfortable on such a position.