– Majors in tight ranges, Asian equities down 0.5-1.5%
– We expect SNB to keep rates unchanged and maintain dovish tone
– US Philadelphia Fed survey to provide directions for US growth
What to watch for today
CHF: Strong franc to hold SNB from turning hawkish. We expect the Swiss National Bank (SNB) to stay on hold today and maintain a dovish tone in the policy statement. Although growth and employment projections are likely to be robust, we think that the SNB will point to the euro zone fiscal stress and CHF strength as threats to exports and growth going forward.
We expect little change in the SNB’s language and think that the SNB is almost certain to retain the warning that “the current expansionary monetary policy cannot be maintained over the entire forecast horizon without compromising long-term price stability.” However, we expect the tone of the statement to make clear that the medium term remains quarters away. Our monetary conditions index shows that CHF strength has already tightened monetary conditions sharply. Our VARex model for Swiss policy rates suggests that the SNB would need to begin signaling policy rate hikes only in Q1 2012 even if EURCHF rises back to 1.25-1.26 (FX Strategist – Strong franc to keep SNB on hold, 16 June 2011)
GBP: More bad news. The consensus forecast is that both headline and core retail sales fell 0.6%mom in May. Numbers in line with the consensus forecast would represent an extension of the recent trend of soft data, including April industrial production and claimants count. We remain bearish on sterling, and expect the MPC to remain on hold at least until November.
USD: Focus on June data. The spotlight is on the Philadelphia Fed manufacturing conditions survey today. The consensus forecast is for an improvement from 3.9 to 7.0, which would represent a notable break from the recent trend of disappointing data. A weak surprise on the other hand would further undermine expectations for a rebound in ISM manufacturing from the plunge reported last month. Our economists are looking for a 415K reading in jobless claims, slightly better than consensus at 420K.
PHP: Another hike. We expect the Philippines’s central bank (BSP) to hike policy rates 25bp to 4.75% today, in line with the consensus forecast for a 25bp hike. BSP’s governor continued to sound hawkish and highlighted that upward pressures on prices remained even as CPI inflation momentum continued to fall in May. But we don’t think the BSP will tighten liquidity and lift peso rates significantly. The PHP is unlikely to get much yield support in the meantime, in our view. Also, remittances growth has been pretty poor and that should make it easier for the BSP to restrain PHP appreciation to maintain export competitiveness.
What happened overnight
The USD rallied late into the Asian morning as Asian equities fell and EURUSD dropped to 1.4130. The market is increasingly focused on the contagion risk Greece poses to European financials. This has begun to close the divergence between EURUSD and European financial CDS spreads that we noted several days ago (Exhibit 1).
Exhibit 2 highlights that stress has been more concentrated in EURUSD vols and risk reversals than at this point last year. EURUSD front end vols and riskies have widened further, but still remain below the peaks of the crisis in Ireland late last year, much less last May. If they continue rising we doubt this stress will be able to be contained within the EUR and would expect pricing of risk in the rest of the G10 to begin rising more significantly, particularly if the US Philly Fed survey out today follows yesterday’s Empire survey weaker. However, we also think that the recent rise in credit spreads in Europe is part of the necessary process of putting pressure on Europe’s politicians to come to a less market unfriendly solution than has so far been proposed by Germany.
With Asian equities much weaker, Asian currencies have weakened against the dollar. The Malaysian ringgit, Indonesian rupiah, and Korean won have led the weakness in regional FX. The JPY has failed to follow the rally in the CHF. We think this is, in part, because Japan is probably still running a trade deficit, making the yen more subject to idiosyncratic flows. We also note that although US yields fell overnight, USDJPY is already trading quite cheap to US – Japan yield spreads.
The NZD is underperforming amongst the majors with AUDNZD rising to 1.315. Dovish comments from New Zealand Finance Minister English have seemingly over shadowed a sharp rebound in Q2 Wespac consumer confidence and continued improvement in May manufacturing PMI.
Credit Suisse Asia economic forecast update. Our Asia economics team has published an update on their forecasts. China’s 2012 growth forecast has been downgraded to 8.5% from 8.9%, previously. They now expect 85bps in hikes in the one-year lending rate to 7.16% by end-2011 and another 50bp in hikes in 2012 to 7.66%. For India, they anticipate another 75bps of hikes in 2011, taking the reverse repo rate up to 7%, but believe that the slowdown in 2012 should prompt the RBI to cut rates subsequently to 6.25%.
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