– NZD leads rally vs USD, Asian equities up 0.4-1.6%
– Greek parliament to vote on implementation law at 2pm London time
– Focus on regional Fed surveys ahead of US ISM tomorrow
What to watch for today
EUR: Greek vote on implementation law to overshadow June CPI. The Greek parliament will discuss and vote on the Implementation law today. The vote is expected to take place around 2pm London time. Based on the successful outcome of yesterday’s vote, we see very limited probability of an adverse outcome to today’s vote. We expect market focus to shift to Greece’s 2012 funding schedule and on the ongoing consultations on the debt exchange program over the next few days. On the data front, we expect the eurozone CPI rose to 2.8%yoy in June from 2.7%yoy in May.
USD: Chicago PMI to disappoint? The Chicago PMI and the Kansas City manufacturing index are due for release today. Of the two, we will be paying closer attention to Chicago due to its tighter correlation with ISM manufacturing. It will be interesting to see whether data collected later in the month will show signs of improvement following the fall in oil prices as compared with the weak readings of earlier surveys such as Empire and the Philadelphia Fed. Our economists forecast a 52.0 reading on the Chicago PMI in June, below the consensus forecast of 54.0 and the 56.6 print in May. If in line with our estimates, the data would support our economists’ forecast of a 51.0 ISM reading. Jobless claims are likely to remain rangebound at 430K, according to our economists. Our expectations of further softness in US data underscore our tactical short positioning in CADJPY.
CAD: Flat GDP. Weak retail sales data released last week suggest that April GDP is likely to be flat after March’s 0.3%mom rise. We hold a short CADJPY position in our cash portfolio as a partial hedge against weak US data temporarily hurting our structural EURUSD and AUDUSD longs.
TWD: Rate hike. We expect Taiwan’s central bank (CBC) to hike policy rates 12.5bp to 1.875% at its policy meeting on Thursday, in line with the consensus forecast. However, with the developed economies showing signs of slower growth and Taiwan’s inflation remaining tame, we believe that the CBC will resist the TWD appreciating rapidly or outperforming its Asian counterparts until the leading indicators for exports improve more clearly later this summer.
What happened overnight
USD weakness has extended in the Asian session, with today’s price action having more of a ‘risk-on’ character than unwinding of tail risk hedges. In particular, although AUDCHF has gained 2.4% in the past two days, today’s AUD gains have come with a stable EURCHF and lower USDCHF. Also note that USDJPY has fallen steadily in Asian trading. EURUSD has rallied to just above 1.45 but the EUR is underperforming the AUD, NZD, and the Scandies. Front end FX vols and risk reversals have softened while Asian equity markets have rallied including China’s markets.
NZD: Business confidence surge pushes NZD stronger. The National Bank business confidence index jumped to 46.5 in June, a 12 month high, from 38.7 in May. Swings in the business confidence index correlate well with New Zealand’s GDP. Also, New Zealand building permits rebounded 2.2%mom in May.
AUD: Soft data. The AUD has largely ignored the slew of mixed local data and traded higher to 1.074. Job vacancies in the three months to May fell 4.5% from the previous period. House prices as reported by Rismark continued to decline in May and fell 0.3%mom. Private sector credit growth remained a subdued 0.3%mom in May. Personal and business credit growth remained sluggish, but housing credit increased 0.5%mom in May, following an increase of 0.4%mom in April. Over the year to May, housing credit rose by 6.2 per cent.
KRW: Industrial output was resilient but outlook cloudy. Industrial production rose 1.7%mom in May, more than the consensus forecast for 1.4%mom. However, the manufacturing business survey fell to 90 in July from 97 in June, pointing to a softening outlook for exports and production. We think this may reflect the fact that some of the surge in Korean exports in March-May came from Korean products substituting for lost Japanese production over the period. This effect may now be unwinding as Japanese production recovers. The non-manufacturing survey also dropped 2 points to 84 in July, suggesting still sluggish domestic demand. Although the KRW has rallied strongly over the past two days, we think prospective weaker growth in Korea will lead the Bank of Korea to increasingly resist rapid won appreciation. How it manages USDKRW around the recent low of 1064.60 may prove to be an important test of our view.
What to read today
– Credit Suisse has turned more positive on EM credit and FX. In the latest Debt Trading Monthly, our EM strategist have turned constructive on the outlook for EM credit and FX in July even as they remain concerned about the longer-term prospects for Greece and the rest of the European periphery. In particular, they like relative value plays in Latin America FX, recommending a short position in the Argentine peso against the Brazilian Real in 1-year NDFs and a long position in the 3-month MXNCOP NDFs. They are also constructive on Venezuela hard currency debt.
Credit Suisse
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