– Majors in tight ranges, Asian equities up 0.4-1.4%
– BoE minutes likely to be dovish and weigh on GBP
What to watch for today
GBP: Unchanged voting pattern but a more dovish message. We expect the minutes of the BoE’s July meeting to show an unchanged voting pattern, with Dale and Weale voting for a hike and Posen in favor of more QE. Nonetheless, the minutes are likely to carry a more dovish tone, highlighting downside risks to the medium-term inflation outlook, recent deterioration in domestic data and downside risks to global growth. Most importantly, focus will be on the QE debate, and any indication of increased support for further easing will be bearish for the GBP. While this supports our bullish EURGBP view, we prefer to express QE risk through GBPUSD shorts until stresses in the euro area financial markets ease (see Sterling Investor – 13 July 2011).
BRL: Copom likely to tighten. We expect the Copom to hike the Selic rate from 12.25% to 12.50%, in line with market consensus. Markets are likely to focus on any indication of a change in the committee’s stance on inflation in the wake of the recent deterioration in inflation expectations for 2011 and 2012. Our economists now expect the Copom to hike once again in August and we have turned more bullish on the real, setting a 1.55 three-month USDBRL target.
MYR: Inflation rising. Our economists expect that CPI inflation rose to 3.7%yoy in June from 3.3%yoy in May, slightly higher than the consensus forecast of 3.6%yoy. A rise in inflation momentum would suggest continued policy tightening by the central bank (BNM). However, BNM sounded concerned about slowing growth resulting from lower external demand and is likely, in our view, to rely on macro prudential measures like reserve requirement hikes to curb the rise in bank lending. We think the weak May industrial output and export data will cause BNM to remain biased against ringgit strength in the near term.
TWD: Resilient export orders. Taiwan’s export orders likely rose to 12%yoy in June from 11.5%yoy, according to our economist. Following the downside surprise in June exports growth, we expect signs that external demand is softening will keep the central bank (CBC) cautious on tightening monetary conditions too aggressively. Our equity team argued in a new report that Taiwan’s electronics sector is proving weaker than expected. If the team is right, this suggests that CBC will continue to limit TWD strength.
What happened overnight
Asian equity markets rallied, but FX traded sideways. However, the Asian equity rally has generally lagged the stronger US rally that was driven by positive news on US debt ceiling negotiations yesterday. The press reported that US President Obama is backing an agreement by a group of Democratic and Republican senators to cut the fiscal deficit by $3.7trn over 10 years, increasing hope that an agreement to raise the debt ceiling can be reached.
EURUSD and USDJPY are holding on to recent gains around 1.416 and 79.2, respectively. AUDUSD fell slightly to 1.071 after another weak Westpac leading index print of -0.1%mom. Front-end FX implied vols and risk reversals are slightly softer today, while Eurodollar basis swap narrowed 4bp to -31.8bp yesterday. Asian currencies are slightly stronger vs the USD, with PBoC’s decision to fix USDCNY to a new record low of 6.4952 supporting the positive tone. We understand that the MAS may have been buying USDSGD around 1.2140 to smooth currency appreciation.
Despite the slight positive tone in equity and growth sensitive currencies, we continue to think that sentiment will remain quite fragile until the end of the summer months. As detailed in the latest Strategy Snapshot, Thursday’s EU group leaders meeting and the ongoing debt ceiling debate ahead of the 2 August deadline have potential to turn sentiment in either direction. Our European strategists expect Thursday’s meeting to provide the next step toward helping the periphery. This will likely involve voluntary debt exchanges and voluntary haircuts and could be enough to stem the recent increase in Italian yields. Our global strategy team argues that recent data are consistent with their view that global IP momentum has been rising since April.
For FX, we think that AUD and CAD look particularly vulnerable if financial markets do lurch into panic territory. In contrast, SEK has severely underperformed EUR and USD over the past two months and has cheapened considerably, making it our preferred candidate to trade a recovery in risk sentiment coming out of the summer.
What to read today
QE3 and EM assets prices. Our EM strategists argued in their latest report that the effects of a potential QE3 are likely to be similar in direction, but probably less detrimental for EM rates markets compared to November-December of 2010. They also think that a large underperformance of EM credit spreads seen at the end of last year is unlikely. Similar to the previous experience, EM currencies would clearly benefit, in our view. See report here.
Click here to read the full report:
http://www.easyforexnews.net/wp-content/uploads/2011/07/document-804252340.pdf
Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS