– European currencies lead rally vs USD, Asian equities up 0.1-1.0%
– Likely weak UK Q2 GDP to weigh on the GBP
– Will Richmond Fed follow yesterday’s positive surprise from Dallas?
– RBA Governor Stevens positive on the consumption outlook
– How likely is Japanese intervention?
What to watch for today
GBP: Weak Q2 GDP. Our economists expect UK Q2 GDP to be flat on the quarter, below the Bloomberg consensus for a 0.1%qoq rise. If in line with our expectations, this number might make some Bank of England Monetary Policy Committee members more inclined to support another round of quantitative easing. Our base scenario does not include an extension of QE in the UK, but we think that markets will have to increase pricing for this risk. As market fears of sovereign credit risk in the euro area abate, we expect the GBP to reweaken versus the EUR and push EURGBP towards our three-month target of 0.91.
HUF: On hold. We expect the Monetary Council to keep the policy rate on hold at 6.0% today, in line with the consensus forecast. Recent economic and inflation data releases have painted a mixed picture, supporting a neutral monetary policy stance. Hungary’s manufacturing PMI rebounded to 54.4 in June from 52.4, while industrial production growth fell sharply to 2.6%yoy from 9.7%. Headline inflation surprised low at 3.5%yoy in June. Overall, we remain constructive on the HUF based on the recent improvement in the external accounts and fiscal outlook. We also expect a growth recovery and an easing in euro zone stress to ultimately support the forint. We continue to target EURHUF at 260 in three months.
USD: Manufacturing gaining momentum? The Richmond Fed releases its index today. following yesterday’s strong survey results from the Dallas Fed in which new orders rose to their highest level in over a year. The data so far suggest that manufacturing conditions have improved from the lows recorded in June, but that progress remains very slow (Exhibit 1). The consensus forecast is for a mild improvement in the Richmond Fed manufacturing survey to 5 from 3.
What happened overnight
Markets reacted to the ongoing US debt woes by selling the USD. Speeches by US President Obama and House Speaker John Boehner gave little new information but remained at odds over the plans to raise the debt ceiling. The European currencies are leading the rally against the USD. EURUSD rose to a high of 1.448 while AUDUSD rose to a new high of 1.091 since 3 May. USDJPY spiked up to 78.4 but grinded lower to 78.1 with no confirmation of official BoJ intervention. AUDNZD traded a wide range, but was flat at 1.255 despite New Zealand reporting a lower trade surplus of NZD230mn due to weaker than expected exports.
Asian currencies continue to grind stronger vs the USD led by the MYR and KRW. Asian central banks are once again smoothing FX appreciation. We think Singapore and Korea’s central banks may have been buying USDSGD and USDKRW around 1.204 and 1,051, respectively. Asian equities are up 0.1 to 1.0%.
AUD: RBA Governor Stevens remains positive on the consumer outlook. Reserve Bank of Australia Governor Stevens’ speech today about the Australian consumer outlook argued that the recent divergence between rising incomes and weak spending is unlikely to be sustained. He said consumption will ultimately realign with income, pushing consumption growth up, even if this is not to pre-crisis debt fueled rates. On balance, we read the speech as arguing against the 38bps of cuts in the RBA policy rate the market currently has priced for the next year. Although Stevens noted that the AUD is quite strong, he did not protest this strength. We remain bullish on the AUDUSD, forecasting 1.10 over the next few months and 1.13 or a bit above over the next year.
KRW: BoK Deputy Governor sounds hawkish. Bloomberg quoted Bank of Korea (BoK) Deputy Governor Kim Jae Chun as saying that exports are “pretty strong” and that the economy will accelerate in H2. Kim said “a possible economic slowdown is not in our list of policy concerns.” These comments follow his statement yesterday that “our biggest concern is inflation becoming a chronic problem.” We continue to think the BoK will guide USDKRW down to 1040 over the next couple of months and 1000 or just below over the next year.
JPY: How likely is intervention? Japanese Finance Minister Noda said he is watching currency markets closely. We understand that the Japanese government is highly uncomfortable with the yen’s recent appreciation. However, we think intervention is unlikely unless the debate over the US debt ceiling leads USDJPY to begin gapping lower in a highly illiquid market. The Japanese will likely struggle to win G7 support for yen intervention given USD weakness is broad based.
Nonetheless, the yen may be due an at least temporary correction if the US debt ceiling is raised without event. Exhibit 2 shows that the recent drop in USDJPY has run against the two year US – Japan interest spread recently.
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Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS