– AUD rally leads the USD weaker; Asian equities mixed
– Australia inflation surprised high, points to rate hikes, not cuts
– A moderation in the Swiss KoF is likely to have limited CHF impact
– USD durable goods likely to contract and keep USD yields depressed
– We have lowered our three-month USDCAD forecast to 0.93
What to watch for today
CHF: KoF moderation. The consensus forecast is for the Swiss KoF to moderate to 2.11 in July from 2.23 in June. We think the sharp fall in PMI, particularly the forward-looking order components, suggests that the risk to the Swiss KOF is to the downside. This should keep the Swiss National Bank dovish. We believe that the CHF is unlikely to see significant relief in the near term as markets grow increasingly concerned about the politically deadlocked debt ceiling negotiations in Washington. With CHF vols at stubbornly elevating levels, we believe Switzerland will continue to struggle to recycle its current account surplus for the time being, contributing to CHF strength.
USD: Disappointing durables. Durable goods are likely to contract in the month of June, according to our economists. We expect a -0.5%mom headline with a -2.0%mom reading on core capex orders, well below the 2.1%mom and 1.6%mom, respectively, reported in May, and below the consensus forecast. If in line with our estimates, the data would likely keep US yields under pressure, adding to expectations that the FOMC might engage in further easing. In the FX space, we believe this will translate into USDJPY downside, likely mitigated in scope by rising expectations of MOF intervention against JPY strength.
What happened overnight
The USD remained under pressure in the Asian session. AUDUSD rose to a new post float high of 1.1062 after Australia’s CPI inflation surprised higher. EURUSD is holding on to recent gains above 1.45, while USDJPY traded lower to 77.8. The NZD rallied against the USD to 0.874, but fell vs the AUD. The NBNZ business activity outlook rose to 43.7 in July, close to the highs recorded in May last year.
The INR and MYR are outperforming amongst the Asian currencies. The Reserve Bank of India’s decision to raise its policy rates by a larger than expected 50bps yesterday has enhanced the INR’s carry and is attracting bond inflows. This seems to be overwhelming the negative effect of the hike on equity flows. Asian equities are mixed, with the Nikkei down 0.5% while the Chinese stock markets are up 0.1-0.7%.
AUD: CPI points to RBA hikes not cuts. The Australian interest rate market sold off 15-17bp, bear flattening, in response to Q2 CPI inflation surprising high at 0.9%qoq in both the headline and underlying measures. Importantly, our AUD rates strategist estimates that the two quarter annualized average of underlying inflation is now running at 3.6%yoy, above the RBA’s 2-3% target range (Exhibits 1 and 2). He is maintaining his forecast for a RBA rate hike in Q4. We disagree with the market pricing of 20bp of RBA cuts over the coming year and remain bullish the AUD. We think there is upside risk to our three and 12-month AUDUSD forecasts of 1.10 and 1.13, respectively.
China’s central bank fixed USDCNY to another low of 6.4426. We expect the central bank to allow CNY appreciation vs the USD as part of the policy mix in tightening monetary policy. Reuters quoted Xia Bin, a member of China’s central bank (PBoC) monetary policy committee as saying that monetary policy should stay relatively tight in the foreseeable future. He added that he sees little risk of an economic hard landing in China. We continue to expect USDCNY to fall to 6.38 and 6.17 in three and 12-months, respectively.
KRW: Growth moderated in Q2. Korea’s GDP growth slowed to 0.8%yoy in Q2 from 1.3%qoq in Q1, largely in line with the consensus forecast. This was driven by weaker exports growth in Q2, while investments and construction rebounded, but remain weak. The BoK business survey points to the outlook for exports stabilising, with the manufacturing survey rising to 91 for August from 90 in July. Recent comments from Deputy Governor Kim Jae Chun point to the central bank remaining hawkish. Kim sees the economy accelerating in H2. We continue to think that the BoK will allow USDKRW to drift gradually lower to 1,040 over the coming months.
What to do
We have lowered our three-month USDCAD forecast to 0.93. USDCAD has traded through our 0.95 target this week, with the currency benefitting from expectations of continued reserve manager demand and widening rate differentials. We see some scope for this move to continue as markets move to fully price expectations of an October tightening from the Bank of Canada and reserve managers continue to diversify newly accumulated reserves away from the USD and EUR.
However, we would view a move to our new 0.93 target as an overshoot of longer-term fundamentals and we are leaving our 12-month target unchanged at 0.95. We see evidence that valuation effects are already beginning to impact Canada’s macro dynamics and monetary policy, and would expect these effects to intensify as USDCAD extends its decline towards our target.
See USDCAD: stepping into uncomfortable territory, 26 July 2011.
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Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS