– The antipodeans led modest rally vs USD, Asian equities down 0.2-0.8%.
– Bernanke at Jackson Hole today at 15:00 GMT
– A weak Swiss KoF is likely to have limited impact on the CHF
– Bank of Mexico likely to keep the policy rate at 4.5% with a shift to a neutral bias
What to watch for today
USD: Bernanke is unlikely to announce new easing initiative. We see a high probability that the Fed chairman will only outline the Fed’s options for further easing, as he did last year. Our US economists outline a range of possibilities in their report US Economics Digest: What’s in the Fed’s Toolbox. Of these, our rate strategists believe that extension of the Fed’s Treasury holdings portfolio duration is the most likely next policy move. We doubt that this will produce a lasting positive effect on markets.
On the data front, our economists are looking for a revision in Q2 GDP from 1.3%qoq to 1.1%qoq.
GBP: Weaker GDP revision. Our economists forecast that Q2 GDP will be revised down to 0.1%qoq from 0.2%qoq. Nonetheless, we doubt that weak data will have a significantly negative near-term impact on GBP given rising market concern about the euro area, no new signal about QE from the Bank of England, and what seems to be continuing reserve manager inflow into gilts.
CHF: KoF to point to slower growth. The consensus forecast is that the KoF moderated to 1.85 in August from 2.04 in July. We expect limited impact on the franc as we expect EURCHF price action to remain a function not just of euro-area-specific events and stress, but also of US growth more generally. Weaker growth expectations would undermine the credibility of Europe’s fiscal plans, supporting the market’s appetite for hedging EUR risk via CHF longs, in our view.
MXN: Turning neutral. Our economists expect the Bank of Mexico to keep the policy rate unchanged at 4.5%. The policy statement is likely to display a shift from its recent hawkish stance, with a revision in language pointing to a less pronounced focus on upside risks to inflation. The significant sell-off in MXN over the past few weeks would suggest that expectations of a shift in policy are by now well priced in. As such, we see limited impact on MXN price action.
What happened overnight
G10 made modest gains vs USD, equities down slightly in very quiet trading ahead of Bernanke’s speech. Asian flows were very light ahead of this event. The antipodean currencies are leading a modest rally vs the USD. AUDUSD rose to 1.048 as Reserve Bank of Australia Governor Stevens effectively argued against rate cuts in testimony to Australia’s parliament. EURUSD has rebounded from the 1.433 low in NY trading to trade above 1.44. USDJPY continued grind lower to 77.3. Asian currencies traded in tight ranges, with Asian equities lagging the fall in US equities overnight and only down 0.2-0.8%.
AUD: Balanced tone. Markets reacted positively to RBA Governor Stevens’ testimony and cut the expectation for RBA rate cuts over the next 1-year by 7bp to 126bp. Stevens maintained the same cautious tone in recent policy statements, but we read it as the RBA remaining on hold and not signaling a shift to an easing bias. He acknowledged the ‘heightened’ degree of uncertainty offshore, but again, highlighted the impact from the improvement in the terms of trade on income keeping inflationary pressures elevated. Importantly, Stevens discounted concerns over bank funding. He has also commented on a number of occasions how Australia’s balance sheets – corporate, household and Government – are strengthening. Although Stevens said that AUDUSD at 1.10 is “getting ahead of itself”, he said that intervention would have been futile. However, the AUD remains vulnerable to bouts of renewed global stress, in our view.
What to do today?
Credit Suisse is hosting a conference call at 9am London time on the recent rise in stress in credit markets with our Head of European Credit Strategy, William Porter. Key discussion points during the call will be:
– What is causing the big disconnect in the European Credit space?
– What are the solutions, if any?
– Where do we see the path for credit spreads and dislocation from here?
– How to navigate and trade this space.
Click here to read the full report:
http://www.easyforexnews.net/wp-content/uploads/2011/08/document-804359140.pdf
Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS