– NZD and KRW lead sell-off vs. USD, Asian equities down 0.9-5.1%
– German Ifo likely to weigh on the EUR
– European policy in focus this week
– USD growth data likely to be soft while inflation likely firmer
What to watch for today
EUR: Softer Ifo. The German Ifo survey of manufacturers is likely to follow the manufacturing PMI lower today, according to our economists. In particular, we look for a decline in the expectations component from 100.1 to 99.0 in September. The ECB will also be publishing the amount of bond purchases settled last week. Numbers below the €9.8bn reported the previous Monday could renew market doubts on the ECB’s commitment to the SMP program, with negative implications for the EUR.
USD: Fed survey. Markets will likely monitor the Dallas Fed manufacturing survey and Chicago PMI for guidance on the next ISM data point. We think risk sentiment will need the manufacturing surveys to show at least some stabilization in order to bounce.
What to watch for this week
We expect markets to focus on policy developments in Europe for the remainder of this week. While there is some scope for policy makers to lift spirits with favorable indications on Greek assistance, data in the US will continue to pose big challenges to a sustained risk appetite recovery.
EUR: Policy crunch time. European policy makers will be in focus this week, as the German, Finnish and Slovenian parliaments are set to vote on the 21 July amendments to the EFSF (Exhibit 1). Furthermore, the EU/IMF/ECB troika returns to Athens and may decide on the disbursement of the next €8bn aid tranche to Greece. Finally, Italy will be back in the market on Thursday issuing 2014, 2021 and 2022 paper, one day ahead of a €13.5bn bond redemption. On the data front, our economists expect September HICP to rise from 2.5%yoy to 2.9%yoy, mainly due to a one-off change in the Italian VAT.
Our base-case scenario is that the EFSF expansion will be ratified by all three parliaments, but that it will not be sufficient to bring relief to asset markets for more than a short period of time. We continue to see significant downside risk for the euro from here and have set a 1.3050 1-month EURUSD target.
USD: Still soft. Activity data is likely to remain weak in the US this week. Our economists expect durable goods to print a -0.5%mom headline and -1.0%mom core (Wednesday), and look for softer personal income data on Friday. The core PCE deflator headline on the other hand is likely to increase from 0.2%mom to 0.3%mom, potentially raising fears of stronger opposition within the FOMC to additional easing.
CNY: Bounce in PMI. China numbers may be more helpful for risk sentiment, though the data will only be released after the end of the trading week. The fall in the flash HSBC China PMI this past week suggests the official PMI (released early Saturday October 1) may print weaker than the usual 2.3 index point seasonal rise in official PMI for September. But we think markets will still see a rise in the unadjusted PMI as pointing to Chinese growth remaining resilient and would be constructive for risk.
CAD: July GDP. Our economists expect July GDP to post a 0.3%mom gain on Friday, up from 0.2%mom in June. While the data would be supportive for CAD, we expect the currency to remain strongly correlated with global risk sentiment in the near term. Furthermore, weak data in the US is likely to keep CAD enthusiasm at bay. We have revised our USDCAD forecast higher and now expect the pair to trade at 1.03 in three months time.
NZD: More weakness. The NBNZ survey on Friday is the main event on this week’s Antipodean data calendar. The activity outlook has so far been fairly resilient and is consistent with a rebound in activity in Q3 despite the disappointing Q2 GDP print. Nonetheless, we continue to see pressures on NZD driven by offshore developments and have pushed our NZDUSD one-month risk levels sharply lower to 0.75 from 0.80 previously.
CHF: KoF likely to moderate further. The consensus forecast is that the KoF fell sharply to 1.33 in September from 1.6 in August, in line with the moderations in other European leading indicators. However, we expect limited impact on EURCHF, as the pair will likely to continue trading in a tight range above the SNB’s 1.20 floor.
TWD: On hold. We expect the CBC to hold its policy rate unchanged at 1.88% at Thursday’s policy meeting. With inflation tame and the electronic sector weak, we think the CBC is likely to pause its policy normalisation and shift its FX policy bias towards TWD weakness if growth deteriorates sharply over the coming months.
What happened overnight
Asian markets resumed last week’s sell-off after the G20/IMF meetings over the weekend failed to yield concrete solutions for Europe. Asian equities sold off while the NZD and KRW are leading currency weakness against the USD. Gold has traded through Friday’s low to just a touch above $1,600/oz. EURUSD traded to a high of 1.355 at the open but quickly fell through Friday’s low to trade around 1.340 currently. AUDUSD is down to 0.973, but AUDNZD rose to 1.264 after New Zealand reported a higher than expected trade deficit of NZD641mn vs NZD321mn. USDJPY is down slightly to 76.4.
EUR: Nothing conclusive from the weekend’s G20/IMF meetings. European policy makers signaled that they will wait for the ratification of the EFSF’s enhancement before they start negotiations on specific plans to boost the EFSF’s capacity or further write-downs of Greek debt. Also, the Chief Executive of the EFSF, Klaus Regling, said that the facility may not be allowed to borrow from the ECB under the EU treaty, which forbids the ECB from financing governments directly. France’s Central Bank Governor Christian Noyer denied reports of plans to recapitalise five of its largest banks. In addition, China appeared to have ruled out buying debt of troubled European countries, but could be interested if Europe issues euro bonds.
Asian currencies are weaker vs the USD, led by KRW and TWD. Central bank intervention and USDCNY fixing down 105 pips to new record low of 6.3735 today have helped stabilize Asian currencies somewhat. Asian equities are down 0.9% (Kospi) to 5.1% (Thai SET) today.
CNY: CNY trend appreciation vs USD intact. PBoC Governor Zhou Xiao Chuan gave no indication during the weekend’s G20/IMF meetings that the current crisis will lead to a change in China’s FX policy. In particular, Zhou said that China wasn’t likely to halt the rise of its currency as it did during the 2008 crisis, when it had feared that a stronger CNY would further cut into exports. We think this suggests that the policy of normalising the undervaluation of the CNY remains intact. We continue to expect about 4-5% annualised trend appreciation in the CNY. The lower USDCNY fixing today should also help to stabilize USDCNH spot, which rose to record high vs. USDCNY after the recent unwind of the CNY/CNH basis trade.
SGD: Strong rebound in industrial production. Singapore’s industrial output growth surged 21.7%yoy in August, much stronger than the consensus forecast for 11.2%yoy and the 7.6%yoy in July. This was led by a 157%yoy jump in Pharmaceuticals, while electronics were still sluggish and down 22%yoy. This reduces the risk that Singapore entered into a technical recession in Q3 and supports our view that if the MAS decides to shift policy at its October meeting, the most likely scenario is that it will maintain the SGD on tightening mode but with a reduced slope.
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Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS