– NZD leads sell-off vs the USD, Asian equities flat to down 1%
– Euro area GDP growth likely higher in Q3, but limited impact on the EUR
– US retail sales are likely to surprise lower
What to watch for today
EUR: Strong Q3 GDP. Our economists expect a solid 0.5%qoq euro area Q3 GDP reading today, up from 0.2%qoq in Q2. At a country level, we expect Germany to outperform the euro area aggregate with a 0.8%qoq print. France is likely to print 0.5%qoq, according to our economists. The consensus forecast is that the German ZEW survey declined slightly from its level in October. Data in line with expectations would be a positive for confidence in the euro area, but we expect price action to remain anchored to developments on the policy front.
USD: More good news. We expect that retail sales rose 0.2%mom in October. This is slightly softer than the consensus forecast for 0.3%mom. The Empire manufacturing survey likely rose 6pts to -2.2% in November, according to the consensus expectation. We note that US data have consistently come in better than expected over the past weeks. With financial markets having dramatically reduced pricing of a US recession, we think it would be more difficult for US data to surprise expectations on the topside and support risk sentiment.
GBP: Softer CPI. Ahead of Wednesday’s Inflation Report, our economists expect October inflation fell from September’s 5.2%yoy high, down to 5.0%yoy, mainly driven by the effects of aggressive discounting in the supermarket sector. This would support expectations of an increase in the BoE’s asset purchases. Given the extent of short euro positioning and pricing of downside euro risk in the options market, we think that the GBP can underperform the EUR on a reduction in euro systemic fears.
CE3: Growth update. In central Europe, we have Q3 GDP releases for Hungary and the Czech Republic. The Bloomberg consensus is for growth of 0.7%yoy and 1.6%yoy, respectively. We see downside risk to growth in both economies as they are both largely export driven and heavily geared toward euro zone growth. At the same time, the ongoing European bank recapitalization process has also likely restrained the credit supply and lending to the region, and has weakened growth potential. Among the CE3 currencies, we view the Hungarian forint as most vulnerable to major negative shocks to the euro zone, especially after Fitch’s decision to revise Hungary’s outlook to negative on Friday.
What happened overnight
The USD rallied and Asian equities sold-off as political progress in Europe has seemingly stalled. The IMF warning on vulnerabilities in the Chinese banking system and the PBoC’s decision to fix USDCNY 135pips higher to a two week high of 6.3460 have weighed on risk sentiment. EURUSD traded close to the NY low of 1.3592, while AUDUSD fell to 1.017. USDJPY spiked about 50pips higher to 77.53 at one stage, but has pared back the gains to be largely unchanged on the day at 77.1 when there is no report of official intervention.
The NZD is underperforming amongst the majors. AUDNZD traded higher to 1.312, with comments from Finance Minister English that there are some indication that the NZD is heading lower and that a high currency is negative for New Zealand’s export competitiveness weighing on the NZD. The INR is leading an Asian FX sell-off against the USD, with USDINR trading to 50.61. Asian stock markets are flat (Sensex) to down 1% (Hang Seng) following the 1% sell off in US equities.
EUR: Political developments seemingly hitting road blocks. Bloomberg reported that Italy’s next premier, Mario Monti, is facing political resistance on forming a cabinet. Also, Greek opposition leader, Antonis Samaras, has reportedly told party members that he would not sign a written pledged that the EU has said is required before the next tranche of aid will be disbursed. German Chancellor Merkel’s party voted yesterday to allow states to leave the euro currency arrangement.
AUD: Moving to a neutral stance. The minutes of the RBA’s November meeting revealed that there was a debate on whether the policy rate should be kept unchanged. In the end, the board decided that there had clearly been “material changes” to the course of and outlook for inflation, while the downside rise to growth had increased, and, thus, a 25bp cut to a more neutral level of interest rates. There was, however, no clear hint that more rate cuts are coming, while we estimate that the rates market is pricing in 145bp of cuts by next June. Our AUD rates strategist now expects another 25bp rate cut in December, but notes that developments in Europe remain the key driver of AUDUSD at the moment.
SGD: Weak retail sales. Singapore’s retail sales fell 0.1%yoy in September, much weaker than the consensus forecast for 3.6%yoy. This was driven by a 9.8%yoy fall in motor vehicles sales. Retail sales ex motor vehicles were flat on the month. This may be an early indication that weak exports are starting to constrain domestic demand, but more evidence will be needed before the MAS shifts its FX policy bias from appreciation to neutral, in our view.
Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS