– Optimism about Europe extends into Asian trading
– Focus on Italian auction going into Eurogroup meeting
– US consumer confidence expected to rise
What to watch for today
EUR: Italy is to issue up to €8bn worth of bonds today. Maturities are between 2014 and 2020. Markets will be on the lookout for evidence of further weakening in investor demand for peripheral sovereign paper. A full allotment of today’s offer would mark the largest amount issued in the 3-10yr maturity range since 30 August.
On the policy front, Eurogroup finance ministers meet today. The meetings are expected to focus on the disbursement of Greece’s next loan tranche rather than on the more significant issues now weighing on market sentiment. We expect constructive headlines, but in absence of progress on the topic of fiscal integration or more aggressive market activity from the ECB, we see limited positive impact from today’s meeting and look to the 9 December summit as the next key event on the near-term policy calendar.
HUF: No change, but MC likely to turn more cautious. Our economist expects the Monetary Council to keep the policy rate on hold at 6.0% today. We acknowledge that the risk of a rate hike has increased, particularly after the rating downgrade by Moody’s. We believe the MC will turn more cautious and hawkish in this meeting to prevent further capital flight and forint weakness. In addition, we think the central bank could intervene in the FX market to slow forint depreciation. For now, we think the EURHUF exchange rate will be a key driver for monetary policy, rather than the other way round. We think the forint remains vulnerable to further external shocks given its heavy growth and banking exposures to the euro zone.
SEK: Downside GDP surprise. Swedish Q3 GDP should moderate to 0.3%qoq from 0.9%qoq in Q2, slightly below the consensus forecast for 0.4%qoq. A weak reading would support our forecast for a December rate cut. Against the backdrop of the ongoing risk aversion and stress in the euro area, we think the SEK is vulnerable to further loss of rate spread support.
USD: Confidence expected to rise. The consensus forecast is for the consumer confidence index to rise slightly to 44.0 in November vs. 39.8 in October. Case-Shiller data for September are scheduled for today as well.
What happened overnight
Optimism about political solutions to Europe’s debt crisis lingered into Asia, pushing the USD weaker and Asian equities higher across the board. EURUSD has bounced to 1.3356, AUDUSD has rallied to 0.9953 and most of USD-Asia is lower on the day led by USDKRW trading down to a four day low of 1146.20. Only the JPY and IDR are weaker against the USD today. China fixed USDCNY essentially unchanged at 6.3587
Moody’s announced that it is reviewing ratings on subordinated and junior debt from 87 European banks for possible downgrade. Moody’s expects two notch downgrades to subordinated debt on average and a one notch downgrade on other debt on average. Austria, France, Italy, and Spain have the most banks under review.
JPY: Strong retail, weak labor. Retail sales rose 1.4%mom in October, up from a contraction of 1.5%mom in September and stronger than the consensus forecast for a 0.6%mom rise. However, the October unemployment rate rose to 4.5% from 4.1% in September.
In other news, Bank of Japan Governor Shirakawa told Japan’s parliament that he viewed yen strength as being due to credit stress in Europe. He hoped the BoJ’s efforts to lower long-term Japanese yields would weaken the yen. In a similar vein, Japan’s finance minister reiterated that the government wanted a weaker JPY.
KRW: Current account surplus remains strong. Korea’s current account surplus was $4.2bn in October, down from $5.1bn in October 2010, but still historically quite robust. The trade surplus of $3.6bn in October is the main support for the overall surplus and will likely rise if oil prices soften further; note that the non-oil surplus is at a record high. In other news, the statistics department announced that its rebasing of the CPI to 2011 will cut inflation by about 0.4% to 4.0% for January-October. Exclusion of gold rings is a major factor in the revision.
INR: RBI warns banks. India’s Economic Times reported that the Reserve Bank of India has warned banks not to use their open position allowances to run speculative long USDINR positions lest the RBI change regulations.
MYR: FDI surges. The government announced that foreign direct investment into Malaysia rose 42% in the first three quarters of 2011 to $8.3bn.
CNY: Repo rate at five day low. The recent increase in fiscal spending has so far added more liquidity to China’s financial system than the central bank has sterilized with bill issuance. Seven-day repot to 3.66%
What to do
– The Earth Starts to Move. Our global strategy team argues in its new report that euro area policy is finally moving more meaningfully toward a fiscal union. They expect this to free the ECB from its current role as fiscal disciplinarian for Europe, allowing it to ease monetary conditions much more substantially in Q1 2012.
– The ECB is increasingly likely to introduce a full blown QE program in Q1 2012, according to our economics team. They argue in their new report Game Over that the rapid deterioration of the euro area economy combined with tightening financial conditions will justify this move. They expect the ECB to buy a representative basket of euro area sovereign bonds rather than just those of countries suffering from financing stress.
Click here to read the full report:
http://www.easyforexnews.net/wp-content/uploads/2011/11/document-931787241.pdf
Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS