– AUD and KRW lead sell-off vs USD, Asian equities down 0.3-0.7%
– Turkey’s MPC likely to keep policy rates unchanged at 6.25%
– US durable goods likely provide more headwind for risk assets
What to watch for today
GBP: No revision. Our economists do not expect any revision to the second estimate of Q1 GDP growth of 0.5% qoq. Weaker industrial production in March has partially offset the better-than-expected construction output data, suggesting any revisions will likely be very modest. We remain of the view that the GBP needs a run of unambiguously strong data before markets shift to pricing near-term BoE tightening again. We continue to target EURGBP towards 0.91 over the next several months.
TRY: No change. Our economists expect Turkey’s MPC to keep both the repo rate and the reserve requirement ratio unchanged at 6.25% and 16%, respectively, and to leave key language little changed. They note that the MPC’s 21 April statement underscored an expectation that credit growth will slow later in Q2 in response to the measures taken thus far and suggested that the MPC might want to observe the credit developments in Q2. The risk scenario, however, is that the MPC decides to tighten reserve requirements further and adopt more hawkish language today given recent strength in credit growth. We remain bullish on the TRY, although the current macro backdrop is not conducive to adding longs in EM currencies.
USD: No durable relief. Our economists expect that all three measures of durable goods orders fell in April. Specifically, they forecast that headline durable goods orders fell 3%, ex-transport orders fell 1%, and core capex orders fell 2%. The weak headline number will be primarily a function of supply disruptions in the auto sector and a drop in aircraft orders, while seasonal patterns point to softer ex-transport numbers.
We remain constructive on the outlook for economic activity heading into the summer months. But we accept that backward-looking data will continue to pose a challenge for risk assets in the nearer term amid a delay in a resolution for Greece. We remain cautious on entering new USD shorts as we think it is still too early in the process of risk reduction to do this confidently (Strategy Snapshot, 25 May 2011).
What happened overnight
The USD has regained some ground particularly against commodity bloc currencies. Reports of a potential snap election in Greece by Reuters and a Spiegel report that the ECB is holding significant risk on its balance sheet have weighed on risk appetite. EURUSD traded lower to 1.406 after failing to sustain a break above 1.41 yesterday, while AUDUSD is back near yesterday’s low around 1.05. KRW and MYR are leading the Asian currency sell-off vs the USD, despite PBoC fixing USDCNY 89pips lower at 6.4949 today. Asian equities are modestly weaker by 0.3-0.7%.
AUDUSD is underperforming, not helped by weaker than expected construction work data. Rates market expectations for RBA rate hikes over the next 12 months fell 3bp to 21bp after the release of data showing that construction activity only rose 0.7% qoq in Q1, compared with the consensus forecast of 1.4% qoq. Q1 construction work fell in Queensland, likely due to the floods in December-January, but we think that it will rebound going forward, supported by reconstruction activities.
We think the RBA will not be overly concerned with a little softness in the property sector as it helps to offset the boom in the mining sector. Leading indicators from The Conference Board and Westpac rose 0.4% mom and 0.5% mom, respectively in March, pointing to continued expansion. We think the private capital expenditure data out tomorrow will likely be robust and reinforce our rates strategist’s expectation of the RBA hiking its policy rate 25bp in August. We remain constructive the AUD, targeting a move in AUDUSD to 1.10 as global growth recovers in the late summer.
FX inflows to Philippines moderating. The Philippines’ trade deficit widened to $5.1bn on a 12-month rolling basis in March, driven by a 16% mom rise in imports. Near term, FX inflows are likely to remain weak, with the electronic sector still sluggish amid slowing US growth, in our view. While the BSP may continue to hike policy rates, we believe monetary policy is unlikely to be supportive of the peso until the central bank starts tightening liquidity and lifts peso rates higher. We think this is only likely when exports and global economic activity recover in H2.
Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS