– G10 in narrow ranges, Asian FX slightly weaker
– US jobless claims unlikely to prove supportive of risk assets
– We have cut our 3 and 12m EURCHF forecasts to 1.26 and 1.30, respectively
What to watch for today
USD: No relief from claims. Our economists forecast a 420k reading in the jobless claims tonight, roughly unchanged from last week’s 424k. This would fit with the “soft patch” trend, especially in the light of yesterday’s disappointing ADP data. Our economists have revised down their headline non-farm payrolls estimate from 185k to 120k after the ADP data. Data in line with our expectations will remain a challenge for risk sentiment and risk-sensitive currencies, although EURUSD has shown a tendency to react more positively to softer US data in recent weeks. We remain positioned for a recovery in risk sentiment, diminished growth fears, and renewed USD weakness via long EURUSD, long AUDUSD and short USDMXN recommendations.
What happened overnight
The dollar has consolidated in the Asian session, with most currency pairs trading in tight ranges. EURUSD has bounced slightly to 1.436 from the two-day low recorded at the NY close when Moody’s downgraded Greece’s sovereign credit rating to Caa1 from B1. The FT reported that European banks are being “forced” to resubmit their information for the latest round of stress tests due to overly rosy assumptions, with results delayed to July. USDJPY initially spiked to 81.3 on news that Japanese law makers are scheduled for a no-confidence vote on Prime Minister Kan today, but has pared back to 81.0 after Kan offered to step down once the post-earthquake crisis is resolved.
AUDUSD is flat at 1.062 after initially rallying on a stronger than expected 1.1% mom rise in Australian retail sales. The Australian trade surplus was largely flat at AUD1.6bn in April, driven by a 12% mom rise in capital imports, which points to continued strong investment growth. While imports of consumption goods fell, strong April retail sales and income growth in Q1 suggest this will likely rebound as companies replenish their inventories.
The China Daily quoted the National Development and Reform Commission as saying that China plans to increase its imports of energy to manage its power shortages. Coal and natural gas seem to be at the forefront of this push, further boosting the outlook for Australian and Indonesian exports of energy.
Asian currencies are broadly weaker vs the USD. The PBoC’s decision to fixed USDCNY higher for the first time in five days to 6.4886 have likely added to the dovish tone on Asian currencies, in particular the TWD and MYR. We remain of the view that the CNY NEER is unlikely to repeat the 1.5% appreciation in May, and the pace of USDCNY downside will largely be a function of renewed USD weakness. Asian equities are broadly lower by 0.6-1.5% following the more than 2% sell-off in US stocks overnight.
What to do
Revising EURCHF forecast lower
We have cut our three- and twelve-month EURCHF forecasts sharply to 1.26 and 1.30, respectively, from 1.34 and 1.41. Our expectation that euro area credit stress would fall consistently after March, pulling EURCHF vol lower and making euro area credit risk more attractive, has simply been wrong.
Nonetheless, several factors should ease pressure on the franc over the next quarter.
– The core of our view is that Greece will receive a new funding package by end-June.
– We also expect global growth momentum to begin recovering by July or August.
– The ECB will raise its policy rate 25bps in July and retain a bias for further hikes, in our view.
Putting this into our EURCHF model via an assumption that implied volatility falls back to 10.0% – 10.5% suggests EURCHF should retrace to 1.25 – 1.26. We use our model to present a scenario analysis.
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http://www.easyforexnews.net/uploads/2011/06/document-804093340.pdf
Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS