G10 Currencies
USD: Surprisingly bad US economic data published yesterday (ADP +38k new jobs rather than the expected 175k; ISM 53.5 instead of the expected 57.1 index points) did not put any pres-sure on the dollar but was seemingly ignored by the FX markets.
The reaction on the bonds markets was quite different: 2 year swap rates eased by 3? bps while the yields on 10 year T-notes dropped by 9 bps. The US data illustrates that the US economy is going through a period of pronounced weakness. Under these circumstances a normalisation of US monetary policy seems a long way off. On the contrary: The first voices are mentioning QE3 – i.e. an additional round of unconventional measures to further ease monetary policy. Whether we will see that or not, there are concerns that the US economic recovery is not happening.
But why does this not seem to have any effect on the FX markets? The situation reminds us of patterns we saw in 2009: at the time the dollar was supported by bad US data and came under pressure when good US data was published. This was due to the fact that bad data caused risk aversion among FX market participants to rise to such an extent that they decided in favour of the safe haven US dollar. Something similar seems to be happening now. Our factor model is going to come to our aid once again: at present it identifies a rise of the risk factor (see charts in attached pdf file). As a result the participants on the FX market are returning to safe havens. And in addition to the Swiss franc that is the US dollar.
JPY: Under normal circumstances the yen would be one of the principal beneficiaries of a flight to safety. But not this time round. Japan’s slide into recession, the fear of interventions and at the moment also political uncertainties have made Japan a very unsuitable place for investors looking for security. The vote of no confidence against Prime Minister Naoto Kan is taking place at present. He has already announced that he will step down soon even if he survives the vote. Not very helpful in times of rising risk aversion, it seems impressive enough that the yen has been able to more or less defend its position against the dollar.
EUR: The rating agency Moody’s downgraded Greece’s rating from B1 to Caa1 yesterday and according to its own definitions is therefore suggesting that Greece’s credit risk was “very high”. Moody’s points to a rising risk that the willingness to continue or increase the bailout packet on the part of the IMF and the EU has fallen. Moreover the rating agency admits that even in case of a continuation or increase of the aid packet Greece is a long way from a sustainable fiscal situation. Accordingly the outlook remains “negative”. EUR-USD came under pressure as a result of this announcement last night, even though it did not provide any real news. Moody’s pointed out that Caa1 corresponds to a default probability of approx. 50% within the next 5 years. The CDS markets have long since been pricing in much higher default probabilities (see chart 3 in attached pdf file). That means: last night’s shock which cost EUR-USD approx. 100 pips will likely not last long.
GBP: Yesterday’s May PMI Manufacturing data came in at 52.1 versus expectations of 54.1. This continues a trend in UK survey data where expectations are consistently disappointed by the grim reality of austerity Britain. We expect more of the same in the coming days with PMI Construction Index today and the PMI Services Index tomorrow. Since the rumors of a deal to agree a second round of loans for Greece appeared last week, EUR-GBP has moved higher from 0.862 to 0.88. We expect this momentum to continue over the next few days as the survey data disappoint and we get a clearer indication of the latest loan package for Greece. The next level on the upside to watch is 0.8870.
Emerging Market Currencies
RUB: The Russian PMI index for manufacturing missed the 50 mark, which separates the uptrend from the downtrend signal, by a whisker. At 50.7 the index eased further than at any point since the crisis. Hardly surprising as industrial production has increasingly become the problem child of the Russian economy, as it is structurally very weak. As the PMI series is more than volatile the collapse should not be over-interpreted, the long-term outlook for the ruble is nonetheless deteriorating. Short to medium term the Russian currency is still benefitting from the recovery of the oil price and the central bank’s restrictive monetary policy. The ruble was again able to breach the 28 mark against the US dollar to the downside. Longer term fewer and fewer factors support the ruble though.
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http://www.easyforexnews.net/uploads/2011/06/DCB-020611.pdf
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