– The AUD and SGD lead rally vs the USD, Asian equities up 0.2-0.7%
– Greek parliament approves austerity measures
– Greek PSI in focus
– Firmer US data is supportive of the risk complex
What to watch for this week
EUR: Greek PSI. The Greek parliament is expected to continue voting on individual austerity measures, with the PSI negotiations finalized after the Greek vote. Agreement on a PSI deal and consequent approval of the previously agreed second support package (the euro zone finance ministers are scheduled to meet on Wednesday) would likely see a risk-positive reaction.
We stress that only hard data on actual participation will provide a reliable gauge of the program’s success. Risks remain high that participation remains inadequate to avoid a forced restructuring, either through collective action clauses or otherwise. We expect Euro system stress to build again as we move through the process, and remain long USDCHF as a reflection of this view.
The data calendar is light in Europe this week, with Q4 GDP data out on Wednesday. Our economists forecast a 0.4%qoq contraction after a 0.1%qoq rise in Q3. At the country level, we expect below average performance in Germany and Italy, and a flat quarter in France. On the issuance front, Italy will be issuing bills on Monday and bonds on Tuesday, while Spain will auction bonds on Thursday at its usual weekly auction. The ECB will also allot one-month liquidity at the start of the reserve maintenance period, but we expect a relatively low uptake ahead of the three-year LTRO at the end of the month.
USD: Retail sales, IP and February leading indicators. US data are likely to remain on the firm side this week. We expect retail sales rose 1.0%mom on the headline and 0.7%mom ex autos (Tuesday) and industrial production rose a modest 0.4%mom (Wednesday). The consensus forecasts are for a slight improvement in the Empire manufacturing survey (Wednesday) from 13.5 in January to 14.35 in February and in the Philadelphia Fed survey from 7.3 to 8.8 in February (Thursday). We continue to view strong US data as positive for CAD, MXN and, to a lesser extent, the rest of the risk complex.
CAD: Soft CPI. We expect headline CPI fell to a nine-month low of 2.2%yoy in January, with core unchanged at 1.9%yoy. This would put core inflation below the BoC’s forecast for Q1, reinforcing our view that the Bank of Canada is unlikely to start tightening anytime soon.
SEK: A close call. We expect the Riksbank to deliver a 25bp cut but we believe it will be a close call. Recent data, in particular the forward looking and reliable PMI and consumer sentiment indicators, have surprised to the upside. There has also been an improvement in financial market conditions along with receding risk of a sharp recession in the euro area. Subdued growth at the turn of the year suggests that Q4 is likely to be weaker than the central bank’s forecast and we expect downward revisions to growth projections. Nevertheless, based on the recent pick-up in leading indicators, we think the rates trajectory is likely to be kept flat even if the Riksbank decides to ease this week.
It also worth noting that two new members will join the Riksbank Executive Board from this meeting. Kerstin af Jochnick and Per Jansson will succeed Svante Oberg (the hawkish outlier) and Lars Nyberg on the board. This increases the uncertainty surrounding the monetary policy decision this week. The rates market has significantly priced out Riksbank easing since the beginning of the year and is currently pricing close to just a 50% chance of a 25bp rate cut. This makes the SEK vulnerable to lower rates or a dovish statement, in our view.
GBP: Focus on the Inflation Report. The Bank of England’s Inflation Report on Wednesday will likely explain the decision to increase the Quantitative Easing Program by £50bn. Ahead of the report, our economists expect CPI inflation to decline to 3.7%yoy in January from 4.2% as the “VAT effect” following the January 2011 rise continues to drop out. However, annualized three month on three month growth rates (seasonally adjusted) are still substantially above the 2% target. We expect the GBP to remain supported versus the EUR over the near term but to depreciate gradually on a trade weighted basis.
JPY: More easing. The Bank of Japan holds a two-day meeting concluding Tuesday. While market speculation has centered on the possibility of further easing, our economics team sees just 30% chance of a move this week. If the BOJ does decide to move this week, options include the introduction of a three-year lending facility or an increase in JGB purchase operations. In either case, we would expect only a small impact on the JPY given very low levels of front-end yields elsewhere in the G10 limit scope to move rate differentials against the currency.
AUD. Employment up this time. The consensus forecast that employment out on Thursday rose 10k in January after a 29.3k drop in December. The unemployment rate is expected to rise to 5.3% from 5.2% with a small rise in the participation rate. We see a good chance of more positive data. Job ads picked up strongly by 6%mom in January; total hours worked, also a good leading indicator, increased as well. A good release should temporarily help AUD. However, as the labor market remains subdued, high AUD rates continue to hurt the economy and with RBA leaving the door open to further easing, we expect AUD to underperform other G10 currencies.
ILS: Inflation and growth. The consensus for inflation (on Wednesday) is for a further moderation to 1.8%yoy from 2.2%yoy, while our economist forecasts 1.9%yoy. However, given inflation is comfortably close to the Bank of Israel’s target we expect less of a market reaction. On Thursday, 4Q GDP is expected to moderate further from the 3.6% annualized rate in Q3, although our economist sees a good likelihood of a read above the consensus of 3.0%yoy. This could help Israeli rates and the shekel (our model based on rates spreads is currently predicting USDILS at 3.66).
HUF: Key political events. The Hungarian Parliament is scheduled to meet on 13 February (Monday) to discuss whether the government should proceed with legal changes in line with the EC requirements. Our economist notes that the Parliament has a track record of passing laws quickly, and the required legal changes can be enacted before the 17 February (Friday) deadline to respond to the EC’s objections. If domestic policy risk recedes we expect the forint to catch up further with its regional peers, such as the zloty, and expect the risk premium in implied EURHUF vols to decline. We maintain our EURHUF 1×2 put spread, initiated on 19 January, in our derivative portfolio. On the data front, Hungarian Q4 GDP is likely to moderate to 0.8%yoy from 1.4%yoy, as per the Bloomberg consensus forecast. Headline inflation in Hungary is likely to rise sharply to 5.1%yoy from 4.1%yoy, due to a VAT hike to 27% (from 25%) which came into effect on 1 Jan 2012.
CZK, PLN: Mixed data. Czech GDP is expected to print flat in Q4, reducing the annual growth rate to 0.7%yoy from 1.2%yoy in Q3. Weak numbers would be consistent with timid growth indicators we saw across Europe in Q4. At the same time, January inflation data will be important for the central banks in the region to evaluate their current monetary policy stance. The Bloomberg consensus forecast is for Poland’s inflation to fall to 4.2%yoy from 4.6%yoy. In contrast to Poland, Czech inflation is expected to pick up to 3.2%yoy from 2.4%yoy due to a partial VAT hike valid from January.
INR: Inflation moderated further. Our economist expects WPI inflation (Tuesday) fell further to 6.8%yoy in January from 7.5%yoy in December. The consensus forecast is for a 6.6%yoy print. This would be the lowest outturn since November 2009 and would support our view that RBI will start cutting rates from March. Our economist now expects 175bp of cuts from March to January 2013 vs 125bp expected previously.
MYR: GDP growth slowed. We expect Malaysia 4Q 2011 GDP growth (Wednesday) to have slowed to 4.9% from 5.8% in 3Q, in line with the consensus forecast. Domestic demand growth is likely to have remained robust while net exports growth likely slowed. With the MYR NEER having risen back to the highs in 2011, we think Bank Negara is likely to resist MYR outperformance more forcefully.
SGD: Upside surprise in exports and retail sales. Singapore retail sales on Wednesday and export data on Friday. Our economist forecasts retail sales rose 6.1%yoy in December, higher than the consensus forecast for 4.0%yoy. Non-oil exports likely rose 6.0%yoy in January, in our view, while the consensus forecast is for a 3.2%yoy fall. We expect Q4 GDP rose slightly to 4.2%yoy from the advance read of 3.6%yoy. With Singapore’s data resilient, we expect the Singapore central bank to keep the SGD on its current mild appreciation path.
What happened overnight
Risk assets rallied after the Greek parliament passed the overall austerity package. A total of 199 MPs voted in favour, with 74 against. The parliament will continue to vote on the individual pieces of the package. EURUSD surged 0.6% at the open to about 1.3260. The AUD is leading the rally in G10 after robust Australian home loans data. AUDUSD rose 1% from the NY trading low to about 1.075 currently. USDJPY initially spiked to 77.79 after Japan’s GDP fell a more than expected 0.6%qoq in Q4, but it has drifted lower to 77.6.
The SGD is leading an Asian currencies rally vs the USD. USDSGD is down 0.7% to 1.2527, with the SGD NEER still 0.5% below our estimate of the middle of the policy band. The PBoC fixed USDCNY 2pips higher to 6.2939 on the first day of Vice President Xi’s visit to the US. Asian equities are up 0.2-0.7%.
CNY: The FT reported that China’s policymakers have told its banks to roll over loans to local governments. This reduces the risk of a hard landing in China, with banks extending maturities for local governments to avoid a wave of defaults. Our equity bank analysts’ latest trip to China found the PBoC is not easing significantly and the government is still maintaining curbs on large infrastructure projects and bank loan-deposit ratios. This suggests that growth is likely to continue to moderate, but not head for a hard landing. Credit growth is still expected to be 13% – 14%, the government is also experimenting with some easing in property restrictions in towns in Anhui and Guangdong.
AUD: Robust home loans growth. The number of home loans rose a more than expected 2.3%mom in December, up from 1.8%mom in November. This is the highest rise in seven months. The value of loans rose 2%mom while the number of loans for investment lending rose 7.5%.
JPY: Growth contracted. GDP shrank an annualized 2.3% in 4Q after a revised 7% expansion in 3Q, according to the first preliminary estimates. Our economists expect to see growth of around 1.5% for 1Q 2012 given the improved outlook for the US economy and the rebound in domestic production after the Thai floods. Japan’s tertiary industry index was up 1.4% mom sa in December, compared to a 0.6% decline in November.
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