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Category: Forex Market

Emerging Markets Weekly from SEB

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Emerging Markets Weekly

Emerging Markets Weekly – EM trading starting the year quietly

US non-farm payrolls will cap the short, first week of the year. We have a slightly higher than consensus expectation for an addition of 190 thousand jobs, but the impact on EM FX should be small, with EM investors bracing for what Trump will do after taking office on Jan 20.

EMEA

■ The RUB looks set to be one of the most attractive targets in 2017 due to the possibility of reduced US-Russia tensions, an orthodox and hawkish CBR, and, until recently, a favorable outlook for oil prices. We still expect the price of Brent oil to average $55.0/bbl in 2017. Yet, near-term downside risks have risen markedly with US producers ramping up capacity at an increasingly rapid pace and speculators adding to their strongly net long WTI positioning (increasing the risk of a reversal). We expect the RUB to depreciate roughly by the rate of inflation in 2017, but the relative stability seen in 2H is unlikely to be repeated in2017.

■ The National Bank of Romania will not deliver any surprises when it announces its rate decision on Fri, keeping the monetary policy on hold at 1.75%. Nov CPI inflation remained firmly in negative territory, but the base effects from the VAT cut will fade, which together with strong domestic demand growth looks set to push inflation to around the 2.5% central target in 2017. A key risk for the RON in 2017 is further fiscal slippage, which would push EUR/RON (now 4.53) to above the 4.63 last seen in 2012.

■ The TRY is selling off partly because of a deadly terrorist attack on an Istanbul nightclub on New Year’s Eve. However, regrettably terrorism is now rampant in Turkey and is no longer a major driver of the TRY. Key for the TRY will be interest rates in the US and the EU. Ankara has attempted, in vain, to reduce the attention on the CBRT’s monetary policy by reducing the number of rate setting meetings to 8 times per year from 12. However, the reduction will instead leave the market guessing for clues about the CBRT’s intentions in between meetings with increased volatility as a result. The TRY has been the worst performer of all EM currencies that we track since Jan 2008, primarily as a result of the CBRT’s unwillingness, or inability to tighten monetary policy in a timely fashion. We expect the pattern to continue in 2017 and USD/TRY (now 3.54) to hit new highs before the CBRT is forced to tighten monetary policy sharply to restore confidence in the currency and bring down inflation expectations. The TRY is hanging by a thread and while a sudden sell-off is not our main scenario, the risk of USD/TRY jumping to 3.70 (potentially on stronger than expected US data) before the next CBRT meeting on Jan 24 is not small.


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LATIN AMERICA

■ The BRL appreciated by almost 18% against the USD last year, a performance that it will not repeat this year. The growth outlook is weak, monetary policy will be eased, and the REER is close to its long-term average, which point to the BRL weakening in nominal terms by up to 9% against the USD to 3.60 (now 3.27). The Dec Markit manufacturing PMI fell 1 point to 45.2, while the Nov industrial production (due Thu) will remain largely flat compared to Nov 2015 when it had dropped by more than 10%. The key support factors are still-high interest rates and progress on structural and microeconomic reforms.

■ This year, the MXN will not repeat its dismal 2016 performance against the USD, when it depreciated by nearly 17%. Nevertheless, it will be a challenging year for MXN bulls due to uncertainty over what actions US President-elect Donald Trump will take in relation to NAFTA, as well as immigration policy. Rising prices, especially the petrol price increase announced in Dec, will weigh on consumer and business confidence. Nevertheless, in real (trade-weighted, inflation-adjusted) terms, the MXN is very cheap, suggesting that much of the bad news has been priced in already.

ASIA

■ China kept the yearly $50,000 limit on individuals’ purchase of foreign exchange. The legitimate use of the quota, according to Chinese officials, is for foreign travel and education, not investment. In a sign of growing concerns about capital outflows, the State Administration of Foreign Exchange (SAFE) increased the paperwork required and tightened demands on banks to report suspicious transactions. Nevertheless, expect heavy activity in CNY when banks reopen on Tue and individuals start using their freshly-reset, yearly quotas. Key to watch will be the PBoC’s Dec international reserves on Jan 7. A fall below the psychological $3trn level will prompt additional verbal interventions, as well as tighter capital controls. An expansion of the number of currencies in the CFETS’s RMB index to 24 from 13 (including the KRW, ZAR, MXN, and TRY) is unlikely to have a significant impact on the value of the RMB. Nevertheless, it will help justify RMB movements against individual currencies, most importantly the USD, when the broad index remains stable.

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Forex Commentary from Morgan Stanley

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Forex Commentary Morgan Stanley

Morgan Stanley FX Morning  – Forex Commentary

Oil markets have been out of focus as prices have stayed in a US$43-48 range. This range has allowed broader markets to stabilise as they digest the potential for central banks to target steeper yield curves. For oil insights we are also watching China data, where crude imports are strong, up 13.5%Y over January to August. China’s state council recently said that it would use stronger fiscal policy, which could stabilise commodity prices. Intraday FX investors may become more sensitive to oil-related news in the coming week as OPEC meets in Algiers. Saudi Arabia and Iran have had a pre-meeting in the past two days but are reported to have not reached any agreement. This week’s surprise drop in US oil inventories and the generally weaker USD have supported prices for now but, as oil prices will likely be volatile, we prefer to play via being short the CADNOK cross,  highlighting economic data divergences.

CAD CPI watched: CAD is still more sensitive to oil prices than NOK, and this may be due to the potential for a central bank policy change in Canada. We will get more clues on its path for policy today, with both CPI and retail sales due this afternoon. Canada remains within an adjustment process after heavily investing in the oil market and seeing the oil price halve. The BoC’s Poloz’s speech this week gave little indication on the probability of another rate cut but the last monetary policy statement did suggest there could be downside risks to inflation, so we will watch that data point today. We still promote a short CADNOK trade which has been further supported yesterday by Norges Bank no longer looking to cut rates, in contrast with the BoC. The Exhibit below shows the diverging fiscal policies too, where Norway has been expanding spending over the past year, which has helped growth to stabilise. Both oil economies have seen housing booms but Norges Bank now seems less worried about the risks as growth in the non-oil sector has stabilised.

GBP: Data to guide BoE: GBP has become less sensitive tooil over recent weeks, suggesting that the main driver is economic data and the impact that may have on monetary policy and investment in the UK. Yesterday the BoE’s Forbes saying that further stimulus was not required supported GBP but the comment shouldn’t have surprised markets at all as she never voted for starting the gilt purchase programme at its August meeting. However, Forbes did suggest that she would not vote to stop the purchase programme now. Business investment into the UK will depend largely on the certainty over the new rules after Brexit. Divergences within the Conservative party are starting to arise over the timing of the triggering of Article 50 and potentially if it will be a hard or soft Brexit. Yesterday Foreign Secretary Boris Johnson was giving a speech saying that Article 50 would be triggered early next year and there would be a jumbo trade deal with curbs on immigration. PM May soon said that the decision would be hers when to trigger. This uncertainty should keep GBP as an underperformer.


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After the Fed, now watch US data: We have been suggesting that USD should decline another 4-5% from here, focusing particularly on high yield currencies. While for risky assets it doesn’t matter whether the Fed hikes in December or not, market focus will be on upcoming US data, which could determine how many hikes the market prices for 2017 and beyond. The US’s economic surprise index has turned sharply lower since the start of August, which could be reflective of the uncertain political environment in the coming months. Businesses are reporting less positive credit conditions as suggested by the US credit managers index, which in August fell to 52.0 from a high of 54.6 in April; this index follows ISM closely. We can use US inflation expectations as a gauge for the US economic outlook. Here, even as oil prices have risen in recent days, the Fed’s dovish rate path wasn’t enough to boost inflation expectations, with the 5y5y swap falling from 2% to 1.9% today.

ms-fx-morning-figure-1

 

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Nomura Global Markets Research – Trump tracking

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Nomura Global Markets Research

Nomura Global Markets Research: FX Insights – Trump traking: The “eye of the storm” moment?

Political uncertainty is always on the horizon, and one thing we’ve learned in 2016 thus far is politics has stumped the consensus on FX. November may have a few key events: the UK is likely to have its first “post-Brexit” budget, Italy will hold its constitutional referendum (possibly 6 November) and of course there is the US Presidential election (8 November). So we may reflect back on this post-Brexit summer period as the “eye of the storm”. That is the calm region at the centre of a storm, followed soon after by its most damaging winds and intense rainfall. Could Donald Trump provide that? His tax cuts could provide a boost for risk assets, but trade rhetoric could see MXN, CAD, CNY and US trade-dependent currencies significantly underperform. Mr Trump’s chances of victory are following a similar pattern to that of what was the “unlikely probability” of a Brexit. For US presidential elections, what can be telling tends to be the swing state polls where the tracker metrics show Mr Trump’s chances have improved considerably of late. Winning the Presidency without also winning Florida is very rare. Since 1960 this has happened only twice. Interestingly, the last time it happened was in 1992, when a Clinton was on the ticket. The probability of Mr Trump winning Florida stands at 49.6%; it’s tight.

The Trump-implied probability is rising

FiveThirtyEight’s 2016 US election forecasting model is likely to be one of the market’s first ports of call for interpreting the likelihood of a Trump presidency as we approach the 8 November election date. It keeps a rolling update on the polling, collected by RealClear Politics and other sources, then weights accordingly each poll by analysing the historical accuracy and methodology of each firm to produce a probability of a Trump win (see Figure 1). There are three main models that they quote, overall showing that Mr Trump’s chances cannot be “written off” yet.

Fig. 1: Just because the probability is low, doesn’t mean it can’t happen

Nomura-FX-Insights-Figure-1

As we have seen with political binary events before, as long as the probability of the “market negative” stays well away from the 50% level, the overall market pricing of the event will remain limited. However, the ebb and flow of price action could start to become sensitive to it, especially if the market believes the implied probability (after a political event for example) could be higher than polling suggests.


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Keep an eye out for the swing states or “tipping points”

It is clear that the Republicans are at an Electoral College disadvantage. This is why, when there is only a few percentage points’ difference between Donald Trump’s polling and Hilary Clinton’s, it still translates into a relatively small probability of a Trump victory. The election forecasting is a product of both national and state-wide polling. State polling on an individual basis is interesting but not necessarily telling for the national outcome in all cases, especially if polling is tight. What will be interesting is the state of polling in the “swing states” where it’s not clear which candidate should win.

Fig. 2: Donald Trump’s chance of winning is non-trivial

Nomura-FX-Insights-Figure-2

Fig. 3: Swing states to watch

Nomura-FX-Insights-Figure-3

We advise keeping an eye on the “tipping point states” that carry the highest Electoral College seats so also carry with them a possibility of tipping the election either way. FiveThirtyEight put the probability of Florida providing the decisive vote in the Electoral College at 17.1%; combine that with Ohio (11.3%), Pennsylvania (11.7%), Virginia (7%) and North Carolina (6.5%), and you have a probability in excess of 50% that one of these will be the state to “tip the election”. Winning the Presidency without also winning Florida is very rare. Since 1960 this has only happened twice. Interestingly, the last time it happened was when Bill Clinton was on the ticket in 1992. Mr Trump is currently predicted to lose Florida but, with FiveThirtyEight putting the probability of a win at 49.6%, it’s still to play for.

Fig. 4: Donald Trump has a chance in Florida and Ohio, which could “tip the election”

Nomura-FX-Insights-Figure-4

Even though it’s “unlikely”, when it comes to politics it’s prudent never to rule anything out

Polling is not a perfect science. Brexit was an example of that, with many other examples over the years. The argument in favour of political polling for the US election though is that there is a lot of historical data to work with (as this is a recurring event) and forecasters have learned from the errors of past. However, Donald Trump’s campaign has consistently surprised political forecasters, who did not expect him to win the Republican nomination in the first place. So could it be that, as with the Brexit polling, there is a factor that pollsters are missing?

Watch out for the possible Republican convention bounce

This week has seen the start of the Republican convention and Donald Trump formally nominated for president by the Republican Party. There is typically a “convention bounce” in the polls for the candidate in the weeks following that is worth taking note of. It doesn’t always happen. Mitt Romney’s experience in 2012 is an example of that, where forecasters were looking for a 4% bounce, but instead saw a 1% decline in support. Nonetheless, the broader historical evidence is convincing, so any pick-up in Trump support following the convention should be taken with a pinch of salt, unless it becomes a persistent level of higher Trump support.

Fig. 5: The post-convention bounce in voter preference

Nomura-FX-Insights-Figure-5

What a Trump presidency would mean for markets

A Trump presidency could lead to market uncertainty; we focus on the trade aspect

Donald Trump, with Mike Pence as his running mate, will be on the ticket come 8 November with a “non-trivial” chance of becoming the next President. There is no justification then for dismissing the potential impact of a Trump presidency on markets, especially when some of Mr Trump’s “positions” would have potential trade impacts.

The market reaction would not be across the board “risk-off”
It is not immediately clear what a Trump presidency would mean for risk markets. Mr Trump’s original tax plan had sizeable tax cuts (see here), although his team plans to release an updated tax plan soon, perhaps even this week at the convention, so this could be revised. Nonetheless, if it looks something like that of a typical republican tax cut plan, would it not be a fiscal stimulus to the benefit of US equity markets?

An argument against the “doom and gloom” view is that if Mr Trump were to win the Presidency, it is likely that in the process of doing so he may have “softened” some of his extreme stances. This may turn out to be true, but he has repeatedly pointed out his intention to declare China immediately a “currency manipulator”, to “build a wall” and reminded us that he is prepared to “rip up NAFTA”. Even if he were to achieve just one of those it would still have a profound impact on the respective markets.

Therefore, as we explained in Trading the Trump factor (6 June 2016), rather than trading broad risk assets in the event of a Trump win, we judge it is the US tradedependent currencies of MXN, CAD, CNY and Asia that would underperform.

In terms of events to come, we have the Democrats convention on 25-28 July, but then it should be relatively quiet before the TV debates start on 26 September which should signal the more intense campaigning period.

 

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Credit Suisse FX Strategist: Moment of truth?

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Credit Suisse FX Strategist

Credit Suisse FX Strategist research: Moment of truth?

Exactly what the Chinese government’s objective for the CNY exchange rate is remains uncertain, in our view. However, the pace and consistency of the CNY’s depreciation vs. its basket and on a real exchange rate basis lead us to think depreciation, not stability, is the objective.

CNY depreciation has been easy so far thanks to USD weakness. However, if US data drive a further broad USD recovery, China will have to choose between stability vs. the CNY basket or stability vs. the USD. We think China would focus on the basket and move USDCNY higher.

This leads us to think about two trading scenarios following US payrolls data today:

■ Strong payrolls, stronger USD scenario: We think long USDHKD 1y, long USDKRW, and short the SGD vs. its basket would be attractive plays on a USD rally that pushes USDCNY higher.

■ Weak payrolls, weaker USD scenario: Short the CNY vs. its basket would be attractive in this scenario, in our view.

We don’t like saying we don’t know, but the fact is that we are still uncertain what the Chinese government’s objective for its currency really is.  However, if the USD rally continues, China will be forced to reveal its hand.

The People’s Bank of China’s (PBoC) recent management of the CNY leads us to believe its objective is depreciation of the CNY on a basket basis, particularly in real exchange rate terms.  The CNY has fallen more vs. its basket than we have expected, leaving USDCNY higher than our three month forecast of 6.43. We think this tends to reinforce our outlook for USDCNY to rise to 6.65 in 12m given our forecasts for the USD to recover against most currencies in the second half of this year.

In the near term, if US payrolls data lead this broad USD rally to emerge sooner than we expect, stress around the CNY will probably rise over the next month or so. In contrast, if US data resume USD weakness, it would allow for a more benign scenario of continued drift in USDCNY and CNY depreciation vs. its basket.

Looking across the various measures of the CNY exchange rate, our bias is to think that China is depreciating its currency, not keeping it stable. Figure 1 shows that the CNY clearly has been trending lower vs. the CFETS basket. The CNY has fallen 4.3% YTD vs. the CFETS basket, an annualized rate of depreciation of 12%. It has fallen through the 98 and 97 levels that many in the market expected to be the floor for the index if the policy objective is trend stability for the nominal trade-weighted rate.

Additionally, the extent of this nominal depreciation leads us to estimate that the CNY has fallen to its lowest level since last December on a real exchange rate basis even after accounting for the recent modest rise in Chinese CPI inflation (Figure 2).

Credit-Suisse-FX-Strategist-06-May-2016-figure1-2

However, three factors create uncertainty:

1. For all of the talk of a new FX regime, USDCNY is essentially flat year-to-date.

2. Volatility of the USDCNY fix has tended to be lower than volatility of the CFETS basket until very recently (Figures 3 and 4). However, if the government were managing on a basket basis with an objective being stability in the trend in the basket, vol of the basket should be lower than vol of spot. To be sure, in Singapore, 3m spot vol is about 7.8% whereas SGD basket vol is only 3.2%. Admittedly, CNY spot vol has risen, so maybe things are changing. Perhaps the recent rise in fix vol and fall in basket vol indicates that the government has transitioned to targeting the basket, not the fix.  But the vol differences are still low enough and new enough to lead us to be uncertain.

Credit-Suisse-FX-Strategist-06-May-2016-figure3-4

3. China’s government seems keen to avoid large capital outflows driven by concern about CNY depreciation. We think this requires a stable or stronger CNY vs. the USD, not stability in the CNY vs. its basket.  Figure 5 shows that our estimate of corporate hoarding of foreign exchange, i.e. the difference between actual net FX settlement as reported by SAFE and the reported trade balance, tends to rise sharply when USDCNY rises, but moderate or reverse when USDCNY is stable or lower. We estimate these flows accounted for about 40% of outflows last year.

Credit-Suisse-FX-Strategist-06-May-2016-figure5

Summing up, we see two main scenarios following payrolls.

USD rally: If the US data drive a USD rally China will have to choose between spot stability at a cost of CNY reversal stronger vs. its basket or sustaining the CNY’s depreciation vs. its basket at a cost of a rise in USDCNY. The risk here is of a resumption of a USD appreciation trend back to its 2015 highs, not just a small or temporary bounce.

Perhaps the PBoC has been depreciating the CNY vs. its basket during the recent period of broad USD weakness specifically to create room for the CNY to reappreciate vs. the basket in the event of a USD recovery. This would allow it to keep USDCNY stable, at least in the early stages of any broad USD rally.

However, we tend to doubt this explanation.  One reason is that it would invalidate the whole concept of managing the CNY vs. a basket that the government has been advocating. Another is that if the USD TWI exceeded its past highs, China would have to accept CNY appreciation to new highs.

In contrast, we think the most likely scenario would be that the PBoC would push USDCNY higher in order to try to prevent the CNY from appreciating vs. its basket. In this scenario, we estimate roughly that if the DXY were to return to its November 2015 high, USDCNY would need to rise to about 6.86 to prevent appreciation on a basket basis. That’s for CNY stability vs. its basket. If the objective is further depreciation vs. the basket or on an REER basis, USDCNY would have to rise more sharply.

USD weaker: Goldilocks continues. A stable or weaker USD-G10 would likely lead China to keep USDCNY stable or slightly lower in order to continue trend depreciation vs. its basket.

How to trade this?

USD rally scenario:

A USD rally scenario would be most disruptive for markets, in our view. Yet market pricing of risk has CNY risk moderating slightly. Implied volatility has crept lower while implied to delivered ratios have been roughly stable and the 6m/1y vol curve has steepened. Vol adjusted risk reversals have also been stable as vol levels have fallen.

We think the best ways to position for CNY stress generated by a stronger USD are in proxies for the CNY, not the CNY or CNH itself. Specifically, we prefer:

■ Long USDHKD 1y forward points. We expect the peg to hold, but if USDCNY rises significantly we believe the HKD forward points are likely to rise back to 400 – 500 as they did in January and February vs. the current roughly 83.

■ Long USDKRW. The KRW retains Asia’s highest beta both to risk appetite falls and stress in China. Additionally, seasonal factors tend to be particularly negative for KRW in May.

■ Short SGD vs. its basket.  We expect slowing growth and moderating inflation in Singapore should push the SGD 1.5 – 2.0% lower against its basket over the next couple of quarters even without CNY stress. A resumption of an uptrend in USDCNY would likely accelerate this move in the SGD, in our view.

USD weakness scenario:

In contrast, we believe the best way to trade the implications for the CNY of a resumption of broad USD weakness is by going short the CNY vs. its basket. We would expect the PBoC to continue pursuing CNY depreciation vs. the basket at roughly the recent pace if it can achieve this with a stable or slightly lower USDCNY. Crucially, the more that the CNY depreciates vs. its basket the more it will risk creating competitive stress for other EM currencies, in our view. Remember that China’s exports have retained or gained market share in all of its major markets bar Japan over the past year even with the CNY REER at a historical high.

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BNP Paribas research – FX Daily Strategist Feb 12

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BNP Paribas Research

 

Significant change to Fed forecasts to impact USD direction

Financial  markets  remain  in  the  grip  of  severe  risk  aversion  and  against  this  backdrop  current  account  surplus-backed currencies continue to extend gains while receding Fed expectations undercut the USD generally.  The US money market curve is flirting with pricing risk of policy easing, a possibility the Fed Chair did no t dismiss outright in her Senate testimony even if she continued to emphasize it is not her expectation. In response to the tightening of financial conditions we have observed over  the past month, our economists have made significant changes to their Fed forecasts and now no longer expect the Fed to hike rates in 2016 or 2017  (see  here).  Essentially, we expect the fragile risk environment to preclude tightening in H1 and slowing activity to argue against further rate hikes thereafter. The shift in Fed expectations cle arly has big implications for the dollar  outlook  and  we  are  currently  reviewing  our  USD  forecasts  accordingly.  For  now,  the  funding  currencies  are  likely  to remain well supported and the USD on the defensive, though markets will remain wary of action and com ments from other G10 officials, particularly in Japan where verbal warnings are possible as officials return from Thursday’s holiday.

Soft Q4 GDP growth in Europe adds to pressure on ECB

We expect the first estimate of eurozone GDP to show growth of 0.2% q/q in Q4, with the corresponding number for Italy also at 0.2% q/q and Germany a little weaker at 0.1% q/q. With ECB already in full QE mode, eurozone data has typically had little market  impact  lately,  but  given  concerns  over  a  major  global  growth  slowdown,  markets  should  me  more  sensitive  to  this release.  Current  market  conditions  in  the  asset  markets  imply  that  the  EUR  should  continue  drawing  support  from  its  large current  account  surplus.  However,  we  continue  to  see  limits  to  EURUSD  appreciation.  Should  EURUSD  rally  through  1.15, levels last seen before the dovish ECB shift in October, ECB will be more likely to respond quite aggressively to the undesir able tightening in financial conditions at its March policy meeting.

Commodity currencies could follow USD lower

The CAD and AUD have held up better than might be expected this week, holding stable against a broadly weaker USD despite continued weakness in crude prices. We see scope for these currencies to  depreciate  in the weeks ahead, even vs. the USD. Both  are  current  account  deficit  economies  reliant  on  financial  inflows  and  both  are  exposed  to  continued  weakness  in commodity  prices.  While  the  broad  USD  retreat  may  have  reduced  the  risks  of  further  CNY  devaluation  for  now,  the  AUD remains exposed to negative news from China and further pressure on industrial metals prices. There is also scope for markets to increase pricing for RBA and  BoC  easing.  RBA Governor Stevens’  testimony to parliament yielded few surprises,  where he maintained an easing bias but also continued to sound relatively optimistic about the domestic outlook.

 

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Goldman Sachs – China: FX reserves fell US$99bn in January to US$3.23tn

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Goldman Sachs ResearchBottom line:

The PBOC’s FX reserves decreased US$99bn to US$3.23tn in January (Bloomberg
consensus: -$118bn; December: -$108bn). After adjusting for estimated currency
valuation effects, the fall in reserves may have been about US$89bn (vs. estimated -$130bn in December).
As has been the case in the last few months, additional SAFE and PBOC data, likely
to be released in the next two weeks, should give useful supplemental information
regarding the underlying flow situation.

Main points:
The People’s Bank of China (PBOC) reported that its foreign exchange reserves fell
by US$99bn in January (vs. a US$108bn decrease in December), to US$3.23tn at the
end of the month. We estimate that currency valuation effects could amount to
around -US$10bn (assuming the currency composition of China’s FX reserves is
similar to that of the global average), and therefore sales of FX reserves might have
been about US$89bn in January (vs. estimated $130bn in December). The continued
rapid loss in FX reserves suggests that FX outflow remained at a rapid pace.
As we have discussed previously, however, headline FX reserve data do not
necessarily give a comprehensive picture on the underlying trend of FX-RMB
conversion by corporates and households. This is not related to any accuracy issues
of reserve data, but is due to the fact that valuation effects are uncertain and that
other non-PBOC financial institutions may also use their (spot) balance sheet to
absorb underlying flow pressures. Correspondingly, the PBOC or related entities
may have accumulated forward positions that do not affect reserves immediately.
In our view, a preferred gauge of the FX-RMB conversion trend amongst onshore
non-banks would be based on SAFE data on banks’ FX settlements on behalf of their
onshore clients. That report captures banks’ FX transactions vis-à-vis non-banks
through both spot and forward transactions, and will be out on February 23. Data on
the positions of FX purchases by the banking system should also shed useful additional light, and are likely to be released around middle of the month (we
discussed the coverage and definitions of various official FX data sets in Asia
Economics Analyst: Sizes and Sources of China’s Capital Outflows, January 26,
2016).

Deutsche Bank – Early Morning Reid – August 28

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Deutsche Bank Research

Barclays FX Thoughts for the Week Ahead – From one anxiety to another

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FX Thoughts for the Week Ahead

From one anxiety to another

Growing concern about Chinese economic activity has left FX markets little time to consolidate following the recent conditional agreement between Greece and its creditors. Much like the well-known “whack-a-mole” game, one source of volatility and anxiety has been quickly replaced with another. Following the sharp decline in Chinese equities in June and early July, indicators of Chinese activity have begun to deteriorate with last week’s July manufacturing PMI falling to a 15-month low, deep into contractionary territory and disappointing market expectations by a large margin (China: July ‘flash’ PMI plunges unexpectedly, 24 July 2015). Commodity prices and related currencies such as AUD, NZD, CAD and NOK have fallen significantly over the past month. We continue to expect further commodity currency weakness amid a relatively unsupportive risk environment and our greatest conviction lies in additional AUD downside from still-overvalued levels (~10%). In contrast to the RBNZ, which cut its policy rate by 25bp last week to 3.00%, the RBA appears unwilling to deliver necessary monetary stimulus given financial stability concerns related to rapidly rising Sydney house prices. As such, the currency will likely have to do the work and we continue to recommend being short AUDUSD targeting 0.7000. (See Macro Daily Focus: Commodity currency contagion, 15 July 2015).

USD strength has been another important theme for FX markets over the past month and should be underscored this week by the FOMC rate decision and Q2 GDP data. Although not committing firmly to a September rate hike (our call, versus market pricing of January 2016), given recent market volatility related to Greece and China, Wednesday’s FOMC statement should reflect the recent US economic data strength. Indeed, data released on Thursday should reveal above-consensus US Q2 GDP growth of 3.0% q/q saar, driven primarily by strong consumption growth and a boom in residential investment. Overall, we think the USD should appreciate in both “risk-on” and “risk-off” states of the world. In “risk-on” states, superior US economic fundamentals are likely to support higher returns to capital and currency appreciation. In “risk-off” states, the USD is likely to be supported by its highly attractive safe-haven attributes including low volatility in asset returns (see Three Questions: Top dollar, 4 June 2015).

FX option markets suggest USD long positions have become surprisingly cheap. Indeed, 3-month 25-delta risk-reversals across liquid G10 currencies, excluding the JPY, suggest USD calls are now close to their deepest discount versus puts, based on data since 2010 (Figure 1). As such, we think this is a particularly opportune time for investors to express a long USD view via options given our expectations of US data/events this week and broader bullish USD view. While we expect continued commodity currency weakness against the USD, our forecast for extremely low euro area inflation (Friday) and sub-consensus UK Q2 GDP (Tuesday) should also provide a catalyst for further EUR and GBP weakness versus the USD.

Several EM central banks are scheduled to meet this week. In EMEA, BoI is widely expected to leave policy settings unchanged on Monday while we and consensus expect the CBR to slow the pace of easing and lower its policy rate by 50bp to 11% on Friday. In LatAm, we and consensus expect the BCB to hike the Selic rate 50bp on Wednesday. Banxico is likely to leave rates unchanged on Thursday amid all-time low inflation.

Figure 1: G10 3-month 25-delta risk reversals

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Note: Data since Jan 2010. Dashes show max and min, boxes cover 10th to 90th percentile.
Source: CFTC, Bloomberg, Barclays Research

 

Trade for the week ahead: Buy the EURUSD 3m 25d risk reversal (buy the put, sell the call)

As discussed above, USD calls have become extremely cheap and we recommend expressing our bearish EURUSD view by buying the 3-month 25-delta risk reversal (buying the put with a strike of 1.0584, selling the call with a strike of 1.1389, spot reference: 1.0964) for 11bp. Our technical strategist is also bearish EURUSD and looks for selling interest near 1.1050 to cap near-term upticks. A move below support in the 1.0810 area would confirm a top under the 1.1470 range highs and signal further downside traction. His initial targets are towards 1.0675 and then the 1.0460 year-to-date lows. His greater downside targets are in the 1.0200 area (Figure 2).

Figure 2: EURUSD from a technical perspective

Barclays_image002

 

 

 

 

 

 

 

 

 

 

 

Source: CQG, Barclays Research.

 

What to look for this week

USD: A more optimistic outlook

The FOMC rate decision (Wednesday), first Q2 estimate of GDP (Thursday) and Employment Cost Index (Friday) are the main events for the week ahead. The FOMC statement should not present material changes, but risks are tilted towards a more optimistic rhetoric as recent economic data have improved and near-term risks regarding Greece have receded. The Employment Cost Index should shed some light regarding wage pressure (Barclays and consensus: 0.6% q/q, 2.4% y/y), as it is one of the measures that better correlates with core inflation. On top of this, we expect the first estimate of the Q2 GDP to confirm that Q1 weakness was influenced by transitory factors. We anticipate an above consensus 3.0% q/q growth (consensus: 2.5%) with consumer spending advancing at a 2.7% rate. This suggests that the USD will likely continue with its upward trajectory, having an additional support from soft commodity prices and a slowing China.

EUR: Extremely low inflation to drive further currency weakness

Euro area flash July HICP inflation (Friday) should confirm extremely low inflation and support the ECB’s continued commitment to its Public Sector Purchase Programme (PSPP). We forecast HICP and core inflation to have eased 0.1pp to +0.1% (consensus: 0.2%) and +0.7% (consensus: 0.8%), respectively. Indeed, we think that the ECB will continue its monthly asset purchases at the same pace until September 2016, and probably even longer as we believe the increase in inflation will likely be slower than the ECB currently projects. Moreover, we believe that the chance that additional measures will be announced by the end of this year is non-negligible and will depend on financial market developments, especially in conjunction with upcoming discussions about the third Greek bailout (see ECB committed to fully implementing QE, 16 July 2015). As such, we continue to expect substantial EURUSD depreciation over the coming year as ECB monetary policy diverges materially from that of the Fed’s and a large degree of economic slack weighs on euro area returns to capital (see FX Themes: A weaker EUR, at the core of our views, 25 June 2015).

GBP: Q2 GDP in focus  

In an otherwise quiet week for UK data and events, focus will centre on UK Q2 GDP (Tuesday); we forecast 0.6% q/q growth, slightly below the consensus forecast of 0.7%. Wednesday’s lending report may also gain some attention. We expect mortgage approvals to edge up slightly in June to 66.5k (consensus 66.0) and mortgage lending to increase to GBP2.2bn (consensus: GBP2.0bn) in line with BBA data released on Friday. Meanwhile, we and consensus expect consumer credit to increase GBP1.1bn.

GBP FX and rates have been volatile over the past month, driven in part by the media’s more hawkish reporting of recent BoE communication (for example, Carney’s comments at the BoE Inflation Report Treasury Select Committee hearing) and disappointing economic data (for example June retail sales). Overall, we remain comfortable with our view of modest GBP outperformance versus the EUR but material depreciation against the USD. The BoE MPC vote for rate rises remains 9-0 against. While some members (Martin Weale, for example) are moving closer to a voting for tighter policy, inflation remains nonexistent and will likely only reach 0.3% y/y by year-end. As such, it will likely take until Q1 next year before the majority of the committee agree to hike the Bank Rate. Furthermore, tight fiscal policy and downside risks to business investment and confidence related to the EU referendum mean that the likely pace of policy tightening will be extremely moderate once it begins.

JPY: Eyes on Japanese data and politics, but focus remains on the Fed

USDJPY remained range-bound around 124 last week after rebounding sharply from 120 on receding Greek concerns. Recent price action has been consistent with our view that USDJPY should oscillate around 123 with risks on both sides. Upside risks include a bringing forward of Fed hike expectations and downside risks include a deterioration of risk sentiment (see Global FX Quarterly: In the dollar we trust). Having said that, Japan factors have become less supportive of the yen recently, including slowing economic activity, decelerating core CPI, and a sharp drop in approval ratings of the Abe administration.

Economic data have disappointed lately, suggesting that Q2 GDP will contract and y/y core CPI will likely to turn negative again over the summer/fall. In this light, the June Household survey (Friday), June Industrial Production (Thursday), and June Core CPI (Friday) will demand some attention this week. We expect June real household spending to increase +2.8% y/y (consensus: +1.9%), the second consecutive month of positive y/y growth. We forecast June Industrial Production to increase +0.1% m/m (consensus: +0.3%), but translates to a 1.8% contraction in Q2 as a whole. On inflation, we look for June core CPI to stay at +0.1% y/y (consensus: 0.0%) from +0.1% in May. Furthermore, major polls show that approval rating for Abe administration plummeted to sub-40%, the lowest rating since Abe’s inception in December 2012, likely over the controversial security bills. A combination of worsening economic activity, decelerating core inflation on the back of falling oil prices, and a deteriorating cabinet approval rating suggest that there may be less incentive for political jawboning against yen weakness than there was a month ago. All in all, Japanese data and political development will continue to demand close monitoring while Fed hike expectations likely remain the main driver of USDJPY in the weeks ahead especially given important US events, including FOMC, GDP, core PCE deflator, and nonfarm payrolls.

CAD: On the brink of recession

Despite the better-than-expected retail sales print in May (1.0% m/m vs. consensus 0.6%), we believe that the ongoing decline in the price of oil and other commodities and the weakness in investment will continue to weigh on the performance of the Canadian economy and hurt the loonie. After the recent cut in the BoC’s reference rate, the market will be following economic data to assess the possibility and timing of further easing. In that respect, the release of May’s monthly GDP next week will be the focus of the market (consensus 0.0% m/m) and will allow for a better assessment of the current state of the economy. A disappointing GDP reading would most likely bring Canada into technical recession (after a first-quarter GDP decline of 0.6%), putting pressure on BoC to commit to further easing. On the other hand, a GDP reading closer to BoC’s projections would give the central bank some room to wait. Particular attention will be paid to non-resource exports and consumer spending, which the BoC hopes will help cushion the negative effects associated with the decline of Canada’s terms of trade.

SEK: Activity data to test recent SEK weakness

Activity and confidence data releases in the coming week are expected to steer the path for the SEK, likely confirming a positive economic outlook. Solid retail sales (Tuesday) and the preliminary release of Q2 GDP (Thursday) should help unwind some of the recent currency weakness following the surprise Riksbank cut, which has driven EURSEK close to the top end of its recent multi-month range, contrary to our expectations. Moreover, the release of the Economic Tendency Report (Wednesday) will provide further insights into the country’s economic outlook and we expect the ETS Index to resume its uptrend. In line with the market (2.6% y/y) and the Riksbank’s (2.8% y/y) expectations, we expect a solid rebound in Q2 economic activity (Figure 3) despite the recent weaker-than-expected data reflected in our DSI (Figure 4). We think the trend of weaker data is likely to only prove temporary. Further ahead, we continue to expect a modest pick-up in inflation and further improvements in the Swedish labour market, likely allowing the Riksbank to tolerate moderate currency strength. We remain short EURSEK on the basis of the superior growth prospects in Sweden, a very undervalued SEK and our expectations that the Riksbank is close to the bottom of its easing cycle and see the recent uptick in EURSEK as an opportunity to re-engage in short positions (see SEK: Inflection point, 12 June 2015).

Figure 3: Growth expected to remain solid Figure 4: Recent data weakness likely to be temporary
Barclays_image003 Barclays_image004
Source: Riksbank, Haver Analytics, Barclays Research Source: Bloomberg, Barclays Research

NJA and AUD: USD-Asia crosses moving higher across the board

USD-Asia crosses have pushed higher over the past two weeks after Fed Chairman Yellen signaled that the FOMC is likely to raise rates later this year. USDKRW, USDSGD and USDTHB have led the move higher in region, and now the previously lagging currency pairs like USDTWD, USDIDR and USDMYR have started to move out of their consolidation ranges of the past one month. We expect the strong USD trend to persist, especially with the lack of a convincing turn in economic activity in Asia. Korea’s Q2 GDP print surprised to the downside last week, and this week’s July exports print for Korea (Saturday 1 August) is likely to worsen to -7.5%y/y from -1.8% previously, adding to negative sentiments to the KRW. Korea’s June IP (Friday) is also likely to remain in contraction on a y/y basis (Barclays: -0.5%; last: -2.8%). In Taiwan, we expect Q2 GDP (Friday) to slow to 3.0%y/y from 3.4% in Q1, given weak exports and IP of late. Thailand’s manufacturing output and exports for June (Monday) are likely to show negative prints (y/y basis), weighed by poor demand from China. We expect China’s Official PMI for July (Saturday) to edge up to 50.4 from 50.2 with some signs of improved trade momentum, but the unexpected drop in the Markit ‘flash’ PMI raises the risk of disappointment which would add further pressures on commodity currencies like the AUD. That said, technicals show currency pairs like USDKRW and USDTHB are currently in short-term overbought territory, and thus a temporary pullback may be possible even if macro data continues to disappoint. However, we think that the USD would stay strong over the course of H2.

LatAm: No reasons for Banxico to have a hawkish bias; BCB to deliver 50bp hike

Mexican inflation at new all-time lows should weigh on Banxico’s decision next week. Despite recent weakness in EM currencies, we find little evidence of a broad FX pass-through and think that Banxico has enough arguments to soften its language. Economic growth below potential and a subdued optimism around reforms coupled with well-anchored inflation expectations will likely keep Banxico in check in the next few months. Any decision to hike in the months ahead will be strictly dependent on the Fed’s action and MXN developments. In addition, we believe that Brazil’s developments and China’s growth concerns will continue exerting some pressure in the MXN. We remain confident that USDMXN will continue its upward trend towards out forecast of 16.50, but we acknowledge the risks of a pullback in the short-term given how stretched the positioning is. 15.90-16.00 should serve as a good entry point to re-establish/add long USDMXN positions.

In Brazil, despite very weak economic data in the past few weeks, we believe the BCB will hike the Selic rate by 50bo in its next meeting (in line with consensus). After last week’s adjustment in the primary surplus and recent inflation developments, we think that Copom models will continue showing that more tightening will be necessary in order to move inflation to the midpoint of the target in 2016 and to strengthen the process of anchoring inflation expectations. While this keeps monetary conditions tight, fiscal imbalances continue to deteriorate in an environment of a very weak economy and subdued global economic growth. This should weigh on Brazilian assets risk premia, exerting additional pressure to the BRL as a credit rating cut looks more likely.

EMEA:  CBR, BoI and CBT to decide policy

In Russia, we and consensus expect the Bank of Russia (CBR) to slow the pace of easing and lower its policy rate by 50bp to 11% on Friday MPC meeting. At the most recent meeting, the CBR signaled that it will slow the rate of cuts in upcoming meetings and did not rule out possibly remaining on hold depending on the data. We think the CBR has reasons to continue cutting. While inflation remains high it is likely to experience a marked decline towards 7.5% by mid-2016. Meanwhile, the growth trajectory remains depressing as June real sector data confirm the recession. In addition, the recent decline in oil may give some incentive for RUB weakness to partially offset the unfavourable impact on fiscal balance.

In Israel, Bank of Israel (BoI) is widely expected to remain on hold at 0.10% next week. Inflation has started to increase, and the BoI forecasts that it will move up to the centre of the target by mid-2016. However, ILS appreciation remains unwelcome given the underperformance in exports, and recently caused the BoI to considerably increase its FX intervention. We reiterate our long USDILS recommendation ahead of the rates meeting.

In Turkey, CBT will publish its July quarterly inflation report next week. It will be important to see whether CBT will have any revisions in inflation forecasts on the back of recent TRY weakness; and provide any insights on potential simplification of monetary policy in the coming months, which seem to be expected by the local market participants.

Barclays FX Thoughts for the Week Ahead

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FX Thoughts for the Week Ahead

Still data dependent

Last week’s cautious FOMC communication tested our stronger USD view, with larger-than-expected downward revisions to FOMC participant policy rate forecasts and Chair Yellen’s guarded responses during the press conference. Yet we still expect ongoing improvement in the data to allow the Fed to begin tightening in September, well before the market expectations, which have now shifted towards a December hike (Figure 1). Chair Yellen reiterated the data-dependent nature of the liftoff decision and that the Fed is looking for “decisive evidence” on the sustainability of moderate growth, wage increases, and rising inflation. As such, US economic data should continue to be a key driver of the financial markets this week. In particular, personal consumption and core PCE prices are likely most relevant, while other monthly data, including durable goods orders, new home sales, and Michigan consumer sentiment, will also be watched.

Overall, although we think the USD will continue to be supported in the medium-long term, as it is the currency of the country most capable of generating inflation and closest to beginning to normalise monetary policy, we think next week it will stay range-bound due to a lack of important economic releases. The USD should increasingly benefit from superior returns to capital in the medium term, driven partly by a rapidly closing output gap, and safe-haven demand, given the low variance of asset returns. In this sense, Fed rate hikes are simply a validation of the US’s superior returns to capital, which should ultimately drive currency appreciation (see Three Questions: Top Dollar).

Elsewhere, Greek political uncertainty remains the key risk for the markets. As the 18 June Eurogroup meeting ended without any significant progress, euro area heads of states have scheduled an emergency summit for 22 June in what could be a last-ditch attempt to strike a deal to avert a financial crisis for Greece. With the end-of-June IMF deadline fast approaching, if there is no progress next week, an immediate negative market reaction consistent with a crisis scenario would be likely (see Euro Themes: Greece: Capital controls imminent without breakthrough). As such, the EUR likely remains vulnerable to Greece-related headline risks in the week ahead.

Economic activity data are another focus for the euro area. While the recent improvements in the activity and inflation data are encouraging, we remain wary of downside risk. Indeed, the economic recovery seems to have been unfolding slightly slower than we expected, especially in Germany. The upcoming June euro area manufacturing and services PMI will shed more light in this front. However, we continue to believe that the relatively large negative output gap in the euro area, which we expect to remain in the coming years, along with the ECB’s commitment to the QE program, should suppress the returns to capital in the euro area, weighing on the EUR.

Figure 1: Fed and market expectations for rate hikes have been pared back

Barclays_image006

Source: Bloomberg, Federal Reserve, Barclays Research

Trades for the week ahead: Long USDCAD and short EURJPY as risk aversion extends

Recent price action signals a more cautious approach to risk exposure in FX. High beta currencies such as the CAD have had sellers emerge to stem recent gains. A bullish daily candle formation in USDCAD points to buying interest in the 1.2125 area and room for a move higher in range. Our initial targets are towards 1.2360 and then the May highs near 1.2565. Safe haven currencies such as the JPY have had investor buying.  A short-term topping pattern in EURJPY signals selling interest near the 140.05 range highs and scope for downside towards targets near 137.00 in the near term.

Figure 2: Technical analysis suggests USDCAD has bottomed and EURJPY has topped

Barclays_image007

 

What to look for next week

USD: stuck in a range

We expect the USD to to trade sideways with a weakening bias in the short term, as the Fed seems to remain very dovish and inflation is still not showing any sign of picking up, according to last week’s release. With only tier 2 data in the US next week, we do not expect any major moves in the dollar and look for further positioning reductions. On the data front, on Tuesday, we get durable goods orders for May; we expect a monthly drop in the headline figure of 2.5% (consensus: -0.5%) and an increase of 0.7% in the core, compared with the 0.6% consensus (ex-transport). Later in the week is the final reading of Q1 GDP, which is expected to be revised up from -0.7% to -0.2%. Finally, on Thursday, the PCE index is scheduled to be published, along with personal income and spending data. Regarding the PCE, we are slightly below consensus, expecting a 0.3% increase m/m (consensus: 0.4%), while for the core series, we and the consensus expect +0.1%. For spending and income data, we forecast +0.8% and 0.4% respectively.

 EUR: EA heads of state summit and PMIs the focus

As discussed above, the EUR will remain vulnerable to news regarding Greece’s ongoing negotiations with its creditors. In the wake of no progress made at last Thursday’s Eurogroup meeting, euro area heads of state will meet on Monday (from 6pm London time) in what could be a last-ditch attempt to strike a deal to avert a financial crisis for Greece. While differences remain at the technical level and the end-of-June IMF deadline is approaching, euro area leaders will likely try to strike a deal with Prime Minister Tsipras, at a minimum regarding a programme extension. Failure to do so would allow the ECB to start increasing haircuts on ELA collateral as soon as next week and likely result in an immediate negative market reaction and a worsening crisis scenario. Depending on the outcome of the euro area summit, there is also the potential for discussion to continue into Thursday’s scheduled EU summit.

In terms of data (full details below), we look for euro area flash composite PMIs to edge down in June to 53.4 (consensus: 53.5), due to lower services confidence (Barclays: 53.4; consensus: 53.6), while manufacturing PMI should inch up to 52.4 (consensus: 52.2). Wednesday’s German IFO business climate index is likely to moderate slightly in June to 108.0 from 108.5 (consensus: 108.1) but remain well above recent lows of 103.6 in October last year.

Figure 3: European data calendar

Barclays_image008

Source: Bloomberg, Barclays Research

JPY: Back to data watching after rounds of political rhetoric

After rounds of comments on FX markets by BoJ Governor Kuroda in the past two weeks, USDJPY is stabilizing in the 122-to-124 range. Looking ahead to this week, the market focus will likely return to economic data. First, on the inflation front, we expect May National core CPI (Friday) to decelerate to a flat reading, or 0.0% y/y (consensus: 0.0%) from +0.3% in April. We also expect May Services PPI (Wednesday) to decelerate to +0.4% y/y (consensus: +0.4%) from +0.7% in April. Secondly, hard data will shed some light on the latest growth picture. We expect the May household survey (Friday) to show that real spending increased 2.8% y/y (consensus: +3.6%), turning positive for the first time in 14 months.

SEK: Two Riksbank meetings of the executive board in focus – no surprises expected

The executive board of the Riksbank will be holding two meetings next week (Monday and Friday) and are likely to gain market attention. Despite recent Riksbank rhetoric about the possibility of further easing, we see increasingly less evidence for the basis on which this could be justified. As a result, we do not expect any kind of policy action during next week’s meetings.  As we recently highlighted, Swedish economic data have picked up recently, helping to alleviate pressure for additional easing by the Riksbank and supporting SEK appreciation. Inflation is recovering modestly and medium-term inflation expectations have stabilized and also pointing higher. On the basis of positive economic fundamentals, the SEK’s undervaluation and the Riksbank’s increased emphasis on financial stability considerations, we recommend being short EURSEK (see FX Focus: SEK: Inflection point, 12 June 2015).

NJA: Central banks on hold amid poor manufacturing growth

Attention in Asia will focus on central bank meetings and manufacturing/industrial production data. On Thursday, the BSP in the Philippines and CBC in Taiwan are scheduled to deliver decisions that will likely leave policy rates on hold. However, we expect the BSP to maintain a hawkish tilt, albeit slightly toned down due to softer inflation, while the CBC is set to maintain a broadly cautious tone. Although China’s flash June HSBC manufacturing PMI is likely to rebound slightly (Barclays 49.6, consensus: 49.4 from 49.2 in May), hard data in Taiwan (Wednesday), Singapore (Friday) and Thailand (Friday) should paint a picture of soft manufacturing activity. Taiwan IP is set to rise only 1.0% y/y in May (consensus: 1.2%), Singapore IP is set to drop -2% y/y, (consensus: -3.5%) while Thai manufacturing production is likely to drop a sharp -5.6% y/y over the same month. We expect weak export demand to be revealed in a further contraction in Thai May exports (Thursday), highlighting the ongoing China-related pressure on manufacturing and exports in the region. While on the face of it weak exports should focus attention on weaker currencies, Asian currencies are benefiting from a softer USD tone of late.

EEMEA: Central banks in the spotlight

In EEMEA, there are four rate decisions next week. In Israel (Monday), we expect the BoI to keep the policy rate unchanged at 0.1%. It has recently signaled that it has no appetite for negative interest rates, but given its discontent with a stronger ILS, we expect it to continue FX purchases. The stronger ILS remains a concern within the context of weak export performance, and with the central bank leaning for a weaker ILS, USDILS should eventually move higher with the resumption of USD strength.

In Turkey (Tuesday), we expect the Central Bank of Turkey (CBT) to keep all policy rates unchanged. Inflation is running above the target, and the TRY weakened further with the contribution of political uncertainty after the elections. On the other hand, inflation has likely peaked, and the TRY should get some relief if a coalition government is formed, which seems a likely scenario at the moment. Overall, we think the CBT will keep its cautious monetary policy rhetoric and continue to highlight focus on inflation.

In Hungary (Tuesday), we expect one final cut of 15bp from NBH, bringing down the policy rate 1.5%. While there have been limited indications that NBH might be ready to stop, our economists think there are good reasons for NBH to call a halt to cuts. Inflation has risen sharply in the past months to 0.5% y/y from a low of -1.5% in January, and core also picked up to 1.3% y/y, although below the 2-4% inflation target. In addition HUF has depreciated since April, loosening monetary conditions.

Finally, we expect the Czech National Bank (CNB) to remain on hold and retain the exchange rate floor on Thursday. Inflation has accelerated considerably, to 0.7% y/y, while it remains below the 1-3% target. The CNB has signaled that it will not remove the CZK floor until inflation reaches the midpoint of the target, probably in mid-2016, in their view. Thus, we see no reason for the CNB to change its policies at this time.

LatAm: A hawkish BCB to support BRL

We expect the BRL to remain supported next week, particularly because of last week’s FOMC dovish bias and, in contrast, a hawkish central bank that seems to be committed to anchoring inflation expectations. The BCB may release its Quarterly Inflation Report this week, and markets will assess the distance of its models’ forecasts for 2016 inflation to the mid-point of the target in order to fine-tune forecasts of when the next hikes in the tightening cycle will occur. On Thursday, the National Monetary Council (CMN) will have its quarterly meeting, and local newspapers have recently commented on the possibility of its changing the inflation target of 2017, either reducing the mid-point (4.5%) or the tolerance range (2pp higher or lower).

Finally, on the fiscal front, on Wednesday, Congress could vote on the payroll tax break reversion, although local festivities during the week could risk insufficient quorum. In terms of data, focus should be on the labor market on Thursday; our forecast is consistent with the unemployment rate moving up to 6.1% in seasonally adjusted terms, reflecting the fairly weak outlook for the labor market in Brazil. In addition, we expect another negative growth number for real wages growth in this report.

In Mexico, the inflation number for the first half of June is scheduled for release, for which we forecast a 2w/2w increase of 0.05%, compared with the market consensus of 0.13%. Later in the week, we expect retail sales for April to show an increase of 0.4% after printing a 0.2% gain in March, while the unemployment rate probably will slightly improve in May from 4.3% to 4.2%.

Deutsche Bank Early Morning Reid

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Deutsche Bank FX Daily – RMB: SDR inclusion

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Barclays Global Macro Daily

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Barclays Global Macro Daily London Open 10 April 2015