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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.


■ 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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■ 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.


■ 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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Markets Week Ahead from Societe Generale

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Markets Week Ahead

Markets Week Ahead – Brave new 2017 to kick off with higher euro area inflation

Following last year’s dramatic political events, policy uncertainty is expected to remain high also this year. A theme to follow closely will be the strength of rising inflation in the euro area. This week’s expected rise in December inflation to over 1% looks set to fuel concerns further over inflation expectations, bond yields and ECB policy, while survey data should confirm robust GDP growth at the end of last year. In the US, this week’s data should justify the Fed’s recent hike, with the ISM and payrolls remaining strong. In Asia, focus will be on China’s end-year FX reserves which should have declined somewhat.  

United States: Healthy data to start the new year
The start of 2017 is likely to bring a batch of healthy economic data, in part justifying the Fed’s December hike. ISM factory index may have inched up further in December, while the ISM nonmanufacturing may have slipped slightly but likely remained solid.Meanwhile, we expect that NFP probably advanced by 185k, in line with the ytd average of 180k. Lastly, the FOMC minutes could reveal some officials’ thinking with respect to the potential impact of fiscal policy.

Euro area: Inflation set to rise to a three-year high
Data this week should continue to point to a resilient recovery in the euro area. Inflation data are expected to show oil prices having a more decisive impact on inflation, with headline inflation expected to have risen to 1.1% yoy in December, a 39-month high. Core inflation should however remain stable at 0.8% (watch for surprises in French and German CPI data on Tuesday). Final December PMIs should be broadly stable, at a high level consistent with GDP growth of nearly 0.5% qoq in 4Q16, while European Commission survey data should rise slightly further. Unemployment data in Germany and Spain should improve further, while factory orders in Germany could have dropped rather sizably in November, following a strong rise in October.

United Kingdom: Looking back – a first glimpse at December
2017 will start with the first glimpse of business conditions in the final month of last year. The December PMIs are likely in aggregate to indicate that economic momentum was little changed from November but with minor hints of cooling.

Asia Pacific: China’s FX reserves barely above $3tn
The focus of the week should be China’s year-end FX reserves figure. Negative valuation effects and continued FX intervention likely lowered the reserve stock by another $40bn to $3,010bn. Elsewhere, we forecast a sizable decline in the Australian trade deficit for November, thanks to the steep increase in commodity prices. Taiwan’s CPI inflation is expected to have increased further to 2.2% yoy in December, on rising fuel prices, but the core reading likely eased.

Eastern Europe: Waiting for MPC reaction after expected Polish CPI rebound
With no data releases, we may see investors’ first reaction to confirmation of the end of the deflation period in Poland. Inflation is likely to enter the 1.0-1.5% range in January-February.

Latin America: Inflation trends strengthen in Latam in December
Inflation likely rose in Mexico while it declined in Chile and Colombia. Brazil’s industrial production contracted at a slower pace in November. Lastly, in Chile, economic activity probably rebounded in November.

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Societe Generale FX Daily – The Fed’s in a pickle

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Societe Generale FX Daily

■  The odds of this week’s US FOMC meeting delivering a rate hike are zero, according to Bloomberg. The chances of a cut are higher, but only 2%. What matters is the tone of the statement but the Fed has painted itself into a corner. The odds of a June hike are now down at 20% and the FOMC can’t signal a move without triggering market turmoil. A neutral/dovish message may provide a modicum of short-term comfort to markets and hold down the dollar but wouldn’t solve the problem of how to prepare markets for further policy normalisation.

■  Meanwhile, CFTC data paint a now-familiar picture of speculative FX positioning: Longs are building in AUD, CAD, NZD and JPY. MXN and EUR shorts are dwindling away and only GBP shorts grew in the week to Tuesday. The sum of positions is net short USD for the first time since July 2014. The four months after that saw the dollar rally 20% in trade-weighted terms as dollar longs were built up. The current environment is very different of course, but anything which makes the markets price in a faster pace of rate hikes than the current one (1.5 hikes by the end of next year) would be bad for risk sentiment and good for the dollar.

■  The merest whisper of further BOJ action at Thursday’s meeting was enough to scare some of the yen longs (and revive interest in the Nikkei). Most likely is that the BOJ will borrow from the ECB playbook and lower the cost of some loans to banks, to help offset the effects of January’s move. That won’t have much significance, and it’s not surprising that the yen is a bit stronger this morning. However, I do think the CFTC data accurately reflect short-term market sentiment and as Japanese demand for foreign assets remains incredibly strong, we look for further yen weakness in the few weeks.

■  European news doesn’t look likely to be the driver of the Euro. Treasuries/Bunds are in a range, like the currency. Money supply data are due Wednesday and should be reasonably encouraging, while Q1 GDP data are due on Friday, showing annual growth slowing to 1.5% from 1.6% which is neither here nor there. The chances of a re-run of the Spanish elections in June seem high but that’s not really a new development either.

■  Bookmakers reacted to the intervention of President Obama in the UK’s EU referendum debate by lengthening the odds of a ‘leave’ vote. Politically-inspired sterling shorts are being squeezed as a result, but the news that a major High Street retailer is in danger of administration is a reminder of headwinds facing the economy. Q1 GDP is likely to come in a 0.4% q/q, steady at 2.1% y/.y but definitely on a slowing trajectory. The scale of sterling short-covering is best seen in EUR/GBP, which looks overdone under 0.78. We’ll stick with short GBP/NOK as the best way of reflecting twin views about oil (cautiously positive) and the UK economy (gloomy).

■  Other ways to express views: Short EUR/RUB remains attractive. Jason still like shorts in SGD/INR. There’s about more to take out of shorts in USD/CAD and AUD/NZD longs are still performing, while we still like shorts in CHF/SEK. But the time is coming, with a growing focus on China’s debt problems and a market that has fully embraced the Fed’s dovishness, to figure out how to get outright long the US dollar again.

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Morgan Stanley FX Morning – April 11

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Morgan Stanley FX Morning


Why JPY has further upside: We expect further flows from various market participants to continue to support JPY. First, Friday’s reluctance for JPY to weaken (indicating de-risking ahead of the weekend) suggests that ‘the Street’ has not traded JPY long in significant amounts last week. Note that CFTC data showed the most net long positions building in the first four weeks of the year. Instead our client conversations focusing on the BoJ and its ability to weaken JPY are suggesting to us that the market has not fully adopted our view, suggesting JPY strength staying with us for even longer. Second, Japan’s retail accounts may still need to wind down their JPY-funded carry trades, suggesting more of this ‘P&L’ driven JPY buying in store. Third, pension funds and financial institutions’ foreign assets relative to total assets are near historical highs and most importantly still hugely currency-unhedged. The GPIF had allocated 36% of its portfolio to foreign assets at the end of December 2015.

The BoJ’s ability to weaken JPY remains limited, as we highlighted on Friday. Sovereign bond purchase-focused QE can no longer rely on the JGB yield curve acting as a transmission mechanism. Negative interest rates seem to undermine banks and monetary velocity, hence strengthening and not weakening JPY. The BoJ’s tool box appears to be limited to the purchase of private assets such as ETFs. The JPY-weakening impact of such BoJ equity purchases should be limited. The mechanism of JPY weakness in this scenario would be limited to the de-FX-hedging of equity portfolios, where many global equity investors have used JPY as a ‘quasi’ hedge for equity risk. Alternatively, the focus on increasing fiscal spending would require equity market investors to have more faith that Abenomics is going to work in order for JPY to weaken significantly. Bloomberg is reporting that foreign traders have sold Japanese equities for 13 straight weeks, the longest stretch since 1998. This ‘outflow’ from Japan has not weakened JPY as it has been met with a larger inflow from domestic investors.

The likelihood JPY resumes its appreciation is high, but the higher JPY moves, the bigger are the carry trade liquidation pressures. Here we under line our thoughts again. The second-round effects of JPY strength would terminate the US D downward correction, especially against liquid high-yielding currencies with the EM spectrum. Within the DM world it might be AUD suffering most. China’ s CPI remaining steady at 2. 3%Y puts focus on this this week’s trade and GDP data. China’s 1Q GDP will be released on Friday, with a high likelihood of seeing a positive surprise. The Chinese economy seems to be under going a cyclical rebound, while structural issues such as over capacity, low debt and investment multipliers have not been addressed yet. The question is how much of the good cyclical news has been priced in. Should AUD fail to rally following the anticipated strong 1Q GDP report then AUDUSD should have traded its corrective top to near 0. 7730. Within our strategic portfolio we sell AUDUSD near 0. 7650 and we recommend selling AUDNOK as our ‘trade of the week’.

The Fed-JPY link: We put special focus on AUDJPY, which offer s significant downside potential from here should JPY-based investors pile out of carry trades. Another interesting factor driving AUDJPY down comes via the Fed and risk appetite. USDJPY-bearish performance may remind Fed Chair Yellen that there aren’t just winners from a lower USD. Abenomics and the ECB’s Draghi’s “Whatever it takes” approach are the losers. Sure, lower inventories, negative net trade and the weak US manufacturing sector have pushed the Atlanta Fed ‘Nowcast’ GDP indicator to 0. 1%, but this week’s release of March retail sales should provide a timely reminder that US domestic demand conditions have remained growth-supportive. Markets currently under price our call for the Fed hiking rates in December. In addition, 1Q earnings will start to be released in the US today. Actual releases tend to surprise under whelming expectations. Market projections are for an aggregate 6. 9%Y decline of S&P500 listed company profits. Should positive surprises disappoint relative to previous quarters then risk appetite may get hit. If not, it might be rising rate expectations that limit the equity mar ket upside anyway. Whatever the outcome, AUDJPY should receive little support from the risk appetite side of matters.

EURGBP’ s next target is 0.85: The press is reporting that the ‘Save Dave’ political reaction to the release of the ‘Panama papers’ may suggest promoting Justice Secretary Gove to Deputy Prime Minister and allocating a prominent cabinet post to Boris Johnson after the referendum. Some may say this is part of the plan to bring the Conservative party back together but for FX trading it suggests two leading figures of the Brexit campaign increasing their political relevance ahead of the June 23 vote, increasing volatility in GBP. The economic fundamentals are not looking good either with the 7% current account deficit, the 4% budget gap and the UK household sector reporting a 2. 3% decline of its net savings in 4Q, leaving us firmly within the sterling bearish camp. Our favoured way to play this week is to be long EURGBP.

Trades of the week:

G10 – Sell AUDNOK

Our structural bearish view on AUD, based on weak nominal growth, a poor terms of trade outlook and a slowing housing market, is likely to lead to 50bp of cuts by the RBA by year-end. We propose selling AUDUSD on rallies but prefer to sell AUDNOK today. NOK has been fairly shielded during the ups and downs in the oil price recently because of the sovereign wealth fund, and the ability for the government to ramp up fiscal spending if needed may limit the negative impact on the economy relative to other commodity producers.

Despite AUD depreciation over the last few years, Australia’s nominal trade deficit and current account remain near post-crisis wides. China’s rebalancing away from investment, particularly the steel capacity cuts announced in recent months, as well as the excess real estate inventory in Tier 3 cities pose large downside risks to iron ore prices. Furthermore, domestic demand has mainly been supported by the housing boom, which we expect to reverse. With the RBA’s inclusion of negative language on AUD in the most recent statement, we believe that too strong an AUD rally from here increases risks of an RBA cut in the near term, and we expect weaker data in the future. Both would support the trade.

The main risk for the NOK side this week is the lead-up to the OPEC meeting on April 17, with the probability of an agreement to cut production looking low for now. NOK’s correlation with oil is much lower than that of CAD.

We like to sell AUDNOK at market with a target of 6.0800 and a stop at 6.2950.


Evidence suggests that positioning in the Turkish lira has built up meaningfully since the rally in EM currencies started in late January. Lower oil prices, stronger-than-expected growth in 4Q15, which was further emphasised in last week’s better-than-expected IP data, and lower inflation have all contributed to a stronger fundamental footing for Turkish assets recently. One concern is the considerable uncertainty over monetary policy in light of the upcoming appointment of the central bank governor , which could come as soon as this week. The presidency of Turkey does not hide the fact that it would like to see interest rate cuts, and it’s quite likely that TRY will weaken a little ahead of the announcement, but we will only really know the stance of monetary policy once the new governor concludes the first meeting on April 20.

The main risk to the trade would be for the CBT’s initial communications to sound purposefully conservative, given the above considerations, as has been the case in Poland following changes to the MPC earlier in the year. Today will see February current account data released, and the expectation is for just over a US $2.2 billion deficit.

We like to buy EURTRY at market with a target of 3.35 and stop of 3.20.


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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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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










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













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.

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Barclays Global Macro Daily London Open 10 April 2015