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Thursday, May 31, 2012
2/26/2012 - Greek debt swap-It's on
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01/16/2011 - Range conditions persist, but a break may be building
Range conditions persist, but a break may be building
Another week sees another round trip between recent range highs and lows for the USD against many other major currencies. Since the beginning of December, EUR/USD has been effectively contained in a 1.30-1.35 range, with this week’s test below the range bottom having proved unsustainable. The Euro’s subsequent rebound to above 1.3400 looks similarly unsustainable in the short-term, but a further upside test of recent range highs and above 1.3500 seems likely as long as European credit markets continue to mend. We would note the regular monthly meeting of EU finance ministers next week has the potential to generate more positive news flow over the prospects for a permanent debt crisis resolution mechanism, potentially offering a fundamental catalyst to send the EUR higher (see more below). However, there is also potential for disappointment on this front and we would note comments from German Fin. Min. Schaeuble on Friday where he repeated Germany’s opposition to so-called Euro-bonds, the most viable long-term resolution to the debt crisis. For this reason, we would prefer to use EUR strength on a test and potential break of recent range highs as an opportunity to establish short EUR/USD positions in the 1.3450-1.3650 area for an expected medium-term decline. We still think additional bailouts will be required down the road and that sovereign debt restructuring (i.e. defaults) will ultimately come to pass for several of the peripheral countries.
Has Europe turned a corner?
The euro dominated action in the forex markets this week. But it was a week of two halves for the single currency: it started the week in sub-1.3000 region vs. the dollar and ended up heading toward 1.3400, now the single currency is on course to have its best weekly performance in 2 years. The turning point was the success of Portugal’s long-term debt auction. The auction was oversubscribed and the Iberian nation paid yield of 6.7 per cent, crucially this was below the 7 per cent threshold that is considered the rate at which Portugal would need to apply for funds from the EU/ECB/IMF rescue fund.
Even though Portugal could borrow at a cheaper rate from the lending facility, for now it can still borrow in the market, which is helping to restore reputational risk. Indeed, 10-year yields on Portuguese government debt has fallen 35 basis points since reaching a peak last week, and for now a bailout is off the table.
While this softened investors’ attitudes in the credit market, the rally in the euro was sparked by two factors: firstly, news that the EU authorities are discussing credible long-term solutions to the sovereign debt crisis, and secondly the perceived hawkish tone to ECB President Trichet’s press conference on Thursday.
After failing to agree on a long-term resolution to the debt crisis that has gripped peripheral Europe since the end of 2009, reports that the EU would look at possibly extending the size of the European Financial Stability Fund (EFSF) and extend its scope so that it could directly buy foreign bonds along with reducing the interest rate for rescue funds cheered the market. This fuelled the rally in the euro. It was given more gusto after ECB President Trichet was perceived as being hawkish during his monthly press conference. He noted that inflation had risen on the back of higher commodity prices and hinted that if it persisted it may warrant a rate rise. The market has rushed to re-evaluate its interest rate expectations for the ECB, and although a rate rise may not be imminent, it is too early to rule one out for the second half of 2011.
The widening differential in interest rate expectations between Europe and the US has fuelled EURUSD gains. As long as sovereign risk fears remain on the backburner and the ECB remains more likely to raise rates before the US, then EURUSD should be supported. If it can break above 1.3410, then we could see 1.3500, before the 1.42 November 2010 high comes back into view.
But there are some serious hurdles the market would have to clear first before we would be comfortable with EURUSD breaking back in the 1.40 territory. Firstly, EU officials need to come up with the goods and find a credible solution to the sovereign debt crisis. This will most likely require greater fiscal union between euro-area members, with a larger transfer of funds from the rich countries to the peripheral ones. This would hurt Germany as it is the largest economy in the Eurozone. Credit-default swaps on German bunds have been rising steadily higher in recent weeks as investors worry that Germany could get the rough end of the stick in any permanent resolution mechanism. This may make German officials reluctant to agree to expand the EFSF rescue fund, which would dent investor sentiment toward European assets in our view, as it would make a bailout of Portugal and Spain more likely.
Added to this, some large bond funds are still staying away from peripheral debt, and the ECB remains a large purchaser of this asset class. The markets are by no means robust, and a cocktail of German reluctance to extend funds for a rescue mechanism, weak economic data in the currency bloc and a less hawkish ECB/ less dovish Fed could spark a reversal in the single currency’s rally. So we are keeping in mind significant support levels for EURUSD including 1.2910 – recent lows, then 1.2650 – the low reached in August.
China’s continued tightening is a temporary setback in risk
The PBoC announced another hike to the reserve requirement ratio (RRR) today with the intent of managing liquidity and controlling the pace of bank lending. This is the fourth 50bps hike to the RRR in just over two months and will bring the rate for major banks to a record high of 19% when it takes effect next week on Jan. 20. Monthly new yuan loans data released on Tuesday came in at 480.7 billion yuan for December compared to expectations of 360 billion yuan which shows that lending remains at elevated levels. With inflation above 5% and rising from the prior reading, the central bank is also faced with the task of cooling upwards price pressures. The PBoC last raised benchmark rates by 25bps in late December and is now likely to shift towards using reserve requirements as a primary tool to rein in liquidity with several more RRR hikes expected throughout 2011.
The continued tightening in China – the world’s second largest economy – has added to the “risk off” sentiment and resulted in a knee-jerk reaction of firmer greenback and softer AUD and NZD. Commodities were also hit following the announcement of further tightening measures. China has allowed its currency to strengthen slightly as President Hu Jintao prepares to meet with President Barack Obama in Washington next week. Treasury Secretary Timothy Geithner was on the wires on Wednesday with his usual stance that China needs to strengthen the “substantially undervalued” yuan. We would expect the current decline in risk appetite to be a periodic setback and not to have a substantial impact on Chinese growth which was last reported at 9.6%. We would anticipate a rebound in sentiment coming from the tightening by the PBoC, although external factors (i.e. Europe) will remain a key driver of risk sentiment.
A long and winding road to BoC tightening
The Bank of Canada is set to release its interest rate decision on Tuesday, Jan. 18. With the target rate likely to remain unchanged at 1%, the market will home in on Wednesday’s release of the January Monetary Policy Report. In the October report, the BoC revised its 2012 year-end inflation outlook lower to 2% but highlighted upside risks from three principal factors: higher commodity prices, ‘a stronger-than-anticipated US recovery’, and the potential for ‘greater-than-expected momentum in the Canadian household sector’.
The first upside risk to the BoC’s revised inflation outlook has been fully realized as commodity prices have moved broadly higher since November (CRB Index is up about +10% since 11/1/10). The second risk, a ‘stronger-than-anticipated US recovery’, has also been set in motion and the BoC will likely note positive Canadian export growth on the back of improving US economic conditions.
However, the third upside inflation risk (‘greater-than-expected momentum in the Canadian household sector’) has not yet developed and will likely keep the BoC’s upcoming inflation outlook balanced. Household spending growth has been decelerating and signs of a rebound may be fleeting as household debt has been on the rise - household debt to disposable income was a record 148% in Q3 2010. The discouraging uptrend in households’ debt to income ratios dampens upside inflation risks as well as the possibility for a rate hike any time soon. A premature hike would weigh especially heavy on debt saddled households and subsequently Canada’s growth prospects - household spending accounts for about 60% of aggregate demand.
We believe that price gains in commodities alongside a quickening pace of recovery in the US may see the BoC acknowledge upside inflation pressures in the upcoming January Monetary Policy Report. However, we think that BoC tightening is still much further down the road. Although domestic conditions are showing signs of improvement, worse than expected housing data (Dec. Housing Starts 171.5k vs. expected 180k, Nov. Building Permits -11.2% vs. expected +1.5%) and high debt to income ratios suggest a Canadian economy unable to absorb rate hikes in the near future, not to mention the risk for the US recovery to stall. BoC policy direction, however, is moving down the road to tightening - albeit a long and winding one.
Key data and events to watch next week
Unites States:
Monday – Fed's Plosser Speaks
Tuesday – Jan. Empire Manufacturing, Nov. Total Net TIC Flows, Jan. NAHB Housing Market Index, Weekly ABC Consumer Confidence
Wednesday – Dec. Housing Starts & Building Permits
Thursday – Weekly Initial Jobless & Continuing Claims, Dec. Existing Home Sales, Dec. Leading Indicators, Jan. Philadelphia Fed, Weekly DOE U.S. Crude Oil Inventories
Euro-zone:
Monday – EU Finance Ministers Meet in Brussels
Tuesday – EU-27 Finance Ministers Meet in Brussels, German Jan. ZEW Survey, EU Jan. ZEW Survey
Wednesday – Nov. Euro-Zone Current Account, EU Nov. Construction Output, ECB's Stark Speaks
Thursday – German Producer Prices, Jan. Euro-Zone Consumer Confidence
Friday – French Jan. Own-Company Production Outlook, French Jan. Business Confidence Indicator, German Jan. IFO
United Kingdom:
Monday – Jan. Rightmove House Prices
Tuesday – Dec. Nationwide Consumer Confidence, Dec. RICS House Price Balance, Nov. DCLG UK House Prices, Dec. CPI, Dec. Retail Price Index
Wednesday – Dec. Claimant Count Rate & Jobless Claims Change
Thursday – Jan. CBI Business Optimism, Jan. CBI Trends Total Orders
Friday – Dec. Retail Sales
Japan:
Monday – Dec. Consumer Confidence
Tuesday – Nov. Industrial Production, Nov. Capacity Utilization, Dec. Nationwide Dept. Sales, Dec. Tokyo Dept. Store Sales, Dec. Machine Tool Orders
Wednesday – Nov. Tertiary Industry Index
Thursday – Nov. Coincident & Leading Index
Friday – Nov. All Industry Activity Index, Cabinet Office Monthly Economic Report
Canada:
Monday – Nov. Int'l Securities Transactions
Tuesday – BoC Interest Rate Announcement
Wednesday – Nov. Manufacturing Sales, BoC Publishes Monetary Policy Report
Thursday – Dec. Leading Indicators, Nov. Wholesale Sales
Friday – Nov. Retail Sales
Australia & New Zealand:
Monday – NZ Dec. REINZ Housing Price Index & Sales, NZ Dec. Food Prices, AU Dec. TD Securities Inflation
Wednesday – AU Jan. Westpac Consumer Confidence, AU Jan. DEWR Skilled Vacancies
Thursday – NZ Dec. Business PMI, NZ 4Q Consumer Prices, AU Jan. Consumer Inflation Expectation, NZ Jan. ANZ Consumer Confidence Index
Friday – NZ Nov. Retail Sales, AU 4Q Import/Export price index
China:
Tuesday – Dec. Actual FDI
Thursday – 4Q Real GDP, Dec. CPI, PPI, Industrial Production & Retail Sales, Dec. Fixed Assets Inv. Urban
Friday – President Hu Jintao's State Visit to United States
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05/01/2011 - The USD swoons; more weakness is likely
The USD swoons; more weakness is likely
The Fed consigned the greenback to another bout of weakness, signalling that easy policy would remain in place for the foreseeable future, and markets were only too happy to oblige, sending the USD index to lows last seen in 2008. We see little on the fundamental horizon that could alter the dollar’s downtrend at the moment, with US rates on hold and other major central banks biased toward tightening. That leaves the market dynamic (meaning excessive USD-short positioning could lead to a short squeeze) as the only obvious catalyst to a bounce in the buck, which we would view as only temporary.
Although we anticipate further USD declines in the weeks ahead, we are in no rush to sell at current levels in light of the proximity of key technical and psychological levels, like 1.5000 in EUR/USD, 80.00 in USD/JPY and the series of 2008 lows in the USD index around 71.00-73.00 (last 72.92). Instead, we would urge patience and look for opportunities to re-enter USD shorts, looking to buy dips in EUR/USD around 1.4450/4500, AUD/USD near 1.0450/1.0500, and to sell USD/CHF near 0.9850/9900 and USD/CAD around 0.9800/9850. Finally, we would note that the current USD decline increasingly risks becoming disorderly, possibly leading to more concerted G7, possibly even G20, action to rescue the greenback. A disorderly decline in the USD risks sending commodity prices even higher, sparking even greater inflationary pressures, which we can all do without.
As an alternative to USD shorts, we observed that carry trades (JPY-crosses) failed to extend recent gains, despite the strong performance of other risk assets (stocks and commodities) during the past week overall. If risk sentiment remains buoyant, which we think will be the case going in to the start of a new month, then we would expect to see JPY-crosses resume gains and we prefer to be buyers of JPY-crosses on remaining pullbacks to recent lows seen early last week.
Commodities toy with key psychological levels
The sharp rise in commodities of late has been nothing short of spectacular. While silver has been the clear outperformer for the month of April, gaining over 31%, gold’s performance during the past week far surpassed the ‘poor-mans-gold’, as it rose from lows around $1495 to over $1560 at the time of this writing. This may partially be explained by those short the gold/silver ratio deciding to take profits into the end of the month. Meanwhile, crude oil came in last of the three as it rose a still highly respectable 7.8% in April. At the moment, commodities are toying with key psychological levels – Gold: $1550-1600, Silver: $50, and US Oil: $115-120. So, the overwhelming question we continue to hear is what’s causing this rise? And when will they peak?
As for what’s causing this rise, we believe a ‘perfect storm’ has been brewing for quite some time, but is now just coming to fruition. First and perhaps most importantly, has been the low global interest rate environment, especially in the US, leading to a renewed USD slump. This has led investors who believe ‘printing money’ will ultimately cause inflation to seek fiat money alternatives – hard assets (commodities). If that wasn’t enough, growing tensions in the MENA region saw traders flock to a ‘flight-to-safety’ trade. At the end of February we highlighted this potential in our Commodities Corner report, “with tensions in the Middle East unlikely to subside anytime soon, this flight-to-safety trade could be stronger and last longer than the market currently anticipates, subsequently traders are beginning to take action”. Lastly, commodities have benefitted from a strong technical outlook, especially silver which has made a true a parabolic move higher.
While some may believe buying at such elevated levels could be financial suicide, we actually consider it the prudent thing to do in the current environment – accordingly we do not foresee a peak yet. This week Bernanke, at his inaugural press conference after an FOMC announcement, made it abundantly clear that the uncertainty of the US economic recovery is likely to keep the Fed on the sidelines in 2H 2011 – thus remaining accommodative, until their hands are forced. Consequently, we believe the USD is likely to remain under pressure in the weeks and months ahead. While we are cautious of getting long at immediate levels next week, we would look to be rather opportunistic upon pullbacks as the fundamental backdrop is not going to change drastically overnight. Perhaps ADP on Wednesday or NFP on Friday will give us the opportunity we seek.
Tough decisions for the ECB
The Eurozone inflation report released on Friday would have made for some uncomfortable reading at the European Central Bank. Prices are rising in the currency bloc at a 2.8 per cent annual rate in April, up from 2.6 per cent in March. For a central bank that has a sole mandate of price stability then surely rates should rise to stub out inflationary pressure?
However, rising commodity prices are weighing on the inflation rate and this is starting to erode economic confidence. Consumer, economic, industrial and service sector confidence all moderated last month. Although confidence levels are coming off their highs it points to a slowdown in the recovery in the Eurozone, which may make some members of the ECB slightly wary about raising rates at too quick a pace.
On Thursday’s ECB meeting we will see what wins out between the inflation/ growth fight. Right now the market is looking for another rate hike late in the summer and Euribor rates and Eonia- euro swap rates remain at elevated levels.
If the ECB remains as committed to price stability as it says it is then we could hear ECB President Trichet use the code words “strong vigilance” to signal a rate hike slightly earlier at the next meeting in June.
This would sit alongside the fairly hawkish rhetoric coming from ECB members in recent weeks. Last week Luxembourg central bank chief Mersch said that policy has to be decided for the region as a whole rather than for individual countries. This suggests that the ECB may not consider the concerns that Greece may have to default on some of its giant debt load in the near-future.
Peripheral bond markets have come under heavy selling pressure this week with Portuguese and Greek bond yields reaching euro-era highs. Greek 2-year bond yields are now above 26 per cent and Italy and Spain have also had to pay a higher risk premium to investors at recent debt auctions.
A combination of high interest rates and an elevated euro are all likely to weigh on growth in the peripheral economies. EURUSD surged 2.5 per cent last week alone as the Federal Reserve sounded fairly committed to low interest rates at its meeting last week. 1.5000 is now in easy reach and possibly even 1.6000 next.
At these levels the euro could start to hurt exports at exactly the wrong time. The Spanish deputy finance minister spoke on Friday after the Spanish unemployment rate reached a 14-year high of 21.29 per cent in March and retail sales slumped by 7.9 per cent, saying that exports will be the key to the Spanish economic recovery. But this won’t be possible if European goods become less competitive on the global market.
While the EURUSD has surged 10 per cent since the start of this year, the single currency is up 9.5 per cent versus the Chinese renminbi, a major market for European exporters. Thus, the ECB also needs to weigh up the impact of an imminent rate hike on the already elevated exchange rate. So watch out on Thursday, firstly for the phrase “strong vigilance” and secondly, if Trichet makes any reference to the strength of the single currency.
UK recovery looks half-hearted
If members of the MPC were waiting for an update of the first quarter growth figures before making up their minds about hiking interest rates then the 0.5 per cent expansion was fairly lacklustre. At the start of the year a rate hike at this week’s meeting was nearly fully priced in, but that has been reversed. Signs of a flagging recovery, a negative growth reading at the end of 2010, and signs that BOE Gov. King remains intent on holding rates steady in the months ahead, have all dampened interest rate expectations.
Market watchers will now wait for economic signals about how growth progressed in the second quarter but the prolonged Easter/ Royal Wedding holiday is likely to ensure that growth remains erratic in the UK for some time to come. Interest rate expectations were pushed back further last week and the markets now expect a rate hike (based on Sonia inter-bank lending rates) in the last quarter of 2011.
This is weighing on the pound against the stronger currencies like the Aussie and the euro but GBPUSD remains very well supported, it is currently at its highest level since December 2009. We prefer short sterling positions against the Aussie and the euro in particular, as we believe that the dollar will remain under pressure for some time yet as the Fed remains committed to an ultra-loose monetary policy.
Loonie and kiwi grounded for now but may soon take flight
On Monday May 2nd, Canada will take to the polls in parliamentary elections as the minority Conservative party, headed by Prime Minister Harper, defends its run that started back in 2006. Opinion polls have shown a surge in support for the New Democrats (NDP), considered at one point to be a minor opposition party, over the Liberals, previously the leading opposition party. While both the NDP and the Liberals have pledged to reverse tax reductions of $6.3B annually for businesses, the NDP is viewed as favoring more stringent spending and tax hikes. As a result, growing NDP popularity has grounded the loonie relative to other commodity currencies – AUDCAD reached multi-year highs around 1.0440/45 this past week.
On Thursday, the RBNZ left its policy rate on hold at 2.5%. While an unchanged OCR was expected, the overall dovish tone of the accompanying statement took the market by surprise – the RBNZ noted ‘higher oil prices and the elevated level of the New Zealand dollar are both unwelcome’ and ‘current policy likely to be appropriate for some time’. The comments were interpreted as a signal that rates would remain low for an extended period of time and sent NZDUSD spiraling lower to below the 0.8000 big figure.
The loonie and kiwi have been grounded this week but both may be setting up to take-off again. While upcoming Canadian elections have weighed on the loonie, we think the ultimate impact is likely to be minimal. To start, the election is not likely to have any material effects on monetary policy as there has been no mention of exerting political pressure on the BoC in any campaigns. Furthermore, the most likely outcome is for another minority Conservative government despite the current cloud of uncertainty surrounding the elections. However, there is the risk for the surge in NDP support to translate into an increase in seats which would likely keep pressure on the loonie. Nevertheless, we think any CAD weakness may provide opportunities to jump on board a future ‘loonie’ flight fueled by prospects for BoC tightening on the back of a firm Canadian economic recovery, elevated commodities, and accelerating inflation.
Inflation is picking up pace in New Zealand as well evidenced by the rise in Q1 CPI to 4.5% from 4.0% y/y. Price gains may accelerate at an even faster pace on the back of earthquake reconstruction efforts which is likely to put pressure on the RBNZ to tighten sooner than expected. Accordingly, we think pullbacks in NZD may also be viewed as opportunities to take a cheaper seat on the flight to continued kiwi upside.
Key data and events to watch next week
United States: The slew of April sentiment data comes through this week along with the all-important payrolls figure on Friday. Monday sees ISM Manufacturing for April. Wednesday sees the ISM non-manufacturing report for April and ADP employment report. Thursday has unit labour costs and productivity from the first quarter. Friday’s Non- Farm payroll report (the market is looking for 180k), and the unemployment rate, expected to remain steady at 8.8 per cent in April, will be the highlights along with hours worked and average hourly earnings data.
Eurozone: The week will be dominated by the ECB meeting on Thursday (see above for preview). Other than that it’s a fairly light data week with PPI out on Tuesday and retail sales due for March out on Wednesday where the market is looking for another monthly contraction of 0.1 per cent.
United Kingdom: The Bank of England meeting on Thursday is the highlight; the Bank is expected to remain on hold. PMI manufacturing data is released on Tuesday along with the latest CBI sales report for April. The construction sector PMI along with the money supply is released on Wednesday with PMI services sector data released on Thursday prior to the BOE meeting. Rounding off the week on Friday is the PPI input and output price data for April.
Japan: It is Golden Week holidays so the data calendar is fairly light, but there are a few things to be aware of including labour cash earnings for March on Monday and the monetary base on Friday.
Canada: The week starts with Industrial product prices and raw materials prices for March that will be looked at closely for evidence of growing inflation pressure in the Canadian economy. Monday’s National elections will be watched closely for a potential change in government. Then on Thursday there is the Ivey Purchasing manager manufacturing survey for April. On Friday, Canada announces its labour market report also for April; the unemployment rate is also released, which is expected to remain steady at 7.7 per cent.
Australia and New Zealand: A busy data week for Australia with the highlight being Tuesday’s RBA meeting, the bank is expected to keep rates on hold. Prior to that on Monday TD Securities releases its inflation data for April then there is the house price index for Q1. On Wednesday there is housing market data including HIA New Home Sales for March. On Thursday we see building approvals data and retail sales for March that are expected to rise by 0.5 per cent over the month. In New Zealand the week gets started with ANZ Commodity Prices for April, along with labour market costs data for the first quarter. On Tuesday we get building permits for March. On Wednesday we get the unemployment rate for the first quarter, which is expected to edge lower to 6.7 per cent from 6.8 per cent in Q4.
China: It is a fairly light data week. PMI Manufacturing will be released on Sunday for April and the market is looking for the index to edge up to 53.9 from 53.4 in March. Non-manufacturing PMI is released on Tuesday with the China HSBC Services Sector PMI released on Thursday.
03/06/2011 - The Dollar sags as key EU decisions loom
The Dollar sags as key EU decisions loom
The greenback slumped further as violence in Libya escalated and fears continue to mount of unrest spreading to other, more economically significant countries in the region. Despite the largest gain in jobs since census-induced hiring in mid-2010, and other signs of improvement in US labor markets e.g. further declines in initial claims, the buck limped out at its lowest level for the year according to the USD Index. But the USD’s performance was mixed against most currencies other than the EUR, which rallied across the board on ECB rate hike expectations (see below). All in all, it could have been much worse for the USD and this suggests a safe-haven bid may be returning to the greenback. US stocks declined and Treasury yields fell on safe-haven buying of US Treasuries in spite of the ostensibly upbeat Feb. jobs report. Precious metals and commodities also continued to gain ground on the Mid-East upheaval. The focus there is firmly on efforts to oust Libyan leader Gaddafi and we would suggest it is a question of when, not if, he disappears into exile, potentially setting up a rapid reversal in safe haven assets. In the meantime, civil conflict in Libya is likely to drag on and the dollar’s descent seems likely to continue, though probably less of a rapid collapse and more of a slow grind.
Over the next several weeks, EU leaders will be meeting to tackle their debt/financial crisis, culminating in the March 25 summit that aims to produce the comprehensive crisis resolution mechanism. The end of next week will see the ‘European Competitiveness Pact’ unveiled, which aims to strengthen economic and fiscal coordination among member states. Indications are that deep divisions remain on many of the key issues, such as establishing concrete debt reduction goals, increasing the size of the bailout fund, and whether to allow it to buy peripheral government debt. The risk to recent EUR gains is that EU leaders fail to produce a credible mechanism and markets conclude sovereign defaults remain a serious threat, which may see EUR come under pressure despite rate hike expectations. Lastly, we would note the relatively minimal gains in EUR/USD since the relatively surprising ECB announcement (only about 120 pips), which we interpret as a sign most of the move was already priced in.
We see immediate upside potential for EUR/USD while the 1.3800/50 area holds. Initial resistance is at 1.4020/50, above which gains to the 1.4180/1.4200 are our expectation. Overall, a Fibonacci wave extension suggests 1.4420/25 as a potential target for the current advance, once above 1.4050.
The ECB takes its anti-inflation medicine
ECB Governor Trichet surprised the markets last week with an explicitness he has saved until the last 6 months of his term in office. He reverted to the verbal code words he used during the Bank’s previous tightening cycle when he said that “strong vigilance” is warranted with a view to continuing upside risks to price stability. In the past this signaled that a rate hike was imminent. Now the market expects Trichet to announce a rate hike at April’s meeting. But it wasn’t this stock phrase that surprised market watchers, it was Trichet’s candidness.
Although he said the ECB never pre-commits to a rate decision he added that he expects rates to rise by 25 basis points and that a rate hike next month would not signal the start of a tightening cycle. This was central bank communication at its most clear.
Immediately investors scrambled to re-adjust interest rates armed with this new information. 3-month euro Eonia swap rates surged 10 basis points to their highest level in 2 years, while Euribor – the inter-bank lending rate – also surged on the news. The extra yield boosted EURUSD, and it is now on the brink of 1.4000.
Up until last week the markets had been expecting the Bank of England to hike first. After the ECB press conference the yield differential between German and UK yields widened considerably which boosted EURGBP to 0.8600.
So why did the ECB bite the bullet? The most likely reason is that rapidly rising oil prices don’t warrant extraordinarily accommodative interest rates. Indeed, Trichet omitted to mention that the interest rate was appropriate; instead he said the current stance of monetary policy was “very accommodative.”
But will one hike be enough? We would say probably not. Inflation in the Eurozone is running at a 2.3 per cent annualized rate. Even with a 25 bp increase real interest rates will still be negative, so the ECB aren’t going to stamp out inflationary pressure with a small, one-off rate hike. So if the Bank is serious about inflation a series of hikes seems more likely. The market has rushed to price in a more than 50 per cent chance that rates will rise to 2 per cent (they are currently 1 per cent) in 12-months’ time.
The ECB and the Federal Reserve are now at either end of the policy spectrum, with the latter seemingly committed to providing the full $600bn allotment of QE2 to the US economy until June. The diverging paths of the two largest global central banks should benefit EURUSD. So far it has failed to break above 1.40, but in the coming weeks, based in its yield advantage, we see EURUSD back at the 1.4250 highs last reached in November 2010.
Commodities continue to stay aloft amid tensions in MENA
This week crude oil prices rose to fresh 29-month highs ($104.30/35) amid the rapid deterioration of stability in Libya and the threat of it spreading to other MENA (Middle East/North African) nations. The persistent violence has caused supply disruptions in Libya of approximately 1 million barrels a day, which is over half of their daily output. While news that Saudi Arabia guaranteed to use spare oil capacity if needed – Saudi’s spare oil capacity is estimated to be 5 million barrels a day, temporarily calmed the markets, it’s not an exact match since Arabian oil is much heavier than Libya’s light sweet crude and is thus problematic since it needs additional refining. With the current geopolitical environment riding high emotionally, fundamentals are likely to remain in the rear-view mirror. Furthermore, even prior to the political unrest in the Middle East we saw signs of demand growth picking up in China and India, and with today’s U.S. unemployment rate falling to 8.9% it signals demand in the west may begin to pick up as well. Lastly, market participants are beginning to envision a weaker USD moving forward, based on diverging interest rate expectations between the Fed and the ECB and BoE, which has caused greater demand for commodities and ultimately adds more “fuel to the fire”.
The “flight-to-safety” trade has not just been all about oil, but was also present in precious metals as well. As noted in this week’s Commodities Corner, “with tensions in the Middle East unlikely to subside anytime soon, this flight-to-safety trade could be stronger and last longer than the market currently anticipates, subsequently traders are beginning to take action.” Over the past week gold broke to new nominal all-time highs near $1440/oz. and silver just made fresh 30-year highs of $35.35/40 at the time of this writing. Going forward, price action should remain volatile, however pullbacks could be shallower than one would anticipate as investors who have missed the current move higher in commodities may look to jump on board in the not too distant future. A resolution to the Libyan turmoil, on the other hand, could see a more serious set-back.
The BOE gets pipped at the post
After the events in the Eurozone, it now seems unlikely that the Bank of England will be the first of the major central banks to hike interest rates. The Bank meets next week to decide on policy, but it is expected to remain on hold. In fact, since the last meeting the market has slightly reduced its bets that rates will rise in the UK over the next few months as economic data has disappointed especiallyQ4 2010 GDP and the PMI services sector survey for last month. Sonia rates – GBP swap rates - have fallen from their peak and 3-month UK Libor (inter-bank lending rates) remains within its near-term range.
This has thwarted the rise in sterling and for now the top in GBPUSD is 1.6300.
EURGBP looks ripe to outperform in the near-term. After 0.8600, the 0.8900 high reached in October comes back on the radar.
Kiwi under pressure ahead of RBNZ
On Thursday March 10, the Reserve Bank of New Zealand meets to decide on interest rates. The outlook for the island nation has been very bleak after the tragic 6.3 magnitude earthquake which struck Christchurch on Feb. 22. This was the second major earthquake in 6 months, the previous quake occurring on Sept. 4. Both quakes are estimated to have cause as much as NZ$20 billion in damage and have delivered a blow to growth prospects with the risk of a relapse into recession as indicated by Q3 GDP which contracted by -0.2%.
The 90-day bank bill rate has plummeted from about 3.20% on Feb. 21 to current levels of around 2.86%. Additionally, Prime Minister John Key said he would “welcome” an interest rate cut. He went on to say “the market has priced in a cut from the Reserve Bank. That would probably be my expectation, that the Reserve Bank would cut, but it’s for them to determine that”. While some market participants are anticipating a rate cut, the distribution of expectations is relatively balanced with about half of analysts forecasting no change in rates. Of those expecting the bank to slash rates, about half are looking for a 50bps cut while the other half is anticipating a 25bps decrease. With recent weakness in the NZD, it appears that a cut may be priced in which indicates that the risk is to the upside.
Technically, NZD/USD is facing a significant pivot around its 200-day sma which currently comes in at about 0.7380 and the Dec. lows which are around the 0.7345/50 area. The pair is trading below the daily ichimoku cloud which suggests a downward bias. A daily close below the 200-day sma and Dec. lows is likely to see further downside. Key levels to the upside include the daily Tenkan line which is around 0.7480 ahead of the daily cloud base and Kijun line which are around 0.7580/90 – just below the 0.7600 area where the 55 and 100-day sma’s converge.
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04/10/2011 - Dollar gets slammed on monetary policy outlook
Dollar gets slammed on monetary policy outlook
The U.S. dollar has weakened significantly this past week as monetary policy divergences became more prevalent and commodities continued to soar. Precious metals marched higher with gold hitting new record highs while silver broke above $40 and oil topped $110 a barrel. Currencies whose countries export commodities were beneficiaries as highlighted by new post-float highs in AUD/USD which climbed above 1.0500 and multi-year lows in USD/CAD which fell below 0.9600. The ECB lifted rates by 25 bps to 1.25%, the first move on interest rates since May 2009 but no gave indication that it will be the beginning of a series. This is largely different from the Fed’s policy stance which has maintained its commitment to keep rates low for an ‘extended period’. Moreover, while recent speeches by some members of the Fed have suggested cutting short the plan to purchase $600 billion in assets through June, this week’s FOMC Minutes showed little evidence that the idea has gained traction among the FOMC voting members. In the week ahead, FOMC voting members Dudley, Evans, and Yellen are set to deliver speeches and we would note that these members are considered to be dovish. The monetary policy outlook remained the key driver as dollar index sunk to new 16-month lows and though budget talks and a looming government shutdown are viewed mostly political theater and are likely to have little economic impact, it gives investors yet another reason to sell the buck.
The exception to USD weakness has been against the Japanese yen which has continued its sharp reversal lower following the G7 coordinated intervention. Japan was struck with another earthquake, this time around the magnitude of 7.1. While reports of the earthquake were initially met with risk aversion, markets breathed a sigh of relief after tsunami warnings were retracted and resumed their appetite for risk. The week ahead will include the Fed’s Beige Book to give clues on the outlook of the economy, speeches by FOMC voting members, and inflation data. We would anticipate a stabilization in the buck as investors take profit ahead of key levels and events.
ECB keeps its cards close to its chest
So the ECB hiked rates as anticipated but the question now for investors is what they will do next. The market thinks there will be a further two hikes before the end of the year with the next hike coming in July, according to the Eonia swaps market.
The 11 per cent increase in the euro versus the dollar since the start of this year suggests that a lot of the expected ECB tightening is already priced into the single currency. So if things stay as they are then the euro may lose its yield advantage and could come under pressure. This would happen if investors think the ECB may not deliver as much policy normalisation as they originally anticipated.
However, on the back of last week’s meeting we know two things: firstly that the ECB has not yet decided if this will be the start of a rate hiking cycle, and secondly, that the future trajectory for interest rates depends on inflation since price stability is the ECB’s sole mandate.
So this week’s second inflation reading will be crucial for interest rate expectations in the currency bloc. The first reading saw inflation rise to 2.6 per cent in March from 2.4 per cent in February. Above target inflation is unacceptable to ECB policy makers and March’s price data most likely sealed Thursday’s rate hike. We will get the regional breakdown of the inflation figures on Thursday. We already know that inflation in Germany rose to 2.2 per cent while even debt-laden peripheral nations have experienced inflation pressures including Ireland, where EU harmonised inflation jumped from 0.9 per cent in February to 1.2 per cent in March.
It is the large jumps in inflation that the ECB want to avoid, and right now price pressures continue to build as energy prices surge to multi-year highs. If we see an upward revision to inflation next week then a rate hike before July becomes a possibility.
We think that dips in EURUSD will remain fairly shallow and a weekly close above 1.4420/30 may herald further gains to 1.4700 then 1.5000. But a caveat to this is the dollar. Arguably weakness in the greenback is pushing the euro higher and any swift resolution to the US’s budget impasse could see a reversal in short dollar positions and thus weigh on the euro in the short-term. In the long-term the direction of EURUSD depends on the clarity provided by the Fed about its intentions regarding monetary policy normalisation.
The UK: pricing out a rate hike
It wasn’t that long ago that the UK was considered the first of the major central banks to hike interest rates. Yet that seems like a long time ago now. The ECB has moved first and the UK’s growth outlook has deteriorated sharply. This has weighed on interest rate expectations and 3-month Sonia rates (GBP inter-bank swap rates that follow interest rate expectations closely) have fallen sharply.
The market is increasingly coming to the conclusion that the Bank of England won’t hike interest rates at their next meeting in May, and instead will wait until August to do so. This is consistent with our call and we expect the BOE to remain on hold this quarter.
Economic data has been largely weak with only a couple of upside surprises. One was service sector data for March, yet we believe this was an anomaly and service sector activity played catch-up after weather-related disruption in January and February.
But, while we think the BOE may be on hold longer than the market currently expects, there are a couple of important caveats to remember. The first is the Q1 GDP release on 27 April. This is the deal-breaker in our view. Lacklustre quarterly growth – something below 0.8 per cent would be viewed as a disappointment – would make a rate hike less likely in the current environment.
Another risk is the May Inflation Report. We think the economic backdrop, the impact of austerity measures and weak wage growth will be enough for the Bank to maintain its cautious stance in May. The Bank tends to hike rates after an Inflation Report, so the next logical date for an increase in rates would be August – after the Bank’s summer Report.
This makes the pound a sell on rallies in our opinion. It has already tested 1.6400 highs, but we think it is vulnerable to a pullback especially versus the dollar and the euro since a lot of its recent strength was fuelled by rate hike expectations. With this major source of support gone, sterling strength is likely to be curtailed going forward.
Will the BoC do anything Loonie next week?
On April 12th the Bank of Canada will announce their interest rate decision. By nearly all measures the market is expecting them to remain on hold at 1.00%, but their statement will be closely watched for any potential changes to their accommodative stance. As a result of rising food and energy prices economists have begun to shift their inflation forecasts higher for 2011 and 2012, however immediate pricing pressures continue to remain subdued. Nevertheless, such a backdrop makes the BoC’s job that much more challenging as they begin to deliberate on the path of future rate hikes.
On Wednesday the BoC will release the April Monetary Policy Report. The MPR is going to provide further economic incite and will likely touch upon turmoil in the Middle East and earthquake/tsunami in Japan – which has caused a rise in oil (energy) prices, as well as provide a slightly more optimistic bias regarding GDP over the coming quarters. While the stronger CAD has restrained Canadian exports, something Governor Carney continues to highlight, it will be unable to keep the BoC on the sidelines for too much longer. Going forward we believe the BoC is likely to remain on hold until the beginning of the 3rd quarter, where we expect a rate hike of 25bps at each meeting through the end of 2011 (July, Sept., Oct. & Dec.).
The CAD has been one of the strongest commodity currencies since the beginning on 2011, appreciating roughly 4.4% year to date, as it has benefitted from strong domestic fundamentals, improving global growth and rapidly rising oil prices. Just today crude oil (WTI) made fresh multi-year highs around $112.55/60,and firm demand from both emerging & developed economies, as well as ongoing unrest in the MENA region will likely to continue to support the ‘black-gold’ going forward. Therefore, while commodities remain strong and the U.S. dollar remains offered, we’ll look to be a seller of USD/CAD on rallies towards 0.9625/35 and 0.9680/00 in the week ahead.
Key data and events to watch next week
The greenback remains on the offer, driven fundamentally by widening rate differentials between the U.S. and other CBs. The USD Index broke below its short term bear flag formation to fresh yearly lows just above the 75.00 figure. Additionally, USD weakness is being confirmed by other asset groups - gold broke above the key 1450 level, also the neckline of an inverted H&S pattern suggesting a measured move objective to the 1550/75 area. Technical developments this week suggest the greenback’s woes may continue but considering the steep rate of USD declines, pullbacks should be expected and may provide better value for those looking to establish USD shorts.
EUR/USD: The ECB’s 25bp hike to the main refi rate may be a historic step as the central bank could be initiating a tightening cycle before the Fed for the first time. Uncertain Fed policy direction continues to weigh on the buck elevating EUR/USD above key technical levels. The most significant being the weekly close above primary downtrend resistance (around 1.4300) suggesting sustainable EUR strength in the weeks ahead. 1.4450 (61.8% retracement for the 1.6035/50-1.1875/80 decline) , however, is proving to be a formidable hurdle as EUR strength was capped into it on Friday trading. Below 1.4300 sees additional support into the 1.4250 pivot which may provide decent value for EUR longs as the medium term technical outlook has now shifted to the upside.
GBP/USD: The BoE remained on hold as expected and with rate differentials driving FX, the uncertain outlook for UK rates has seen the sterling underperform relative to other majors against the buck. GBP/USD, however, looks set to close above its respective primary trendline which technically suggests a potential reversal for the primary decline from the 2.1160 peaks. 1.6500 is likely to be a psychological barrier ahead of the key 1.6825/50 daily horizontal pivot. Immediate support may be seen into 1.6275/00, broken trendline resistance, ahead of the key 1.5975/1.6000 daily pivot.
AUD/USD: Commodities have been screaming higher which has seen commodity currencies benefit substantially. AUD/USD posted post-float record highs on a seemingly daily basis this week and looks set to close near weekly highs around 1.0540/50. The 1.0600 figure is likely to provide some technical hurdles to further Aussie strength but if commodity upside continues, the 1.0900 measured move objective for the symmetrical triangle breakout may be in view next. Downside corrections may find meaningful support into the rising trendline around 1.0450 ahead of the 2010 1.0255/60 highs.
USD/JPY: Another earthquake in Japan saw USD/JPY upside capped ahead of the all-important 85.50 barrier. Rumored options related stops above 85.50 were never hit as the declining trendline from the 2007 124.10/15 peaks and the 55-week SMA effectively stunted further JPY weakness against the greenback. Immediate support may be seen into the 84.50 daily pivot ahead of 83.50 which sees the 200-day sma converge with broken daily triangle tops. Considering uncertain USD monetary policy, USD/JPY is likely to underperform relative to other JPY pairs.
EUR/JPY: With loose BoJ monetary policy now a given for the foreseeable future and the ECB possibly embarking on a tightening cycle, EUR/JPY blew through a number of key technical levels this week. 120.00, psychological barrier and Feb. 2010 lows, proved to be no match for the pair. Furthermore, EUR/JPY has managed to close above weekly Ichimoku cloud tops ( 121.90/00) suggesting upside trend continuation may be sustainable and should be a level of immediate support on downside corrections. Below may find more meaningful support into the Feb. 2010 lows around the 120.00 figure which may provide value for EUR/JPY longs.
Key data and events to watch in the week ahead
United States: Monday – Fed’s Yellen and Dudley speak Tuesday – Mar. Import Price Index, Feb. Trade Balance, Apr. IBD/TIPP Economic Optimism, Fed’s Tarullo to speak Wednesday – Mar. Retail Sales, Feb. Business Inventories, Fed’s Beige Book Thursday – Weekly Jobless Claims, Mar. PPI, Fed’s Duke, Plosser and Tarullo speak Friday – Mar. CPI, Industrial Production and Capacity Utilization, Apr. Empire Manufacturing, Feb. Net TIC Flows, Apr. prelim U. of Michigan Confidence, Fed’s Evans speaks
Eurozone: Tuesday – Mar. final German CPI, Apr. EZ and German ZEW Survey, ECB’s Stark speaks Wednesday – Mar. German Wholesale Price Index, Feb. EZ Industrial Production Friday – Mar. EZ CPI, Feb. EZ Trade Balance, ECB’s Constancio speaks
United Kingdom: Monday – Mar. RICS House Price Balance Tuesday – Feb. Trade Balance figures, Mar. CPI, RPI Wednesday – Mar. Claimant Count Rate, Jobless Claims Change, Feb. Avg. Weekly Earnings, ILO Unemployment, Mar. Nationwide Consumer Confidence
Japan: Monday – Feb. Machine Orders Tuesday – Mar. prelim Machine Tool Orders Wednesday – Mar. Domestic CGPI Friday – Feb. final Industrial Production and Capacity Utilization
Canada: Tuesday – Feb. New Housing Price Index, Feb. International Merchandise Trade, Bank of Canada Announces Interest Rates Wednesday – BOC Monetary Policy Report Thursday – Feb. Manufacturing Sales
Australia & New Zealand: Tuesday – NZ Finance Minister English speaks, Mar. AU NAB Business Confidence and Conditions Wednesday – Mar. NZ Food Prices, Apr. AU Westpac Consumer Confidence, Apr. AU DEWR Skilled Vacancies Thursday – RBA Governor Stevens to speak, Mar. NZ Business NZ PMI
China: Sunday – Mar. Trade Balance Friday – Mar. Industrial Production, Retail Sales, CPI, PPI, Industrial Production, Fixed Assets Investment, 1Q GDP
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Wednesday, May 30, 2012
Sri lankan Cricket Hero in Action on Indian Reality Show
With dance reality show "Jhalak Dikhhla Jaa" shifting from Sony Entertainment Television to Colors, the producers are doing everything they can to create a buzz around the upcoming season.
They've roped in celebrity judges like Madhuri Dixit Nene, Karan Johar and Remo D'Souza, and maintained uncertainty about the addition of a special judge, which in this case will be Rekha. Now, news is that the channel has approached cricketer Sanath Jayasuriya, and the cricketer has agreed. According to sources, the all-rounder is being paid a hefty amount to shake a leg on the show.
Even though the Sri Lankan has no experience in music or dance, he has the rhythm, or so it seems as he jiggies with girls in a recently shot promo for the show, where he is seen wearing a white suit, white hat and golden jacket.
Apart from Jayasuriya, the reality show has reportedly signed on quite a few names from the television industry. Giaa Manek ("Saath Nibhaana Saathiya"), Meghna Malik ("Naa Aana Iss Des Laado"), Hina Khan ("Yeh Rishta Kya Kehlata Hai"), both Anandis - Avika Gor and Pratyusha Banerjee ("Balika Vadhu"), Gurmeet Choudhary ("Punar Vivaah"), Karan V Grover ("Yahaan Main Ghar Ghar Kheli") and Anas Rashid ("Diya Aur Baati Hum") have reportedly been approached.
05/29/2011 - G8 optimism on global growth seems wishful thinking
G8 optimism on global growth seems wishful thinking
The past week ended on an upbeat note for risk assets (stocks and commodities) and a weaker USD ostensibly on the pronouncement from the G8 that the global recovery is “gaining strength and is becoming more self-sustained.” However, incoming economic data suggest the opposite, namely that growth in major developed economies is showing signs of slippage. Just in the past week, key Eurozone PMI’s and business confidence indexes posted larger than expected declines, while in the US durable goods orders and the Richmond Fed index also fell more than forecast. Coming up next week, key US data points include May’s Chicago PMI and national ISM indexes, all of which are expected to post declines from the prior month. And to finish out the week will be the May US employment report, which is also expected to show a moderation in job gains, though still moderately healthy at +184K consensus forecast (prior +244K).
Then there is the Eurozone debt crisis, which continues to drag on like an epic Nordic saga (though no Scandinavians are in trouble). The latest is political opposition from Greece’s minority parties to additional austerity measures and the potential that the IMF may not be able to disburse its share of the next tranche of aid due to Greece at the end of June due to its own internal rules. The political debate on how to shore up Greek finances shows no sign of being resolved, while Greek public opposition to austerity continues to run the risk of major social unrest. We think some form of Greek debt restructuring remains extremely likely, with only the timing open to question. As such, and with European data continuing to indicate a slowing ahead, we think the EUR and risk sentiment in general remain vulnerable.
We’re viewing this past week’s rebounds in commodities and major currencies against the USD as a correction in a larger risk-off movement, but we are also keenly aware that many in the market are more optimistic on the risk outlook. We would note that most indicators of risk aversion, with the notable exception of the USD, support our ‘risk-off’ view: US Treasuries (and other solid government debt issues) are at recent highs; gold and silver are stronger, CHF is at record strength, and JPY-crosses are consolidating nearer to recent lows in most cases. This suggests to us that markets remain exceptionally cautious and are prone to another relapse in risk sentiment. In currencies, then, we favor using current USD weakness as a buying opportunity, especially against some of the commodity currencies (e.g. selling NZD/USD near all-time highs of 0.8210/20). Still, in many of the USD pairs we have reached significant technical pivot levels, which if surpassed would likely signal a renewed bout of USD weakness ahead, so we won’t be married to our outlook. In concrete terms, EUR/USD above 1.4350/70, GBP/USD above 1.6520/50, USD/JPY below 80.00/30, and the USD index below 74.55 would all be problematic for our USD-positive outlook. Next week will see the usual month-end silliness (i.e. inexplicable volatility), along with a US holiday on Monday, so we expect many of those USD levels to be tested at the minimum.
June’s event risks are make-or-break for the Eurozone
As we reach month-end it is worth taking stock of what lies ahead of us especially since June is set to be a critical month for the currency bloc.
Firstly the results of the latest round of stress tests on Europe’s banks are set to be released. This is expected to be the most stringent yet (we’ve heard that before) and are designed to reveal the true depth of Europe’s banking crisis so that capital bases can be re-built and investors can have confidence to invest in Europe’s financial institutions once more.
The major risk from the stress tests is Spain. If its troubled domestic lenders – the Caja banks – have more bad debts than expected then the government will be under pressure to underwrite the capital short-fall akin to what Ireland did that eventually forced it into a bailout.
Currently analysts estimate that losses for Spain’s banking sector could be as high as EUR120bn, which is almost 10 times the Spanish Central Bank’s projection. Massive loans to property developers are the bulk of the toxic assets on the Caja balance sheets. These may top EUR300bn as Spain’s property market remains in deep trouble.
A bailout of Spain is too big for the current EFSF fund to manage and would therefore threaten the stability of the Eurozone. Nerves are likely to be on edge prior to the release of the tests. The exact date the results are due is not yet known, but some in the market predict they will come out in June or July, so watch out.
Also due are the results of the IMF’s audit of Greece’s compliance with deficit reduction targets, which is expected sometime before the end of June and possibly as soon as next week. There are concerns that Athens will not have complied with the terms of its bailout loan so the world’s lender of last resort will cut its support to the nation. This would make a default of Greece extremely likely and could see another wave of panic wash over the financial markets.
This is likely to keep the euro capped in a range until these “unknowns” are finally known. So watch out for some sharp moves especially if Spain’s banking crisis is worse than first thought. Below 1.4040 EURUSD is in a technical downtrend.
There’s more than meets the eye to the Swissie
The Swiss franc had a storming week and broke fresh highs versus the euro and is on the cusp of all-time highs against sterling. It’s no surprise that the Swissie was stronger last week as the markets remained jittery about developments in the sovereign debt crisis and the prospect that the IMF may not extend more bailout funds to Greece next month.
But as risky assets came more into favor at the end of last week, the Swissie remained in demand. This suggests that there are more than just safe haven flows driving the franc. Of course investors remain nervous about the sovereign debt crisis, which should keep the Swissie well supported, but at the same time a raft of strong economic data along with its own warning from the IMF suggest domestic fundamentals could be a key driver of the currency going forward.
At the end of last week the IMF explicitly called for the Swiss National Bank (SNB) to hike interest rates in the “near-term” in a report. It called the current policy of remaining on hold “unsustainable” and said that fears a strong franc would cause deflation or weigh on exports were unjustified. The latter point was backed up by exports data for April, which showed a 7.9 per cent increase, easily reversing the 3.1 per cent decline in March, suggesting a high franc hasn’t yet dampened demand for Swiss goods.
This wasn’t the only bit of good economic news. The KOF survey, a popular leading economic indicator, also remained at an elevated level in May.
So now the pressure is being heaped on the SNB to change its policy stance, which has consisted of keeping rates on hold and talking down the currency. The IMF said that intervention in the markets (verbal or direct) should only occur if there is excessive volatility, which isn’t the case right now.
So the SNB may have no choice but to hike rates in order to retain their credibility. The next policy meeting is 16 June and so far the markets still think that rates will remain on hold at 0.25 per cent. But GDP released on 31/05 could make this position untenable. Although inflation is not currently a problem, in April it was a mere 0.3 per cent on an annualized basis, high levels of growth – the markets expect a 3 per cent YoY rate – could lead to inflation pressures building up in the future.
This is likely to keep upward pressure on the Swissie for the time being, and there is a chance that EURCHF could see 1.2000 before staging a pullback. On a technical basis the pair doesn’t look oversold, which suggests there could be more steam in this record-breaking move higher.
The Loonie’s flight path facing some turbulence
The greenback declined against every G10 currency in the past week with the exception of one – the loonie. Canadian dollar weakness was jumpstarted last Friday by weaker than expected April CPI (+0.3% vs. expected +0.5%) and disappointing March Retail Sales which declined -0.5% from the prior month vs. expectations of a +0.9% print. Real retail sales also fell by -0.8% in March, its lowest levels since August ‘10, suggesting slowing domestic demand as Canadian consumers tighten their pockets.
Negative U.S. data surprises have also contributed to recent CAD weakness – weekly Jobless claims are back above +400k, pending home sales fell by a whopping -11.6% in April, and the Richmond Fed Manufacturing Index printed -6 vs. expectations of +9 in May. More significant, however, is evidence of moderating U.S. Industrial Production - accounts for almost 75% of Canada’s foreign sales - which swooned -0.8% from March to April suggesting downside implications for Canada 2Q GDP.
The Bank of Canada rate decision is set for release Tuesday with the target rate expected to be held steady at +1.00%. The U.S. fiscal situation, Eurozone sovereign debt concerns, moderating domestic demand, and a still firm Canadian dollar’s negative impacts on external demand are likely to be the deciding factors for continued passive BoC monetary policy.
Prior to the BoC rate decision, GDP figures are on tap Monday with Bloomberg surveys expecting a 1Q annualized rise of +4.0% and a March increase of +0.2%. Our estimates are in line with consensus expectations as the GDP release is likely to confirm a strong start of the year for the Canadian economy. However, we think that fading loonie strength on the back of a firm GDP print may be appropriate for two main reasons – the unlikelihood for the BoC to adopt a tightening bias due to the above-mentioned reasons and the technical breakout above the key 100-day SMA which had rejected upside attempts on numerous occasions since September ‘10. Accordingly, we think the short term bias in USD/CAD is higher with the key moving average likely to serve as immediate support in the week ahead.
Key data and events to watch next week
United States: Tuesday – Mar. S&P/CaseShiller Home Price Index, May Chicago PMI, Consumer Confidence, NAPM-Milwaukee, Dallas Fed Manf. Activity Wednesday – May ADP Employment Change, Apr. Construction Spending, May ISM Manufacturing, Treasury Secretary Geithner Testifies, Fed’s Pianalto Speaks, May Total Vehicle Sales Thursday – Weekly Jobless Claims, 1Q Final Nonfarm Productivity, Unit Labor Costs, Apr. Factory Orders Friday – May Employment Report, ISM Non-Manufacturing Composite, Fed’s Tarullo Speaks
Eurozone: Tuesday – German Apr. Retail Sales, May Unemployment data, EZ May CPI, EZ Apr. Unemployment Rate Wednesday – German and EZ May Final Manufacturing PMI, ECB President Trichet Speaks Thursday – ECB President Trichet Speaks Friday – German and EZ May Services PMI, ECB’s Gonzalez-Paramo Speaks
United Kingdom: Monday – May Hometrack Housing Survey Wednesday – May Manufacturing PMI, Apr. Consumer Credit, Lending, Mortgage Approvals, BOE’s Paul Tucker Speaks Thursday – May Construction PMI Friday – May Services PMI
Japan: Tuesday – Apr. Employment Data, Apr. Preliminary Industrial Production, Apr. Construction Orders, Housing Starts, Vehicle Production Wednesday – May Vehicle Sales Thursday – 1Q Capital Spending, BOJ’s Nakamura Speaks
Canada: Monday – 1Q GDP and Current Account, Mar. GDP Tuesday – Apr. Industrial Product Price, Raw Materials Price Index, Bank of Canada Interest Rate Announcement
Australia & New Zealand: Monday – NZ Apr. Trade Balance Figures, AU 1Q Operating Profits & Inventories, NZ Prime Minister Key Speaks Tuesday – NZ Finance Minister English Speaks, May NBNZ Business Confidence, AU 1Q Current Account, Net Exports, AU Apr. Private Sector Credit Wednesday – 1Q NZ Terms of Trade, NZ May Commodity Price Index, AU 1Q GDP, May RBA Commodity Price Index Thursday – AU Apr. Trade Balance, Retail Sales Friday – NZ Apr. Building Permits, AU May AiG Performance of Service Index
China: Wednesday – May Manufacturing PMI Friday – May non-manufacturing PMI
01/9/2011 - US jobs disappoint, but still in the right direction
US jobs disappoint, but still in the right direction
Dec. US job gains disappointed most observers, but that was mostly the result of heightened expectations following Wednesday's surge in the ADP report, a notoriously poor indicator of concurrent NFP changes. Still, that more jobs were created in Dec. represents another step forward for the US recovery, reinforcing the recent stream of better than expected US data. The decline in the US unemployment rate from 9.8% to 9.4% (exp. 9.7%) was also a step in right direction, but probably was overstated due to a 297K gain in the household survey coupled with a -260K decline in the labor force. Again, though, the trend is clearly pointing toward growing momentum for the US recovery, which we expect will continue for the next few months at least.
Following the labor report, the USD suffered set-backs against other major currencies, with the obvious exception being the Euro, which was the biggest loser for the week. Overall, though, the greenback managed to gain against 13 of the 16 major currencies to start the year (MXN, CAD, and KRW gained vs. USD), with the USD index finishing at its highest levels since late November. US Treasury yields fell somewhat following relatively somber and dovish testimony from Fed Chair Bernanke, with 10 year yields down about 7 bps to 3.32% late Friday, still above recent range lows at about 3.25%. While we expect the EUR to see lower against other currencies in the weeks ahead (see below), the USD may have more trouble extending gains against other major currencies, especially if bonds pop and yields drop below the recent lows cited above. We would also note that the US dollar index is facing stiff resistance at the 81.43/45 level, which is the Nov. high and the bottom of the weekly Ichimoku cloud. As such, we prefer to remain sellers of EUR on the crosses (e.g. EUR/CAD, EUR/GBP, or EUR/AUD), preferably on some kind of a bounce, rather than a buyer of USD, unless on a significant pullback toward recent lows. Consistent with broader USD strength, gold and silver prices look to have posted key reversal weeks, and we would now prefer to be sellers on remaining strength.
Is Europe about to implode?
After dodging a bullet before the holidays, Europe’s peripheral nations are once again getting punished in the bond markets. The spreads between German government bonds and the peripheral nations are close to record highs. Portuguese 10-year government bond yields (up 70 basis points this week) are now at critical levels. The government in Lisbon has said that 7 per cent is the threshold at which it would need to consider taking a bailout. Currently yields are 7.11 per cent, so it seems only a matter of time before Portugal is negotiating with the ECB, EU and the IMF and receiving funds.
Another worrying development is Belgium. Although it isn’t a core economy, it wasn’t considered a basket case either. Back in August its 10-year bond yield fell to 2.8 per cent, yet it is now above 4 per cent and has risen in line with other peripheral nations. So will the home of the European Union be forced to negotiate a bailout for itself in the coming months?
There are three main reasons that investors have targeted the peripheral nations bonds with such gusto since the start of this year. The first is a wave of supply that is about to come onto the market. On 12 January Portugal will offer 2014 and 2020 bonds for auction, Italy and Spain are also holding auctions at the latter part of next week. Investors charged a hefty premium to hold short-term Portuguese bonds in an auction last week, which doesn’t bode well for the upcoming debt sales. The news that the world’s largest bond fund will not be participating in the upcoming bond auctions is another red flag in our opinion as it points towards a buyers strike. If Portugal and Europe’s other weak nations have to pay a higher yield to attract investors to purchase their debt, soon people will worry about the impact higher debt payments will have on growth, causing more investors to ditch their debt and yields to rise and so on. This seems like the start of a debt spiral to us. Next week could see some real fireworks, and as you can see in the chart below, bond spreads are close to breaking fresh Euro-era highs.
Belgium’s problems are actually more political. It is currently without a full-time government and seven political parties are locked in discussions trying to form a government and overcome the political impasse. This is bad timing to have political meltdown as Belgium is finding out. Investors aren’t in the mood to suffer risks within the Eurozone easily and until a fulltime government is found it is unlikely there will be a let-up in the pressure on Belgium’s bonds.
Another factor weighing on sentiment toward the periphery is the European Commission’s plans to overhaul the governance of Europe’s banking sector. One of the proposals is to give regulators the power to write down senior bank debt by any amount necessary, or to convert bank debt into equity if a bank were to get into trouble. Until the risks to the investor are set in stone, European debt is an unattractive asset to hold.The sovereign debt crisis in Europe appears to be spilling over to the euro. EURUSD is currently below 1.3000, and if the sovereign debt crisis is poised to get worse then it will be hard to muster up much enthusiasm for a stronger euro and we could see a continuing grind lower in the single currency. A convincing break below 1.2960/65 could herald losses toward 1.2900 then 1.2650 – the lows reached back in October. But the decline may not be in a straight line due to continuing demand for the single currency from Asian central banks that want to diversify away from the dollar.
Queensland flooding slows down the Aussie
The Australian dollar has fallen over 3% against the U.S. dollar since reaching record free-floating highs on the last day of 2010. This past week, massive flooding in the state of Queensland has disrupted the economy by negatively impacting resource production and allocation. Mines, roads, and railways have been incapacitated by the rising waters. As an economy that is reliant on its natural resource exports as a key driver of growth, the floods have been significantly negative for GDP growth in Q1 (Queensland accounts for roughly 80% of Australia’s coking coal exports). This downbeat outlook has reduced the RBA’s near term tightening bias and has put pressure on the AUD.
While the Queensland state government estimates that so far the floods have generated a loss of up to 5 billion AUD or about 0.4% of annual GDP, it will be some time before the damage can be fully assessed. Additionally, the Australian Bureau of Meteorology forecasts heavy rains will continue into next week. We view this as a temporary supply-side shock and note that reconstruction will generate growth in the future.
Technically, AUD/USD sees a long-term rising trend line support come in around 0.9850 and the top of its daily ichimoku cloud to lend additional support around 0.9820. This support line begins at the June lows of around 0.8080 and was most recently tested on Dec. 1. The 55-day sma is currently above that at about 0.9920 to provide initial support. The current pullback in AUD/USD may present a buying opportunity at these support levels however a break below the trendline may see towards the 100-day and 21-week sma which currently converge around 0.9710 and then towards the Dec. lows around 0.9540. A sustained move back above parity may see towards 1.0100 ahead of 1.0200 and prior highs.
Encouraging jobs data and accelerating price gains supporting the Loonie
Much has been made of greenback strength with the USD Index surging close to +2.5% for the past month to current levels near 81.00. One major exception, however, has been against the Loonie – the greenback is down -1.84% against the Loonie month to date. The fundamental backdrop behind divergent CAD strength relative to most other majors can be attributed to a dichotomy of factors.
The first is the improving economic outlook in Canada and its likely impact on policy direction. Of significant influence to this has been the spate of positive data surprises in the US – Canada’s largest trading partner. Even more influential, however, have been implications of recent domestic data releases. Starting with the labor market, Net Change in Employment for December rose to +22k from +15.2k in November. Even more encouraging were the components of the report, full-time employment rose +38k while part-time employment declined -16k, a good sign for consumer confidence and spending which is likely to have a positive spill-over effect for 4Q 2010 GDP. Additional support to Loonie strength emanates from inflation related data. Wednesday’s higher than expected rise in November industrial product prices of +0.5% in conjunction with the +3.5% rise in November raw materials prices sent USD/CAD sharply lower from above parity to lows around 0.9930.
A second significant factor supporting the Loonie is the bullish outlook for oil prices. Improving growth outlooks and tightening supply (DOE weekly crude oil inventories have dropped for the past 5 consecutive weeks) suggest higher crude oil prices in 2011. Considering 2010’s inverse correlation of -.64 between USD/CAD and WTI oil – the outlook for higher oil translates to a corresponding strengthening in the Loonie.
Further progression in price gains, a likely possibility if Canada and US data continue down the path of positive surprises, may see the BoC consider resuming monetary policy tightening sooner relative to central banks of most other developed nations. The result is likely to see a continuation of CAD strength from a divergence in future interest rate expectations and widening differentials.
Key data and events to watch next week
Unites States:
Monday – Fed's Lockhart speaks
Tuesday – Dec. NFIB Small Business Optimism, Fed's Plosser speaks, Jan. IBD/TIPP Economic Optimism, Nov. Wholesale Inventories, weekly ABC Consumer Confidence
Wednesday – Dec. Import Price Index, weekly DOE U.S. Crude Oil Inventories, Fed's Beige Book,
Thursday – Weekly Jobless Claims, Dec. PPI, Nov. Trade Balance, Bernanke Speaks
Friday – Dec. CPI, Dec. Advance Retail Sales, Dec. Industrial Production & Capacity Utilization, Jan. preliminary U. of Michigan Confidence, Nov. Business Inventories, Fed’s Lacker & Rosengren speak
Euro-zone:
Monday – French Nov. Industrial & Manufacturing Production, EZ Jan. Sentix Investor Confidence,
Tuesday – French Dec. Business Sentiment
Wednesday – German 2010 GDP, EZ Nov. Industrial Production
Thursday – EU's Van Rompuy speaks, Jan. ECB Interest Rate Announcement
Friday – German Dec. final CPI, Dec. EZ CPI, Nov. EZ Trade Balance
United Kingdom:
Tuesday – BRC December Retail Sales Monitor
Wednesday – BRC Shop Price Index, Nov. Trade Balance
Thursday – Nov. Industrial & Manufacturing Production, Jan. BOE Interest Rate Announcement, Dec. NIESR GDP Estimate
Friday – Dec. PPI
Japan:
Tuesday – Dec. Official Reserve Assets, Nov. preliminary Leading & Coincident Index CI
Wednesday – Dec. Bank Lending, Nov. Current Account, Dec. Eco Watchers Survey
Thursday – Nov. Machine Orders, Dec. preliminary Machine Tool Orders
Friday – Dec. Domestic CGPI
Canada:
Monday – Nov. Building Permits, 4Q Business Outlook Future Sales, 4Q BoC Senior Loan Officer Survey, BoC Cote speaks
Tuesday – Dec. Housing Starts
Wednesday – Nov. New Housing Price Index
Thursday – Nov. International Merchandise Trade
Australia & New Zealand:
Monday – Nov. NZ Trade Balance, Imports & Exports, AU Dec. AiG Perf. of Construction Index, AU Dec. Retail Sales
Tuesday – 4Q NZ NZIER Business Opinion Survey, Nov. NZ Building Permits, Nov. AU Trade Balance,
Wednesday – Nov. AU Home Loans and Investment lending
Thursday – Dec. NZ Business PMI, Dec. NZ Card Spending, Dec. NZ House Prices, Dec, AU Employment Report, Dec. NZ ANZ Commodity Price
China:
Monday – Trade Balance (USD)
Thursday – Conference Board China November Leading Economic Index
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