Japan’s Finance Minister Azumi said that the government will take decisive currency steps if needed and that speculative moves in the currency market are increasing. He and his policy makers can breath a small ‘sigh-of-relief’ after NFP, the market decided to sell the JPY outright! How long is this going to last? These specific market moves are providing better levels to own the currency. Markets have taken the Ministers comments in their stride. Intervention is a rising risk for USD/JPY shorts if the pair falls towards that psychological 75 benchmark. It seems that exporter related sales will continue to cap any upside potential for the dollar. So, fears that the Greek Prime Minister may resign, the uncertainty that the Dutch Government may not want to write down loans to Greece will again make the yen more attractive.
Below are some other highlights of the week:
Asia
CNY: Chinese markets resumed trading following the week-long Lunar New Year holidays. Premier Wen said that the Chinese government will enhance the elasticity of the CNY exchange rate in both directions.
JPY: Japanese Finance Minister Azumi warned against a renewed rise in the yen and vowed to take firm steps against excess volatility and speculative moves in the FX market.
JPY: Japans December IP rebounded +4.0%, m/m, following the -2.7% fall in the previous month (the ‘flood’ knock effect-on from Thailand).
JPY: Yen remains sensitive to G10’s yield compression.
KWN: Korean IP growth fell to +2.8%, y/y in December from +5.8% in November. This is very much inline with soft export growth in December.
SGD: Singapore’s unemployment rate remained at +2% in Q4, despite weakness in IP and GDP growth for the same period. This suggests that the tightness in the labor market is partly structural.
CNY: China’s manufacturing PMI rose +0.2pt to 50.5 (higher than the consensus forecast of 49.6). Importantly, the PMI was much stronger than the seasonal pattern for a -0.7pt fall. New orders up +0.6pt to 50.4 while inventory fell -2.6pt to 48.0. Export orders fell -1.7pt to 46.9 while input prices rallied +2.9pt to 50.0. The data reduces the scope for monetary easing.
KWN: Korea’s CPI inflation fell to +3.4%, y/y, last month (foretasted for +3.6%). Core-inflation also slowed to +3.2%, y/y, from +3.6% in December. Digging deeper, exports fell -6.6% in January (first negative growth in three-years), providing a – $2.0b trade deficit. Note: Asian data may be distorted by the lunar New-Year celebrations.
IDR: Indonesia CPI inflation eased to +3.7% in January as expected. Core-inflation was broadly unchanged at +4.3%, y/y. The futures market expects their Central bank to ease monetary policy further, cutting rates -25bps to +5.75% next week (February 9). Export growth fell to +2.2% in December while import growth surged to +24.3%. The data has narrowed the trade surplus. Is their economy in the first stages of over heating?
TWD: Thai CPI inflation fell to +3.4%, in January (as expected). Futures market again expects the Bank of Thailand to cut policy rates by another -50bps to +2.5% by the end of Q2.
JPY: Comments from Japanese officials are finding it difficult to halt the yen gains. The perception that JPY is one of the most liquid currencies in the world is been seen as a sound alternative to the two prime reserve currencies, EUR and USD. Their stability and debt-led debasement issues are to blame. This would suggest that it’s only a matter of time before the BoJ appears in the markets directly. A similar storyline is being played out in Europe with the SNB.
CNY: China’s non-manufacturing PMI fell -3.1pts to 52.9 in January (less than expected). The HSBC Services PMI was unchanged at 52.5 for a third straight month in January.
JPY: Japan Finance Minister Azumi said that the government will take decisive currency steps if needed and that speculative moves in the currency market are increasing.
INR: RBI’s Deputy Governor Gokarn said that the central bank may buy dollar rupee to inject INR liquidity.
Analysts’ employment expectations were blown out of the water on Friday. NFP produced a stellar report, creating +243k new jobs, pushing the unemployment rate down two ticks to +8.3%. Risk has been quickly applied and added to in the markets. The loonie is a shining example of a growth currency outperforming, especially on the back of its own disappointing employment report. However, beware of the extremely bearish risk factors lurking in the background i.e Euro debt crisis, slowing global growth and Iran nuclear concerns, which remain largely ignored, before wagering it all on risk. It’s a good start to 2012 for the Obama administration, but not a trend just yet. The headline print has managed to produce some blood on the “street”, they had predicted a more bearish print.
Below are some other highlights of the week:
Americas
USD: This week we saw incomes pick up during December, +0.5%, however, individuals chose to increase savings instead of spending, showing a caution that will likely keep the US economy in slow growth mode throughout 2012. November spending was unrevised at +0.1%.
USD: Unexpected poor Case-Schiller Home Prices and an unexpected Chicago PMI managed to trigger some macro-money profit taking on the last day of the month. Case-Schilller November 20-city HPI fell -1.3%, m/m. The housing market remains sluggish despite lower prices and interest rates, an abundance of foreclosures and tighter mortgage requirements.
USD: Chicago PMI was 60.2 compared with a forecast of 62.2. The forward looking component, the new order index, dropped in January to 63.6 from 67.1.
USD: US January consumer confidence retreats to 61.1 from 64.8, giving back some of the huge gains witnessed over the past two-months. The fallback was concentrated in consumers views of the current economy. The present situation index (current economic indicators) dropped to 38.4 from a revised 46.5-“consumers are more upbeat about employment but less optimistic about business conditions and their incomes.”
CAD: The Canadian economy shrank for the first time in six-months, dragged down mostly by a decline in energy output (oil and gas fell -2.5%), down -0.1% to +CAD$1.27t in November. The BoC released forecasts from two-weeks ago was for GDP growth to slow to +2% in October through December from +3.5% in Q3.
USD: ADP reported that Private Sector Jobs with small businesses lead the hiring +95k. However, the December print was revised lower to +292k from +325k. Its a “slow and steady pace” that could bring down the unemployment rate, but not rapid enough to return payrolls to their pre-recession peaks anytime soon.
USD: January ISM rises near to expectations of 54.1, proof that growth picked up last month. Digging deeper, prices gained ground after contracting in December, and hiring grew at a slightly slower pace. Factories continue to be a consistent contributor to overall growth.
USD: The number of US workers filing new claims for unemployment benefits declined last week (-12k to +367k), continuing the mostly improving trend seen in nine-months. The four-week moving average decreased by -2k to +375,750, remaining below that psychological +400k benchmark that’s required to add jobs to the economy.
USD: In his House Budget Committee testimony this week, Bernanke has not changed his tune, again stating that the economy has shown signs of improvement while remaining vulnerable to shocks, and he called on lawmakers to reduce the long-term US budget deficit.
USD: Dallas Fed Fisher (nonvoter) reiterated his opposition to further QE. He said that QE3 is not needed and that it would complicate the eventual tightening policies.
CAD: Employers hired far fewer workers than expected in Jan (+2.6k vs. +23k) and the jobless rate rose unexpectedly to +7.6% from +7.5%. The data reflects an economy that’s slowing and is consistent with the BoC keeping rates unchanged. Despite creating +129k jobs last year-growth was in the first six-months. (Full-time jobs declined by -3.6k, part-time rose +5.9k, private and public sector increased by +39k while self-employed fell-37k).
USD:NFP produced a stellar report, sideswiping most analysts expectations. Payrolls increased by +243k, m/m, allowing the unemployment rate to ease two-ticks to +8.3%. The breakdown saw manufacturing gain +50k, services +162k and the Government eliminate-14k positions. The hourly income increased +0.2% while the number of hours worked remained unchanged at +34.5.
The EUR again has failed to break out of its current range. When its on its knees, down and just about out, Chinese PMI lends a hand in the overnight session. The world’s second-biggest economy has withstood weaker exports driven by the Euro periphery debt crisis and a government-induced property slowdown to give a PMI print of 50.5. A print that still is in expansion territory, no matter if the data may be distorted by a weeklong holiday.
Along with a rise in risk appetite influenced by a ‘whisper’ that a Greek debt deal is imminent, has the EUR testing against its upper range. In truth, it’s difficult to find a diehard Bull amongst us. The market psyche has us believing that most EUR positive moves are supposedly an excellent opportunity to add to the record short positions. These EUR short squeezes are to be treated as an opportunity-no action taken and it becomes a cost! The weak bears certainly hope so.
A successful conclusion to the PSI talks as “promised and expected” will not be the end of the matter-negotiations will remain ongoing. Why? The haircuts being discussed (around 70%) naturally will meet “with very unsatisfactory participation from the perspective of Greek and Euro/IMF authorities for forward looking debt sustainability.” Greece is likely to legislate Collective Action Clauses into the outstanding debt. The objective would be, once legislated, they can be used more coercively to force participation in the restructuring process-In English, whatever is agreed upon, there will be more negotiations required. The nightmare does not end with a successful PSI announcement.
Given that there are so many technical details to be worked out, maybe the market is not fully reflecting the difficulties that are likely to be associated with completing the Greek rescue package. For now, data showing that contraction in the Euro-zone factory activity last month (48.8 vs. 46.9) has slowed is supporting the single currency. Germany remains the outlier, the only country registering a reading above 50, indicating expansion. No matter, investors will wait for the promised Greek PSI agreement before outright celebrating. So, is it buy the rumor sell the fact time now?
The 1.32 EUR handle is in danger of becoming a distant past. Today’s Euro summit could fail to appease investors concerns about the fiscal outlook of Greece. If that is the case, then the single currency price action is on the verge of repeating itself; a pattern of pre-summit gains and post-summit losses.
The Greek economy is only “one” of the Euro peripheries on the brink of deteriorating further into the abyss near term. The country’s own officials are pushing back on Germany’s proposal for Greece to cede control over its budget in return for aid. Without aid from the IMF and EU, a Greek private sector involvement deal is in danger of collapsing this week. Everyday the market is warned of this pending deal, a deal that was supposed to be concluded weeks ago, a deal that still has some Euro-euphoria premium priced in. Further uncertainty will convince the optimists that a near term EUR top may have been already been established last Friday.
The Fitch credit downgrading last week does not make it any easier for some of the struggling Euro nations to come to the table to raise cash. Auctions this week will be the biggest test of sentiment so far this year. This morning, the Italian auction cleared well, with Italy selling +7.5b of bonds out of a total of +8b. However, the ECB were seen post-results; not necessarily good. Italy, Belgium and Spain sell no less than +EUR22b’s worth of debt amongst a credit rating poisoned atmosphere. The pending issues will be somewhat of a litmus test at these much lower-than-before yield levels. The Italian benchmark 10’s (+5.90%) had only recently traded above the markets +7% default barometer.
The Euro-zone economic sentiment rising to 93.4 from 92.8 has only been capable of offering the single currency slight short-term support. The currency seems to want to check out further, the stop-loss orders touted below the bids into the figure at 1.31 option expiry fame. The economic sentiment indicator along with other Euro surveys may persuade Draghi and company to leave monetary policy unchanged at next months meeting as they look to see if the Euro-zone economic activity is stabilizing. Is the EUR top in for now?
Plans for the Greek Private Sector Involvement remain a source of considerable uncertainty for peripheral markets, and the inconclusive result of negotiations over the past few days will leave the EUR and risk complex vulnerable to a large correction. However, the EU economic and monetary commissioner has indicated that authorities are very close to concluding their talks, either later today or over the weekend. Will the market add to the risk trades that have been applied since the Fed, earlier this week, increased its “free money” term length by 18-months? So far it’s been too tempting for the market to refuse and risk is being added accordingly.
The mixed signals from the Euro-zone debt market means investors need to tread with caution. Thus far, ECB liquidity has boosted demand for Spanish and Italian debt. The same cannot be said for Portugal. Peripheral bond yields have resumed their collapse this week, with Italian 10-year yields down -18bp to +5.84%, a long way from that +7% imploding benchmark. Portugal remains the outlier, with yields still under upward pressure. Perhaps if China invested in Europe we would not care so much?
Below are some other highlights of the week:
EUROPE
EUR: Greek talks were expected to show something of substance last weekend. Not unexpected, this week began with Greece failing to yield agreement on the public sector involvement. Negotiators have been squabbling over the coupon that restructured bonds will carry.
EUR: The single currency opened lower in the Chinese New Year and despite all the negatives, soared through last weeks highs allowing the techies to start talking about outside weekly reversals as the currency remains elevated.
EUR: Analysts expect that even a successful conclusion to discussions would still leave the actual degree of private sector uptake unclear. EUR bears are still looking for that top, as default risks will not fully ‘abate’.
FRF: French January business confidence surprised weak, falling to 91 from 94. The market had been expecting a small uptick, especially after the German IFO and EU PMI prints.
EU: Portuguese debt worries have resurfaced to add to Greek default concerns.
S&P’s Chambers: Greece ‘In all likelihood’ is down to a selected default. However, this default is not expected to destroy the credibility of EMU.
EU: Euro-zone flash PMI’s came in firmer than expected with the composite back above 50 after four-months in contraction territory. This suggests that the region ‘should avoid a collapse in output’ and another quarter in the GDP ‘red’. Manufacturing PMI rose to 48.7 from 46.9 and services PMI rose to 50.5 from 49.0.
GER: Their numbers were strong with manufacturing PMI at 50.9 and services PMI at 54.5. Big picture, data should help the Scandis and CE3 currencies.
ESP: Spain saw strong demand at its bill auction. Spanish Treasury sold +EUR2.51b of 3-and 6-month bills. The bid-to-cover was high in both issues.
EU: With Greek PSI negotiations inconclusive, the IMF is pushing for the ECB’s to take a haircut along with PSI as a means of distributing losses back to governments. However, the ECB and German coalition remains opposed to taking a loss on ECB holdings. Expect the heavy peripheral issuance schedule to remain a key factor in keeping the bulls on their toes.
GER: German ifo surprised higher with the expectations component at 100.9, above the consensus for 99 and up from 98.6 previously (the third consecutive rise) and suggests a GDP growth rate of +0.5% q/q.
GBP: UK GDP contracted more than expected in Q4, down -0.2%, q/q, vs. -0.1%. The weakness was driven mainly by soft industrial production in October and November and poor services at the start of the quarter.
GBP: BoE minuets deferred the decision on more QE until next month, as expected. The assessment on the economy was somewhat less pessimistic as members judged the most serious downside risks have abated. However, others understood that the “risks of undershooting the target meant an expansion of the QE program is likely to be required”.
FOMC: FX risk has rallied following the Fed’s shift to a more dovish policy stance. With US yields holding on to post meeting losses and pricing of tightening being pushed further out in the future has increased the appeal of EM FX.
HUF: Hungary sold HUF +48b worth of bonds (+13b more than expected). This would suggest that market perception of HUF risk has improved. PM Orban has softened his stance on recent legislation and indicated that he is willing to adjust their policies in order to win financial backing from the EU and IMF.
SEK: Manufacturing confidence surprised soft, falling to -14 vs. -11. Analysts believe that weak growth and the recent sharp moderation in core-inflation allows for a rate cut by the Riksbank at the next meeting.
EU: Peripheral bond yields have resumed their collapse, with Italian 10-year yields down -18bp to +5.84% (Friday Morning). However, Portugal remains the outlier with yields still under upward pressure.
EU: On Friday, Rehn indicated that PSI talks are very close to conclusion, either today or over the weekend.
EU: Euro area M3 growth has slowed significantly to +1.6%, y/y, from +2.0%.
CHF: Swiss KoF leading indicator dropped to -0.17 this month from +0.01 in December (ninth consecutive monthly decline and the first negative reading in two years). However, the release is at odds with the recent upward surprise in the PMI back above 50.
Fitch: Downgrades Belgium, Italy and Spain.
PLN: Poland recorded above consensus 2011 GDP growth of +4.3%, y/y.
Should continue to attract foreign capital and support the PLN.
“Key” surprises have ended up being the theme of this week. The Fed has extended the term of free money by 18-months and the door is now ajar for further QE. It’s the “when” that many appear to disagree with. It seems unlikely to be applied until after operation twist ends in June. QE2 and the ‘twist’ arrived after extensive debates and many months of weak data. In the medium term, both equities and commodities should continue to benefit from the idea that the Fed has better than even odds of performing additional QE.
US GDP, despite growing at a solid +2.8% in Q4, provided its surprise in the details. The mix of growth suggests weakness this quarter and beyond. The bulk of last quarter’s growth came from the inventory sector (+2% of the top-line). Real GDP ex-inventories were a poor +0.8%, the weakest pace in a year.
Below are some other highlights of the week:
AMERICAS
CAD: Retail Sales rose a tad more than expected in November (+0.3% vs. +0.2%). However, it was the smallest of four consecutive monthly gains, on increased sales of gas and clothing. Sales rose to +$38.7b slowing from a revised +0.9% increase in October. Sales volume at +0.5% was also the fourth straight increase.
USD: Obama’s campaign begins. In the State of the Union address he called for the creation of a trade enforcement division to investigate unfair trade practices, an end to tax deductions related to US company closures of facilities in the US for relocation abroad. He also announced plans to provide financing for US firms competing with overseas firms receiving state financing.
USD: December Pending Home Sales (-3.5% to 96.6) fell from its 19-month high print the prior month. The results were +5.6% above the December 2010 point.
USD: Weekly crude inventory report increased by +3.6m barrels last week to +334.8m barrels.
FOMC: The Fed surprised markets mid-week by extending its contingent commitment to low policy rates through 2014 (an extension of 18-months). In their transparency approach, the FOMC central projections showed only 6 of 17 committee members anticipate no easing before 2015.
USD: December durable goods orders firm with a +3% increase and a +2.1% ex-transport print. This supports recent manufacturing survey’s that the sector is regaining some momentum.
USD: As expected, seasonally adjusted initial unemployment benefit claims contracted upwards last week to +377k, up +21k w/w. The less volatile four-week average stands at +377.5k. Continuing claims now at +3.55m is more consistent with a +8.6% unemployment rate.
USD: December new home sales unexpectedly fell -2.2% to +307k, well below consensus estimates of +320k. It’s disappointing data on the back of other recent housing indicators having been positive. The data suggests that the market cannot be confident of a strong and sustained boost to GDP despite lower mortgage rates.
USD: First reading of the US Q4 GDP did not live up to hype. Economists expected +3% and they got +2.8%, however, still a notable improvement from the +1.8% in Q3 print.
USD: The belief that more jobs are to be had pushed the UoM consumer sentiment higher to 75 from 74. Sentiment has been expanding for five-months; stronger payrolls lead to stronger sentiment.
USD: UoM inflation expectations edged higher to +3.3% at the end of January from +2.7% earlier in the month.
Other regional data and policy innovation has mostly been positive for the Asian region this week. The Fed’s surprise extension of its commitment not to raise US rates for another 18-month’s, until late 2014, “should be the key to medium-term development”. Yen is expected to be the natural beneficiary of the latest dovish rhetoric by Bernanke and company and monetary easing by other G10 members. The lack of attractive yield opportunities complicates Japans current account recycling efforts. The stronger than expected Euro area flash PMI’s this month should be Asia’s strongest macro support (it suggests that the regions exports have ‘bottomed out’). Analysts historically use this indicator as a bellwether for Asian currency appreciation.
Below are some other highlights of the week:
ASIA
CNY: Chinese New Year of the Dragon begins.
AUD: Because of the Chinese Holidays, markets down-under were vulnerable to illiquid pockets this week.
AUD: The IMF has warned that Aussie banks might need “tougher capital requirements.”
JPY: It was no surprise that the BoJ cut growth forecasts at this weeks monetary meeting, while maintaining the policy rate (+0.05%) and leaving the QE program unchanged. Policy makers have revised down the country’s growth outlook for 2011 (from +0.3%, y/y, to -0.4%) and 2012 (from +2.2%, y/y to +2.0%) attributing the slowdown to the overseas economies and the retroactive revision of GDP stats.
JPY: Their inflation metrics remain unchanged, believing that the global financial markets, US balance sheet adjustments and price stability in the emerging economy, all represent risks to Japanese growth. What about the yen? It’s a currency that is likely to continue to “benefit from policy convergence and risk aversion.”
INR: The RBI held the repo rate unchanged at +8.5% (as expected), however, they unexpectedly lowered the cash reserve ratio to +5.5% from +6.0% (It’s first ease in nearly three-years). Analysts expect this to add approximately +INR320b into the economy.
INR: The RBI also revised this years growth forecast lower to +7% from +7.6%.
AUD: Australia headline CPI was flat in Q4 (forecasted for a +0.2%, q/q rise) due to a sharp fall in fruit prices. The RBA’s trimmed mean measure of CPI inflation was +0.6%, q/q, and the weighted median was +0.5%. Both are running at +2.6%, y/y, after some upward revisions to Q3 numbers. However, with core prices in the middle of RBA’s +2-3% target band suggests further easing is not required just yet. The market expects the RBA to cut rates +25bps because of Euro woes.
JPY: Japan’s December’s trade deficit rose to -JPY567b, pushing the 2011 trade balance into a deficit of JPY2.5trn (the first annual trade deficit in 20-years). Analysts expect this trend to continue for 2012. Euro uncertainties and global central banks monetary easing will continue to make it hard for any current account surplus to be recycled offshore. With repatriation of overseas assets remaining strong, the currency should remain under pressure longer term.
PHP: Philippine imports remained at a high, +$4.9b in November, pushing the trade deficit -$0.7b wider to -$1.6b. Remittances continue to support the PHP and a current account surplus. Expect policy makers to remain reluctant to allow their currency outperform in the region.
SGD: Singapore CPI inflation was at +5.5%, y/y in December, in line with the consensus forecast. Inflation is expected to remain high through the next one to two quarters. This scenario would suggest that the MAS to maintain the SGD on its current mild appreciation path.
FOMC: FX risk has rallied following the Fed’s shift to a more dovish policy stance. With US yields holding on to post meeting losses and pricing of tightening being pushed further out in the future has increased the appeal of EM FX.
KWN: With EM Central Banks more active in reducing the appreciation of their own currencies, the BoK is supposedly restricting KRW appreciation to about five won per day.
NZD: RBNZ remains on hold at +2.5%, as widely expected. No rate move is priced in until Q4.
KRW: GDP growth slowed to +3.4%, y/y, in Q4 vs. +3.5%. The underlying details were soft, with domestic demand and investment continuing to be weak. Net export growth also slowed.
SGD: In Singapore IP rose +12.6%, y/y, in December, much higher than the consensus forecast of 6.4%yoy. The MAS is expected to keep the SGD on an appreciating trend.
KWN: Korea’s manufacturing business survey rallied +2pts to 81 in January, and still below the expansionary level of 100. Analysts expect the index to rise in line with the recovery in global PMI’s. This would suggest stronger export growth and support for the won.
NZD: New Zealand recorded a trade surplus of +0.3b in December, this after four consecutives months in the red. This was achieved on the back of increased dairy exports. In December exports rose +13% while imports fell +1.6%. For 2011, the trade surplus was largely flat at around +1.1b. Expect further Kiwi appreciation to hurt exports. Governor Bollard at the RBNZ said he is comfortable with the current market pricing of no rates hike for the year ahead.
Can we shout “soft landing” loud enough? That is what Europe et al. are praying for from the “Red Rocket,” China. As their economy slows and key export partners struggle more than ever, the government must ensure a soft landing. The call must be fiscal stimulus driven with one priority, improve domestic consumption.
Policy makers seem to agree and are determined to push ahead with shifting the country’s growth drivers away from exports and towards personal spending. The PBoC continues to gradually ease policy. The market should not expect to see a repeat of 2008 when authorities pumped the equivalent of $630b to shield their “empire” from recession. This time around they are expected to be target selective.
Below are some other highlights of the week:
ASIA
EUR: The single currency is beginning to lose support from foreign Cbanks. Reserve data for the 4Q in 2011 reveals a weakening in reserve accumulation as compared to previous years. The ‘build (buy EUR’s) to hold down local currencies was nearly “zero”-resulting in a change of global asset prices.
CNY: China reported 4Q GDP growth of +8.9%, y/y, higher than the consensus forecast of +8.7%. For full year 2011, year-over-year, growth was +9.2%, down slightly from the +10.4% growth in 2010, supported by robust December macro-data. Retail sales growth rose to +18.1% in December, up from +17.3% in the prior month.
JPY: Japan’s Finance Minister Azumi indicated that the BoJ is monitoring the EURJPY rate as it continues to print record lows.
IDR: Bank of Indonesia widened the lower end of their inter-bank rate to +200bps, that is similar to a -50bps cut. With BI continuing to ease monetary conditions and the current account now balanced leaves the IDR more vulnerable to capital flow weakness.
CNY: There have been reports from China indicate the RRR for banks in Guizhou has been lowered. It seems that authorities want to continue to ease selectively following the robust 4Q data.
MYR: Malaysia’s inflation fell to +3.0%, y/y, in December from +3.3%. Analysts note that robust domestic demand points to Bank Negara Malaysia keeping policy rates on hold.
IDR: Indonesia’s credit rating was raised by Moody’s to investment grade at Baa3. Along with Fitch’s support, this can potentially increase portfolio inflows going forward, a positive for the IDR in the medium term.
AUD&NZD: Poor Aussie employment data (-29.3k in December, below consensus for a +10k gain) is supporting expectations of a further RBA cut (-25bps in February) and a weaker than expected CPI by the Kiwis (+1.8%, y/y, versus the +2.6% forecasted and down sharply from +4.6% in Q3) has put the antipodean currencies on the back foot medium term.
PHP: Bangko Sentral ng Pilipinas cut policy rates -25bp to +4.25% as expected. Easing inflation has allowed the Cbank to commence easing to support growth. Ample liquidity allows the easing to have a minimal impact on the currency.
CNY: China’s 2011 fiscal revenue rose +24.8%, while fiscal spending only rose +21.2%. The HSBC flash Chinese PMI was roughly flat in January at 48.8. The market believes the results to have been biased by the by the Lunar New Year.
THB: Thailand’s export growth was better than expected at -2%, y/y in December vs. -10% expected. Import growth surged to +19.1%, y/y, from -2.1% in November. The trade deficit widened to a record high of +$2.1b. The market expects the floods to continue put pressure on the trade balance. This will obviously affect the THB
The market needs an extended break to digest what was dumped on her late Friday and Martin Luther King Day in the US gives us that opportunity. The decision by S&P to downgrade the sovereign ratings of nine euro-zone nations continues to weight on risk sentiment across all asset classes. Thus far, the market believes that the one notch downgrade in France’s rating to AA+ should not snowball into widespread selling of French product. That theory has been tested this morning with the French Treasury coming to market with +EUR8.7b of 84-day-357-day T-bills. The issues drew strong investor demand in Frances first bill auction of 2012 with short-term yields rising only slightly from record lows reached in its last auction of 2011.
The biggest fallout from the rating agency’s actions will be the potential effect it could have on the EFSF. If the EFSF rating is downgraded, analysts estimate that the lending capacity would be reduced to +EUR150b. The German MoF is “in no doubt that the EFSF can fulfill tasks with the current volume.” The S&P’s chop has left Portugal with a rating of BB negative outlook, and has taken the country from a pool of investment grade assets to speculative grade, joining Greece and Cyprus. It seems logical to assume that if Greece cannot pull-off another PSI and move closer to default, then it will only be matter of time before Portugal is on ‘her shoulder.’ Policy makers unwilling to commit further funds are going to have a difficult time convincing investors that PSI for Greece will be the last.
Big picture, unless Draghi and company change its tune on QE or Merkel her views on Eurobonds then it will not be long before the market again is talking about another bailout for Portugal and an earlier focus on that country’s PSI situation.
FX moves seem to belie sovereign yields at the moment. Despite rates punching above their weight, there is a perception that the EUR has weakened too much following the rating announcements last week. The downgrades do not have much of a surprise element in it and the EUR has still managed to drop 1.5-big figures. In times past, and with FX anticipating a downgrade, the single currency typically weakened -0.3%. Is this currency move exaggerated? Perhaps it is the new norm to be seen across all asset classes?
Again, this morning selling EUR’s on rallies is preferred, giving the market a bearish consistency in all asset classes. With the US on holiday and in some corners a perception of an oversold market should lead to some further consolidation in the currency markets short term.
Other Links:
Worried about the Exit of Capital from China?
All dealers can talk about is the limited upside of the single currency and that the risk reward favors shorting the EUR. Analysts have been revising their first quarter and year end projections down to an average of 1.22 and 1.15. Despite the surprisingly positive sovereign periphery bill and bond issues this week, the prospect of additional ECB easing suggests that interest rate support for the EUR is likely to wane further over the coming week or months. The relative strength of the US economy compared to the Euro and UK means that the pound and EUR should record further upsets to the USD.
This mornings Italian bond auction has given the market more of an excuse to fade the single currency rallies. “Buy the rumor and sell the fact” played out very nicely. The market seems to have taken yesterdays stronger periphery auction results as an opportunity to own some ‘expensive’ EURs and even sell them at a profit and then some, proven by the price action over the last 24-hours. One gets the feeling that the market is again happily short at better levels. The solid prior sale of Italian bonds has only upped the ante and the results have only served as a trigger to short the EUR. Further tests of the 1.27 handle are eyed with fresh offers reappearing at the old option strikes of 1.285. The longer term support remains close to the option barriers of 1.265.
Italy managed to sell a total of +EUR4.75b 2014/2018 BTP (the top end of their range). The yields at the auction came in lower than the secondary market levels, some traders were disappointed with the bid-to-cover ratio; the FI market seems happy selling Italy and buying German Bunds as the spread looks attractive.
Even surprisingly strong EUR data is ignored by market players. The Euro-zone this morning posted an unexpected trade surplus surprise. The market had been forecasting a deficit of-EUR1b, however, the region registered a surplus of +EUR1b. A surge in exports helped the Euro-zone post this major surplus. Can the region avoid a severe economic downturn? The Euro tends to post trade deficits in the winter months due to the high fuel and energy inputs. However, the seasonally adjusted figures show that the inputs were the same month-over-month while exports surged +3.9%!
Now we have to wait and see if North America wants to cash in some EUR profit this morning, no matter what, offers are again appearing as the market seems to have more conviction about medium term direction. Before this weeks auctions, the bulk of investors have been happily waiting on the side lines.
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Will the US embrace the EURs new found confidence?
