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FX Market View of the Week (13-19 Jul 08)
USD
USD sentiments likely to be poor on recent unfavorable news flow
· The US Dollar took its cue mainly from turbulence in the US equity market last week. Concern on the stability of financial markets was sparked by a Lehman Brothers report which said that accounting changes may require the Freddie Mac and Fannie Mae to raise up to $75 billion of additional capital. This raised concerns on the solvency of the 2 Government Sponsored Enterprise through last week and fears were heightened by the news of the failure of IndyMac Bancorp on Friday. Equity markets fell as risk aversion rose on the news, dragging the US Dollar down to close lower last week. News that Iran had test fired more missiles end week got more investors on the edge, pushing up oil prices and added pressure on the Dollar. Actions taken by the U.S. Treasury aiming to restore confidence in Freddie Mac and Fannie Mae (Treasury Secretary Henry Paulson has reportedly requested for authority from the Congress to lend to and buy stakes in the two firms if necessary) may provide some relief to the pressure on the USD this week. With inflation concern remaining a key focus in the markets, U.S. June CPI will also be a key data release to watch out for this Wednesday.
EUR Industrial production data reaffirms outlook of economic weakness
· Economic data releases from the Euro-zone last week were reflective of the weak condition that is looming over the region. German industrial production disappointed sharply with a 2.4 per cent month-on-month decline in May, its third straight month of decline. The year-on-year growth rate stands at 0.8 per cent, down significantly from 4.8 per cent in April. The industrial production figures for France and Italy were similarly dismal, coming out below market expectations at -2.6 and -1.4 per cent respectively. The weak data supports the outlook that economic softness in the main European economies is exacerbating, and the need for more aggressive tightening by the ECB in the year seems unnecessary. With the lack of a catalyst on the domestic front for Euro strength, it seems likely that the EURUSD should remain largely range-bound between 1.54 and 1.60 in the weeks ahead.
JPY
USDJPY in narrow trading range
· The Economic Watchers survey released last week showed the main sentiment index fell more than expected. The outlook index dropped 3 points to 32.1, while the current conditions index slipped 2.6 points to 29.5. Both indicators remain well below the boom/bust level of 50 points, reflective of the depressed sentiments on the outlook of the economy. The prospect of a recovery in domestic consumption any time soon is bleak, with consumer confidence falling to a record low of 32.6 in June from 33.9 in May. We remain well convinced that the BoJ will have to keep to the sidelines for the remainder of the year and hence we expect no change to the policy interest rate at the central bank meeting this week. The USDJPY continued to trade in a tight range between 106 and 108 in the past week. We see near term technical support and resistance levels at the 55 and 200-day moving averages of 105.7 and 107.4 respectively. GBP
BoE keeping to the sidelines
· In line with expectations, the BoE kept key interest rate on hold at 5.0 per cent. As usual, no statement was issued after the announcement given that the policy rate was kept on hold. Domestic data in the past week was generally soft across the board. Manufacturing and industrial output came in below market expectations. While the DCLG house price survey showed a 3.7 per cent year-on-year rise for May, the Halifax house price index reflected that house prices had plunged 6.1 per cent on year for the quarter ending June 08. The Nationwide consumer confidence index fell to 63 in June, below consensus forecasts. Cracks are appearing in the UK economy and we see risks to growth. Nevertheless, inflation pressures will keep the BoE hard pressed to strike a balance on its monetary policy stance. We see at this point in time that the BoE will keep to the sidelines for the rest of the year. Against such a backdrop, the GBPUSD is seen to be range trading in the months ahead.
CAD
Signs of softening in the Canadian jobs market · The USDCAD closed lower last week, boosted by a weaker U.S. Dollar and an end-week spike in oil prices. Speculation that Freddie Mac and Fannie Mae may have problems staying solvent cast concerns on the U.S. financial system, placing the U.S. Dollar on the defensive for the most of last week. While a weak Canadian jobs report weighed on the CAD initially last Friday, a spike in crude oil prices past $147 dragged down the USD and helped provide respite for the CAD. The decline in jobs for the month of June (-5k against market forecast of around jobs gain of 6.5k) and the gradual rise in unemployment suggest that weakness is seeping through to the Canadian economy. Already, we have seen the fall in consumer confidence. Nevertheless, Canada is cushioned by positive terms-of-trade from high commodity prices and we should see some resilience in the economy. The BoC is likely to keep its key interest rate on hold at 3.0 per cent tomorrow.
AUD
Upside surprise in employment data
· The AUDUSD made some headway last week, pushing past stiff technical resistance at 0.96 to a high of 0.9716 last Friday on strong employment data. The number of jobs added in June came in at 29.8k, significantly higher than the consensus estimate of around 10k. Job losses in May was revised to -25.6k, up from -19.7k reported last month. The unemployment rate ticked down to 4.2 per cent from 4.3 per cent previously. As we have argued, tailwind from the positive effects of high commodity prices is supportive of the economy, bringing about the risk of positive economic surprises. Key events this week will be the release of the RBA 1st July meeting minutes Tuesday followed by the speech by RBA Governor in Sydney Wednesday. NZD
NZD seen to remain weak on rate cut expectations
· Data releases continue to point to lack-luster business conditions. From the QSBO survey, net 18 per cent of the businesses surveyed had weaker trading activity in Q2 compared to net 7 per cent in Q1. Net 18 per cent of firms expect weak trading conditions in Q3, the worst reading in more than 25 years. The manufacturing PMI also fell for the month of June, losing 2.2 points to 45.7. This week, 2Q CPI data will be released Monday (GMT 2245). Consensus is for a 1.4 per cent quarter-on-quarter (3.8 per cent year-on-year) rise in CPI. A weak reading would likely cement the start of the RBNZ’s rate easing cycle at the central bank’s policy meeting on 24 July.
KRW
Lower trading range for the USDKRW after suspected government intervention actions
· The USDKRW plummeted last week on rumors of massive intervention by the local government. The BoK was suspected of selling U.S. Dollars last Tuesday and Wednesday, with a trader quoted in a Dow Jones Newswire report estimating that the USD selling amounted to around $4bn to $5bn on Wednesday alone. The rumored intervention was also supported by more comments from government officials which suggest that the authorities see the USDKRW as being more “balanced” below the 1000 level. The aggressive stance that the authorities now appear to be taking in supporting the Won suggests a downshift in the trading range of the USDKRW.
INR
Aggressive monetary policy tightening likely to fight inflation
· The inflation figure continues to push upwards, with the wholesale price index reaching a new 13-year high of 11.89 per cent in the week ended June 28. Indications are that price pressures arising from higher energy prices are seeping into the broader economy and the RBI will have to take a hard stance to control the fast-ballooning inflation. Our house forecasts for India’s policy rates have been raised and we now expect the cash reserve ratio to be hiked to 9.75 per cent from 8.50 per cent currently and the repo rate to 9.50 per cent from 8.50 per cent currently by the end of this year. While tighter monetary policy should be supportive of the Rupee, the INR continues to be plagued by a deteriorating current account deficit, pointing to little likelihood of significant strengthening in the year. |
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