USD Bearish Euro sentiment and retreat in oil prices supportive of USD near term
· The US Dollar staged a recovery over the past two weeks, aided by the retreat in crude oil prices. Sentiment on the USD had also improved as the scare of a fall-out in the financial sector from the problems of Freddie Mac and Fannie Mae was perceived to have passed for now. Economic data releases came out mixed last week. 2Q08 GDP disappointed at a 1.9 per cent seasonally adjusted annual rate, which was below the 2.3 per cent pace expected by the market. Weekly jobless claims soared to 448,000, an increase of 44,000 from the previous week. While the ISM manufacturing Index slipped only 0.2 points down to 50.0 in July, weakness seen in the sub-components of the index was worrying. This was especially so for the new orders and export orders indices, which slumped 4.6 and 4.5 points to 45.0 and 54.0 respectively. July non-farm payrolls came out better than expected, at -51k against consensus forecast of -75k. The unemployment rate rose in July to 5.7 per cent from 5.5 per cent the previous month. While we expect economic data to show further weakness in the coming quarters, concurrent deterioration in other developed economies should cushion USD weakness against most major currencies. Further, the recent retreat in oil prices and the shift towards bearish Euro sentiment on recent weak Euro-zone economic data suggest support for the USD near term. Our house view, as with the majority of the market, is for the Fed to keep interest rates on hold this week.
EUR
ECB likely to stay sidelined on rates this week
· The Euro fell last week despite mixed economic data releases. German consumer confidence fell to a 5-year low, while German retail sales declined 3.9 per cent year-on-year (-1.4 per cent month-on-month) against forecasts of a decline of 0.8 per cent yoy (-0.5 per cent mom) in June. The Euro-zone unemployment rate edged up to 7.3 per cent in June from 7.2 per cent the previous month. Meanwhile, inflation pressures have remained stubborn, with the Euro-zone preliminary CPI announced at a 4.1 per cent rate for July, up from 4.0 per cent in June. Nevertheless, we remain doubtful that July’s inflation figure will trigger another rate rise from the ECB this week (or for the rest of the year, for that matter). Inflation is expected to push even higher near term, but the weak economic data that had been coming out of Europe suggests slowing economic activity which should ease inflation pressure in the medium term.
JPY
USDJPY hovering at support as equity markets struggle
· The USDJPY broke out and stayed above its 55-day moving average, which now looks to have become the near term technical support level at 106.46. Meanwhile, a slowdown in global growth is still expected to dampen demand for Japanese exports. The labour market remains weak, which in turn undermines the outlook for domestic consumption. Last week, data showed the jobless rate rising, while real household spending was down 1.8 per cent year-on-year. But a further bounce in the equity markets could drive more gains in the USDJPY near term.
GBP
BoE expected to keep key interest rate on hold this week
· The GBPUSD declined over the past week as weak domestic data weighed on the Pound. The Nationwide house price index slumped 6.1 per cent on year in July and the outlook for the housing market looks bleak. The UK July manufacturing PMI was well below the boom/bust line at 44.3, disappointing consensus expectations of a 45.5 reading. This week, industrial production, services PMI and consumer confidence figures are due Tuesday and the BoE rate decision on Thursday. While inflation is expected to push higher to 4.5 to 5 per cent in the coming months, we believe the BoE will keep the base rate on hold this week given the threat of an impending sharp slowdown in the UK economy. We expect BoE to cut cuts in 4Q08 when inflation has peaked and widespread weakness in the UK economy is seen.
CAD
CAD hit by retreat in commodity prices
· The CAD lost ground steadily against the USD in the past two weeks on the back of the retreat in oil and commodity prices and broad-based recovery in Dollar strength. Unexpectedly, the GDP contracted 0.1 per cent month-on-month in May, adding to the bearish sentiment on the CAD. Near term, the USDCAD is still expected to dance to fluctuations in oil and commodity prices. Key domestic data to watch out for this week would be employment numbers due Friday.
AUD
AUDUSD slumped on disappointing economic data
· The AUD declined sharply in the past week, weighed down by lower commodity prices, surprise weakness in domestic data and heightened expectations of upcoming rate cuts by the RBA. Retail sales slumped in June, falling 1.0 per cent month-on-month against the consensus estimate of a 0.2 per cent rise. Building approvals also turned out worse than expected, falling 7.8 per cent year-on-year against market expectations of a 4.8 per cent decline. Data releases in the past week added to concerns that the slowdown in the Australian economy is becoming more broad-based and market expectations of rate cuts by the Reserve Bank of Australia (RBA) before the end of the year have soared. Indeed, we think the Australian economy is likely to follow the footsteps of New Zealand into a rate easing cycle at the end of the year as activities continue to slow and inflation pressure eases. But we expect this to take some time to play out. While recent data flow has tipped the AUD into a bearish mode which may persist for a while, we would be a bit wary, for now, of being overly pessimistic on the AUDUSD this quarter. We expect the RBA to remain on hold at its interest rate meeting tomorrow.
NZD
Further rate cuts likely in September
· The decline in commodity prices and ongoing weakness in economic data releases have put the NZD under heavy downside pressure. Building permits plunged 20.2 per cent month-on-month (down 47.1 per cent year-on-year) in June, pointing to the likelihood of a significant slowdown in the construction sector which would be a drag on the economy. Further, the NBNZ business confidence index has dropped 4.5 points to -43.2 in July. We expect the RBNZ to move with a second 25 bps interest rate cut in the quarter at its next policy meeting in September. Sentiment on the NZDUSD is likely to remain weak near term.
KRW
BoK seen to opt for 25 bps rate hike this week
· Edgy sentiment in the domestic equity market kept upward pressure on the USDKRW, though lower oil prices and wariness of government intervention had contained the USDKRW below 1015 in the past week. Upside in the spot rate is likely to remain capped on expectations that the BoK will continue defending the Won for now. This week, the BoK MPC meeting is due Thursday and we expect the central bank to hike its key policy rate by 25 bps to 5.25 per cent as a gesture of its commitment to fight inflation.
IND
USDINR expected to range trade with risk of downside bias near term
· In line with expectations for a move to a tightening stance, the Reserve Bank of India hiked the repo rate by 50 basis points (to 9.0 per cent) and the cash reserve ratio by 25 basis points (to 9.0 per cent) at its quarterly monetary policy meeting last Tuesday, adding support for the INR. Near term, INR is expected to benefit if the domestic equity market stabilizes and the price of oil continues to retreat. SCB’s 3Q08 target for the USDINR is 42.80.
