- USD: Payrolls could provide an excuse
- JPY: Spec flows have driven yen so far
- GBP: BoE rates unchanged
- CHF: PMI strong, CPI today
- SEK: Strong GDP
- NOK: Disappointing PMI
- SGD: Potential outperformer if risk aversion spikes
- KRW: Risk may hurt but fundamentals intact
- Technical FX - EURJPY remains pressured, scope for 159.60
G10
USD: Payrolls could provide an excuse
High yielding currencies such as the AUD and the NZD outperformed overnight, as risk aversion eased further and stock markets rose. The USD traded lower against EUR, with EUR boosted by a hawkish Trichet, possibly signalling a September rate hike. The S&P500 rose by 0.4%, and unlike on Wednesday, it wasn’t on the back of a last minute surge in purchases by bargain hunters. Meanwhile, 2 and 10-year Treasury yields finished the session down by 2 and 3bp respectively, presumably as safe-haven flows were unwound. While equity markets have managed to rebound, we suspect that it is far too early to close the book on this latest chapter of risk reduction. Our FX Risk Index continues to move towards record risk aversion levels and markets remain very sensitive to adverse headlines relating to hedge fund losses and the health of mortgage lenders, and banking system exposure to those risks. The USD has shown a fairly reliable tendency in recent years to benefit from equity market stress, as US investors cut back on overseas holdings, and we see scope for this to continue. Moreover, with rate markets pricing in quite a bit of rate hike risk for central banks outside the US, the USD now stands to benefit if spreading credit crunch concerns begin to undermine the G10-ex-US rate outlook. Lastly, the recent moderation in crude prices is also potentially supportive for the USD, as diversification flows from energy producers are believed to have played a role in recent USD declines. We remain short EURUSD from 1.3720 as a trade recommendation. Ahead today, non-farm payrolls for July is due at 1230 GMT. The market expects a rise of +130k, roughly unchanged from the
+132k recorded the month prior. ADP data on Wednesday pointed to a weak
number, while jobless released yesterday were better than expected.
Clearly, payrolls could provide an excuse for risk aversion to spike higher again, should it disappoint market expectations.
JPY: Spec flows have driven yen so far
The MoF’s weekly security flow data released yesterday showed very large outflows by foreigners in the week ended July 28. Bond and equity outflows by foreigners totalled Y0.91 tn in the latest week, versus inflows of Y0.72 tn in the week prior. Meanwhile, Japanese cross-border investment flows were very modest, leaving overall net capital flows dominated by the foreigners. The fact that the yen strengthened sharply last week despite the bond and equity outflows suggests that unwind in carry positions was responsible for the move in yen. Indeed, IMM data, released Friday, showed that net speculative yen short positions fell from -121k to -81k in the week ended July 24. Overall, real money flows have probably not yet been behind the stronger yen, although that could change should Japan asset managers choose to lower their exposure to US asset backed securities in the coming months. We target USDJPY at 119 over 1 month and 117 over 3 months based on the view that we are going through a structural pick up in volatility. As such, USDJPY has likely become a sell on rallies rather than a buy on dips.
GBP: BoE rates unchanged
The Bank of England has left rates unchanged as expected. The pound struggled recently as a consequence of the current risk environment and support may continue to drain if rate expectations further suffer as data shows activity moderation. Markets have priced in weaker expectations of BoE hikes while support from sentiment for yields may also continue to wither. Data remains key in the short term and the MPC will still need to see trends in slowing growth before moving towards a more neutral stance. UK Halifax house price inflation came in at 0.7%m/m, above expectations of 0.3%. The underlying q/q rate has however slowed to 1.7% from 2.6%, but going forward the MPC will want to see a discernable sign of slowing to be dissuaded from raising policy rates again. We continue to see the GBP as at risk at current levels but acknowledge it may be too early to begin fading strength while upside BOE risks remain.
CHF: PMI strong, CPI today
Swiss PMI for July came in at 63, above market expectations for 62 and
62.8 last. The slight increase in the headline reading is the result of both higher production and order backlog. On balance our economists believe this is another very strong sign of life for the Swiss business sector at the beginning of H2. With highly volatile global equity markets also triggering further risk aversion, we advise against fading CHF strength. Sentiment tracked by our risk index, has reached levels last seen six years ago and has stayed above the extreme-risk aversion level of 2.0 for consecutive sessions. The current market environment is supportive of CHF strength so far and in the absence of data releases out of Switzerland, risk aversion, especially in the form of global equity performance remains key in assessing the franc. Also key this week will be Friday’s CPI release, and at 0.6% (vs. 0.6% the prior month), we expect further proof that inflation remaining well contained in Switzerland. SNB rate hike expectations have already come off considerably in recent days, and a weak CPI figure should further support the view of the SNB keeping to a more gradual tightening track.
Accordingly we keep the view that EURCHF will reach 1.66 over one month, and 1.65 over three months.
SEK: Strong GDP
Sweden’s Q2 GDP preliminary estimate surprised markets to the upside at 1% q/q and 3.6% y/y. The release followed last month’s stronger than expected CPI (1.9% y/y versus expected 1.7%) and retail sales readings, and this week’s Swedbank’s PMI survey. Household consumption and gross fixed capital formation were responsible for the highest contributions to growth, while exports and imports enjoyed a further increase.
Consumer and manufacturing confidence received a boost from the planned wealth tax abolition. Therefore, the outcome is consistent with our call for two more rate hikes in September and December, taking rates to 4.00% by year end. The risks to Riksbank policy remain to the upside if data continues to exceed expectations. We remain cautious on SEK strength and target EURSEK at 9.20 and 9.25 in 1m and 3m, respectively.
NOK: Disappointing PMI
July PMI was much weaker than expected at 47, down from 60.9 in June.
Historical data shows such downside surprises to be frequent during the summer months. As such, reaction was muted. Also, the unemployment rate showed the labour market easing, with the rate increasing from 1.8% in June to 2.1% in July. We note, however, that the data is not seasonally adjusted. The AKU unemployment rate for May, due Monday, will be a more telling print. We and the consensus still look for Norges Bank to deliver three more rate hikes this year, starting with a 25bp rate hike on August 15. We are cautious on entering fresh long NOKSEK positions before Norwegian fundamentals rebound to support such trade. Our 1- and 3-month EURNOK forecasts are unchanged at 7.90 and 7.85, respectively.
Emerging FX
SGD: Potential outperformer if risk aversion spikes Despite higher risk aversion and a rout in global EM assets in recent sessions, the SGD NEER has been resilient over the last month and managed to hold at levels slightly above the NEER policy midpoint according to our model. This reflects Singapore’s relative safe-haven appeal during times of heightened uncertainty and makes the SGD a potential long play in constructing a protection trade against a further spike in risk aversion. While the SGD has a historically small absolute correlation to the VIX index, this correlation tends to move into positive territory at times of heightened risk, implying that the SGD tends to appreciate against the currencies in the NEER policy basket when risk aversion increases. The SGD is also well supported by improving fundamentals. The
Q2 GDP numbers released in July showed an estimated annualized rate of 12.8% growth in the second quarter - the fastest pace in two years. The manufacturing sector is also showing signs of recovery to complement the services and construction sectors, which both look set to remain strong throughout this year. The reacceleration of the economy, with the lowest unemployment rate in six years and strong domestic demand, points to further monetary tightening via a higher SGD NEER within to the current policy band. Our NEER model suggests that the SGD is currently around 0.25% above the policy midpoint, implying ample room for the SGD to outperform the policy basket. Given current fundamentals, we expect a gradual appreciation of the SGD back to around 1% above the NEER policy midpoint by the end of the year. We maintain 1.5050 and 1.4900 USDSGD forecasts over 1 month and 3 months respectively.
KRW: Risk may hurt but fundamentals intact
The KRW has come under some pressure in recent sessions, hampered by risk aversion. But unless global risk aversion takes a sharper, more sustained upturn, which would threaten most EM currencies, we continue to like the won based on solid domestic fundamentals. Shipbuilders are still raking in global orders while exporters show no sign of being bothered by the won’s strength, reflecting that Korean exports have moved up the value chain and are no longer competing on price.
Exporters’ reduced sensitivity to the won’s strength against the yen has become more obvious in the last 12-18 months. The JPYKRW rate has fallen to its lowest since the 1997/98 Asian financial crisis in recent weeks, but Korean exports have remained very strong, growing at an average rate of 15.6% over the last 12 months. And the pace of growth is not showing any sign of deceleration as exports have grown at the same pace over the last 3 months to July. We also do not subscribe to the view that the won’s appreciation against the USD has been excessive compared to other major currencies since USDKRW began a sustained downward trend from the start of 2002. Indeed, indexing the two from Jan 2002 would show that the fall in USDKRW has lagged the fall in the USD Index over the last five years. We expect portfolio and FDI inflows to underpin the KRW even if the JPYKRW eases below the psychological 7.50 level. We maintain our view that USDKRW should end the year at or below the 900 mark. We have recommended including the KRW as part of a long Asia currency basket against the USD.
Technical FX - EURJPY remains pressured, scope for 159.60
EURUSD NEUTRAL Likely to remain heavy near-term below 1.3771, key
support 1.3608
USDJPY BEARISH Holds 117.60 key support, needs break of 119.51 to
trigger gains
GBPUSD NEUTRAL 2.0180 marks bear trigger, heavy below 2.0495
USDCHF BEARISH Choppy price action defines 1.2166 and 1.1961 as key
directional triggers
AUDUSD NEUTRAL Break of 0.8459 would open 0.8354/31 solid support zone.
0.8616 resists
USDCAD BEARISH 1.0702 break would trigger fresh strength, support at
1.0499
EURCHF NEUTRAL Bull trend on hold, 1.6347 likely to come under
pressure. Resistance 1.6527
EURGBP NEUTRAL Pullback opens 0.6704. Topside, break of 0.6770 will
trigger fresh strength
EURJPY BEARISH To remain under pressure with scope for 159.60.
Resistance at 163.95