USD: Discount rate cut rumours circulate
EUR: PMIs mixed
JPY: To early to quantify impact of investment law revisions
AUD, NZD: RBNZ left rates on hold; RBA to lift ahead of election
CNY: Reval? And what it would mean to Asia
BRL: Eyeing US equities closely
Technical FX: USDJPY bear focus on 113.26
G10
USD: Discount rate cut rumours circulate
The US dollar was down slightly against most major currencies, with AUD and NZD once again the top performers. US Treasury yields collapsed by 13bp, while the S&P500 closed marginally lower down 0.2%, while the Vix index was basically stable, closing at 20.80. Existing home sales for September fell by 8.0% m/m to 5.04 mn, below expectations of 5.25 mn, while supply for homes stood at 10 � months, which was a record high. However, the market did not respond to the soft housing market directly, but rather focussed on rumours that the Fed would cut its discount rate, similar to the rumours that circulated ahead of the Aug. 17 FOMC decision. Also, affecting sentiment adversely was a Q3 earnings release from a major US investment banks, revealing that its write down of sub-prime related losses was larger than the market had anticipated. Although consumption and employment data have been modestly positive so far this quarter, the Fed will be concerned that with the housing market still not showing signs of bottoming out, the real economy may not prove impervious indefinitely. Policy easing may provide a cushion for markets but regardless of the macro scenario, we think appetite for growth assets will gradually wane as economies outside the US begin to show signs of economic moderation. We believe subsequent risk liquidation and repatriation will prove supportive for the dollar and we therefore target EURUSD returning to 1.35 in three months. Ahead today, jobless claims are due at 1230 GM, while durable goods orders for September are due at 1230 GMT. New home sales for September are due at 1400 GMT.
EUR: PMIs mixed
Eurozone PMIs, came in mixed with services at 55.6 from 54.2 previously and manufacturing weaker at 51.5. Overall, our economists believe the numbers confirm a picture of a downward trend in industrial activity. It seems that the services sector is more resilient at present; however, taking both surveys together, the composite PMI output balance is now below its long term average of 54.6 and way off the Q2, Q3 averages. Some other key releases ahead this week may help determine whether ECB concern regarding inflation is actually beginning to diverge with business sentiment. Sentiment indicators are largely expected to remain relatively flat in the IFO and GfK releases but the forward expectations will still likely convey a strong sense of uncertainty as credit markets are still in recovery mode. Although the ECB is still concerned with upside price risks, similar to other central banks across Europe, further hikes do not seem justified at this stage, with business groups already calling for help in easing credit conditions and stemming a stronger EUR. Our economists forecast no change to rates in the Eurozone for the remainder of the year. We remain cautious in chasing further EUR strength from current levels against the USD and CHF and see rates remaining steady for the rest of the year.
JPY: To early to quantify impact of investment law revisions
MoF security flow data for the week ended Oct.20 shows Japan net outflows of Y339 bn, versus balanced flows the week prior. Japanese purchases of foreign bonds and equities slowed to Y170 bn from Y550 bn, while foreigners were net sellers of Y170 bn in Japanese assets. Market participants are focused on whether outflows from Japan have slowed in light of the new investment laws that took effect earlier this month. Those laws mean that sales have much more documentation to go through in introducing new retail clients to investment products, hence slowing investment trust outflows and the like. However, the monthly MoF security data will provide more insight no that front, since it breaks down Japan investor outflows according to investor type. The October update won’t be due until mid-November. Investment trust and securities house outflows had already started to slow in August and September courtesy of the volatility in global markets and the sharp rise in the yen.
AUD, NZD: RBNZ left rates on hold; RBA to lift ahead of election
The RBNZ left rates unchanged this morning at 8.25%, noting that while there was evidence that the housing market is moderating, inflation pressures were persistent. The RBNZ also noted that the NZD remains relatively high, and that this is restraining externally-focused areas of the economy. Our NZ economist believes that rates will be kept on hold for the remainder of the year, and that the easing cycle should commence around the middle of next year. We think the market will remain focused on downside risks in the NZ economy and accordingly continue to project further upside in AUDNZD over 1 and 3 months. Q3 core CPI for Australia released yesterday was stronger than expected, and as a result, our economists now expect the RBA to lift rates at the Nov. 7 meeting even though that falls before the Federal Election on Nov. 24. Previously the RBA would avoid adjusting rates ahead of an election, but Governor Glenn Stevens said back in August that “If it is clear that something needs to be done. I do not know what explanation we could offer the Australian public for not doing it, regardless of when the election might be due”. A rate hike prior to the election would certainly reduce the odds even further that the incumbent Howard government can win the upcoming election.
Emerging FX
CNY: Reval? And what it would mean to Asia
Newswires on Wednesday quoted what was said to be an internal report by China’s influential National Development and Reform Commission suggesting that another 15-20% one-off revaluation of the CNY may be needed to counter persistent market expectations of continued appreciation of the yuan. While this was subsequently denied by the NDRC and the PBoC weighed in with comments reiterating its continued preference for gradual appreciation of the yuan, we would not rule out another move to revalue the CNY, although our base case is for Beijing to allow for a faster pace of yuan appreciation of around 5%-5.5% per annum from a 4.6% annualised appreciation year-to-date. We think a key factor that could make another one-off revaluation more enticing for the PBoC is a significant increase in pressure from hot money inflows. But we think under such a scenario, China would choose to move at a rate that does not harm local businesses and not reward speculators but just suffices to keep short-term speculators at bay, as they did in the July 2001 revaluation and de-pegging of the CNY. Relative to the purported NDRC recommendation to revalue the CNY by up to 20%, we reckon a revaluation of not more than 6% seems more likely, if at all such a move is being considered. This would naturally have a positive impact on Asian currencies in general but taking into account trade links and historical beta to CNY, we think another move to revalue the CNY would see the KRW, PHP and IDR benefiting the most among Asian currencies. These currencies have the highest beta to the CNY persistently over 3m, 6m and 12m. Korea has the highest trade links to China, with almost 20% of its total trade being with the country. The PHP and IDR are likely to see more central bank tolerance of currency appreciation should the CNY be re-valued. These countries’ trading patterns suggest their exports are largely still competing with China’s exports.
BRL: Eyeing US equities closely
The BRL had a flat day on Wednesday after tracking US equity markets all day. The fundamentals for the BRL remain supportive, with robust IPO and FDI flows picking up the slack from a diminishing current account surplus. However, the trade is somewhat crowded with investors selling USD in anticipation of these flows. This makes the BRL vulnerable to spikes in global risk aversion and US markets are likely to remain a driver in the short term. On the data front, inflation measured by the IPCA-15 for October was slightly above expectations (0.24% vs 0.22% Bloomberg survey), but short-term positive momentum from falling food prices has not ended, in our opinion. Our bias is to be long the BRL but to trade opportunistically, selling on USDBRL rebounds. In the short term, the pair should continue to trade in a 1.79-1.82 range given uncertainties from the US, with lingering pressure for appreciation.
Technical FX: USDJPY bear focus on 113.26
EURUSD BULLISH Recovery beyond 1.4350 necessary to relieve pressure on 1.4125 bear trigger
USDJPY BEARISH Maintain a bearish bias below 115.72, with focus on 113.26
GBPUSD BULLISH Remains entrenched in the 2.0247 - 2.0574 range
USDCHF BEARISH Vulnerable near-term below 1.1801, with focus on 1.1603
AUDUSD NEUTRAL Break of 0.8749 or 0.9078 required for fresh directional inspiration
USDCAD BEARISH 0.9825 resistance fuels new trend low - support at 0.9623/04
EURCHF BULLISH Tests trend-line support at 1.6626. Initial resistance is at 1.6741/50
EURGBP BULLISH Break of 0.6935 opens 0.6924 ahead of 0.6893. 0.7013 marks resistance
EURJPY BEARISH Bounced from 160.48, but 164.95+ required to offset heavy tone