FX Week. Weekly 4 November USD strengthened over the past week. US election focus gives way to the fiscal cliff

Transcription

1 FX Week Weekly 4 November 212 D strengthened over the past week The D ended last week up.5% against major currencies, with the DXY index reaching 8.59 up from 8.15 at the start of the week. The rally is consistent with our view contained in our last October Monthly Insights document expecting a gradual D recovery to begin to take hold into the end of the year. The week saw more evidence that the economy continues to recover, with a number of indicators from consumer confidence to manufacturing sector activity data demonstrating this renewed momentum. Most significant of all at the end of the week was the jobs report which showed 171k of new jobs created in October, and an additional 84k of revised gains for the previous two months. The unemployment rate also picked up slightly to 7.9%, but not enough to detract from the underlying positive tone contained in the rest of the report. election focus gives way to the fiscal cliff With the D rising and equities falling back, the market interpretation seemed to be that the data lessens the chance of more aggressive QE from the Fed. The market may also be anticipating the increased possibility that Mitt Romney wins the Presidential election next week. Such an outcome could be interpreted D bullishly if it casts doubt on the likelihood of Fed Chairman Bernanke being reappointed when his term ends in 214, raising questions about the Fed s guidance to keep interest rates at exceptionally low levels until 215. However, we doubt if the election outcome is really the important factor here. A victory for either candidate could be construed bullishly or bearishly for the D depending on the issue in focus. A Romney victory might boost equity markets initially, but the accompanying rise in risk appetite would likely be taken negatively by the D. The opposite would be the case under an Obama victory. Regardless of who wins the election the issue that will matter most to financial markets is how the fiscal cliff will be dealt with. Unfortunately this issue might take a while to resolve, maintaining uncertainty in financial markets until the end of the year, and helping to underpin the D in the meantime. While we ultimately expect a benign outcome to the negotiations that will start once the Presidential election is over, the process of reaching such an outcome could be a fairly volatile one. It is already apparent that uncertainty over the fiscal cliff is prompting some firms to delay investment decisions, with the Fed s latest Senior Loan Officer Survey showing business spending declining in Q3 even as the supply of finance by banks increased over the same period. Dollar index begins gradual recovery Tim Fox Chief Economist timothyf@emiratesnbd.com Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 DXY Index 2-day MA Source: Bloomberg, Emirates NBD Research

2 BOJ helps to underpin D/JPY strength Also helping the D to gain ground last week were developments in the and in Japan. In Japan s case a further monetary stimulus by the BOJ was the second month in a row that the BOJ has increased its Asset Purchase Programme, this time by JPY11 trillion taking its total size to JPY91 trillion. And with the BOJ s revised forecasts still showing it missing its 1.% inflation target in two years time, the likelihood is that there will be yet more easing again in the future, possibly as early as December. This prospect helps to underpin our 6 and 12-month forecasts looking for D/JPY to rise to 82. and 85. respectively. Greece s position in the remains perilous The s travails over Greece also appear to be returning, as the markets have again been sharply reminded that two bailouts and countless austerity measures have so far failed to bring about an adjustment that will make Greece s debt sustainable. In fact far from improving Greece s debt/gdp ratio appears to be going in the wrong direction, with Greece s draft 213 budget acknowledging that it will widen to 189% of GDP next year up from 179.1% previously, and away from the 12% 22 target believed to be sustainable by the IMF. The coming week will see parliamentary votes on the 213 budget as well on proposed structural reforms, which if they fail could jeopardize the whole bailout program. But even with their passage, the next tranche of aid is not guaranteed with the finance ministers set to approve the next bailout installment around the 12 th November, and with the IMF looking increasingly inclined to support governments taking a haircut of their own on their holdings of Greek debt. Needless to say Greece s position within the is perilous with policymakers facing some difficult choices in coming weeks if it is to survive within the single currency. With Greece in the spotlight, the focus on Spain has lapsed, but the absence of news over a request for a bailout by the Spanish government should not be taken positively, as it means that the ECB s latest liquidity mechanism (Outright Monetary Transactions or OMT) still lies dormant. This means that another ECB meeting will come and go on Thursday with no progress to report, and probably no further monetary stimulus either. Neither outcome will be viewed particularly favourably, and with EUR/D now hovering around its 2 day moving-average it will only take a little more bad news over Greece to tip it lower again, towards our 3-month 1.25 forecast. Bank of England to leave its options open The s Bank of England Monetary Policy meeting on Thursday will also be closely watched by GBP, as doubts are beginning to grow about whether the Bank will announce another round of Quantitative Easing in view of slightly better recent performance by the economy. Q3 GDP expanded by 1.%, and other economic indicators have also shown some tentative signs of stabilization. Nonetheless, even if the Bank does remain on hold for the time being, it appears that the monetary authorities will only be adopting a wait and see approach as further data becomes available between now and the end of the year. Indeed, with the likelihood being that growth will lose momentum again in Q4, and that the crisis will not improve much in coming months, the chances remain high that further QE will be required at some point again in early 213. For this reason, we are still cautious about GBP, still seeing upside potential against the EUR, but viewing the upside for GBP/D as limited. Another RBA rate cut to pressure the AUD Stabilization has also been the theme in China recently, with data releases there supporting the view that a hard landing is so far being avoided. This is good news for Page 2

3 the commodity currencies such as the AUD, which have been relatively steady in recent days. More Chinese data is due out in the coming week, including prominent retail sales, industrial production, fixed asset investment data and CPI. The political transition within the Chinese leadership which begins on Thursday will also be watched closely to see if there are any signs that more stimulus measures might be revealed soon. The AUD also has to contend with domestic considerations, however, and here the message may be less supportive as the Reserve Bank appears poised to cut interest rates again. We have forecast for some time that the Cash rate will be lowered to 3.%, and we see little reason for the central bank to hold off from doing it this month Page 3

4 FX Forecasts - Major Forwards Spot M 6M 12M 3M 6M 12M EUR / D D /JPY D / CHF GBP / D AUD / D D / CAD EUR / GBP EUR / JPY EUR / CHF FX Forecasts - Emerging Forwards Spot M 6M 12M 3M 6M 12M D / SAR* D / AED* D / KWD D / OMR* D / BHD* D / QAR* D / EGP D / INR D / CNY *Denotes D peg Source: Bloomberg, Emirates NBD Research Page 4

5 Major Currency Pairs and Interest Rates Interest Rate Differentials - EUR Interest Rate Differentials - GBP German 2yr yield - 2yr yield GBP 2yr yield - 2yr yield Interest Rate Differentials JPY Interest Rate Differentials - CHF yr yield - JPY 2yr yield 2yr yield - CHF 2yr yield Interest Rate Differentials - CAD Interest Rate Differentials - AUD yr yield - CAD 2yr yield AUD 2yr yield - 2 yr yield Source: Bloomberg, Emirates NBD Research Page 5

6 (contracts s) (contracts s) (contracts s) (contracts s) (contracts s) (contracts s) Major Currency Positions CFTC Speculative Positions - EUR CFTC Speculative Positions - GBP Nov-12 Nov-12 long short net long (lhs) long short net long (lhs) CFTC Speculative Positions - JPY CFTC Speculative Positions - CHF Nov-12 long short net long (lhs) Nov-12 long short net long (lhs) CFTC Speculative Positions - CAD CFTC Speculative Positions - AUD Nov-12 Nov-12 long short net long (lhs) long short net long (lhs) Source: Bloomberg, Emirates NBD Research Page 6

7 Economic Calendar Date Country Event 5-Nov Australia TD Securities Inflation YoY% Lloyds Employment Confidence Australia Trade Balance Australia Retail Sales s.a. (MoM) PMI Services ISM Non-Manf. Composite 6-Nov BRC Sales Like-For-Like YoY Australia House Price Index QoQ Australia RBA CASH TARGET Japan Coincident Index CI Japan Leading Index CI Italy PMI Services France PMI Services PMI Services PMI Composite PMI Services Industrial Production (MoM) Euro-Zone PPI (YoY) Factory Orders MoM (sa) Canada Ivey Purchasing Managers Index SA NIESR GDP Estimate 7-Nov BRC Shop Price Index YoY Switzerland CPI - EU Harmonised (YoY) Euro-Zone Retail Sales (MoM) Euro-Zone Retail Sales (YoY) Industrial Production MoM (sa) Industrial Prod. YoY (nsa wda) MBA Mortgage Applications 8-Nov Consumer Credit Japan Machine Orders YOY% Japan Current Account Total Australia Employment Change Page 7

8 Date Country Event Source: Bloomberg Switzerland Unemployment Rate Trade Balance France Trade Balance (Euros) BOE ANNOUNCES RATES ECB Announces Interest Rates Canada Int'l Merchandise Trade Trade Balance Initial Jobless Claims 9-Nov Japan Consumer Confidence Consumer Price Index (MoM) France Industrial Production (YoY) France Manufacturing Production (YoY) Total Trade Balance (GBP/Mln) U. of Michigan Confidence Wholesale Inventories Page 8

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10 Emirates NBD Research& Treasury Contact List Emirates NBD Head Office 12th Floor Baniyas Road, Deira P.O Box 777 Dubai Tim Fox Head of Research & Chief Economist timothyf@emiratesnbd.com Research Khatija Haque Senior Economist khatijah@emiratesndb.com Aditya Pugalia Research Analyst Adityap@emiratesnbd.com Nick Stadtmiller Head of Fixed Income Research nicholass@emiratesndb.com Irfan Ellam Head of MENA Equity Research Mohammedie@emiratesnbd.com Sales & Structuring Head of Sales Sayed Sajjid Sadiq sayeds@emiratesnbd.com London Sales Lee Sims +44 () simsl@emiratesnbd.com Saudi Arabia Sales Numair Attiyah attiyahn@emiratesnbd.com Singapore Sales Supriyakumar Sakhalkar sakhalkars@emiratesnbd.com Group Corporate Communications Ibrahim Sowaidan ibrahims@emiratesnbd.com Claire Andrea clairea@emiratesnbd.com Page 1