Global FX 2 Apr 2012

Transcription

1 Global FX 2 Apr 2012 Uncertainty reigned in the currency market over the past two weeks, with the dollar fluctuating in rather tight ranges against most other major currencies. The greenback initially came under selling pressure after US Federal Reserve Chairman Ben Bernanke s speech on the US economy on March 26, which reignited expectations that the Fed might go for further quantitative easing. He warned that the trend of improving labour market conditions might not be sustainable, and that the US economy had to grow more quickly to cut the unemployment rate further. However, renewed concerns about the eurozone s sovereign debt crisis and growth in Europe and mainland China triggered some safe haven flows to the greenback. Investors feared that the Mainland economy might be heading for a hard landing, after its government revised its 2012 growth target to 7.5 from 8 in the past eight years, as well as a stream of disappointing data, including HSBC s PMI manufacturing. The commodity-linked currencies were hardest hit as they rely on exports to mainland China for growth. The Australian dollar hovered below 1.04 against the greenback. The euro then pared losses after eurozone finance ministers agreed at their March 30 meeting to combine the region s two rescue funds, namely the European Financial and Stability Facility (EFSF) and the European Stability Mechanism (ESM), to make EUR500 billion of new funds available in case of emergency until mid-2013, on top of EUR200 billion already committed to bailouts for Greece, Ireland and Portugal. During this week, market focus is likely to shift back to the US, as a slew of key economic data, including ISM and nonfarm payrolls, are due for release. EUR/USD USD/JPY GBP/USD AUD/USD NZD/USD USD/CAD USD/CNY Notes: End of period figures; F denotes forecast Sources: Bloomberg L.P, Hang Seng Bank

2 Interest Rates 2 Apr 2012 The Fed has been keeping overnight interest rates near zero since December 2008, and bought USD2.3 trillion in bonds to stimulate growth. At its March meeting, the US central bank reiterated its view that lackluster growth would require keeping rates near zero through late However, what is the way forward for the bond purchase programme, to buy more or not? The issue is still being debated among the hawks and the doves in the Federal Open Market Committee and for the moment, there seems to be no consensus on the issue. US Federal Reserve Chairman Ben Bernanke s comments suggest that he is among the doves in the Committee, and keeps alive hope for further quantitative easing (QE) in the future. Despite the improvement in the labour market, Bernanke warned that the trend might not be sustainable. He also said that the US economy had to grow more quickly to cut the unemployment rate further. In contrast, St. Louis Fed President James Bullard is in a different camp. He is more optimistic about the US economic outlook, expecting growth to be about 3 this year. He reckons that the Fed should think carefully before embarking on a third round of QE, as this would have long term consequences for both the US and the global economy. He cited the experience of the 1970s and said that if the inflation genie is let out of the bottle, it can be extremely difficult to get it back in. Similarly, Atlanta Fed President Dennis Lockhart also seemed more sanguine about the economic outlook and said recently that the Fed should hold the balance sheet unchanged. Across the Atlantic, the situation seems to be clearer. European Central Bank President Mario Draghi s recent comments suggested that the central bank has done enough to ease the stress in financial markets. Interest rates are therefore likely to be held unchanged for now and that there would be no more injection of liquidity after flushing over EUR1 trillion of three-year money into the bloc s banking system in the past three months. () US Fed Funds Target Rate Japanese Target Rate Euro Refinancing Rate British Repo Rate Australian Cash Rate New Zealand Cash Rate Canadian Bank Rate Notes: End of period figures; F denotes forecast Sources: Central Bank Data, Bloomberg L.P., Reuters, Hang Seng Bank 2

3 US Economy 2 Apr 2012 The outlook for the US economy is more upbeat after the recent stream of positive data, including retail sales and nonfarm payrolls. Even the housing market, which was the root cause of the financial crisis and has since been languishing, has shown signs of stabilising. Housing demand, especially for second hand homes, has been slowing rebounding. The sales of existing home fell 0.9 in February, but data for the previous month was revised upwards to show bigger gains. Despite the weak sales pace last month, the median price of second hand homes rose 0.3 from a year ago to USD156,600, the first yearly increase since November Housing inventory has also been falling. The number of previously-owned homes on the market amounted to 2.43 million. At the current sales pace, it would take 6.4 months to sell those houses, down from 8.1 months in September last year. Similarly, sales of new homes fell 1.6 month on month to an annual rate of 313,000 units in February. However, they were up 11.4 in year on year terms. The median new home price also jumped 6.2 to an eight-month high of USD233,700 compared with February last year. With housing demand slowly recovering, home builders have also become more optimistic and therefore more willing to build more homes. While US housing starts were down 1.1 in February from January, they were up 34.7 year on year. Moreover, building permits, a proxy for future construction, surged to the highest level since October Nevertheless, house prices continued to fall. The S&P/Case-Shiller index of house prices in 20 major cities fell 3.8 in January from a year ago, after decreasing 4.1 in December. At current levels, prices are still over 30 below its peak in US Federal Reserve Chairman also warned about the economic outlook. He said in a recent speech that the US economy had to grow more quickly to cut the unemployment rate further, leaving the door open for further monetary easing should conditions deteriorate. 3

4 Euro Zone Economy 2 Apr 2012 Market sentiment towards Europe have continued to improve in recent days, after Greece secured a second bailout package and the European Central Bank offered more than EUR1 trillion long-term loans to banks. Benchmark government bond yields in Portugal, Italy, and other deficit countries have fallen considerably, while five-year credit default swap prices for them have also declined Eurozone Consumer Price Inflation Consumer price index, YoY Consumer price index excluding energy, food, alcohol and tobacco, YoY Source: Reuters EcoWin, Hang Seng Bank Eurozone Money Supply & Loans Growth Money supply (M3) annual growth, seasonally-adjusted Loans to the private sector annual growth, seasonally-adjusted Sources: Reuters EcoWin, Hang Seng Bank Eurozone leaders are now taking further steps to solve the region s debt problems and restore confidence, including moving towards closer fiscal integration and a temporary increase in the size of the region s rescue fund. But any such attempts would fail unless the indebted countries do take their responsibility and cut spending. And without a rise in consumption or investment to offset such a fall in public expenditure, austerity measures are likely to weigh on growth in the short term. Economic data in the first months of the year were largely positive, raising hopes of stabilisation in economic activity. However, more recent data were mixed, highlighting the fact that it is a long road for the eurozone to regain strength. Industrial new orders dropped by a 3.3 annual rate in January after a 0.4 decline a month earlier, while the purchasing managers index for manufacturing, which is widely regarded as a good forward-looking indicator of activity, unexpectedly fell in March. At the time that economic activity appears to have stabilised, inflation is broadly stable. Consumer price inflation was 2.6 in March, down marginally from 2.7 in February. While the recent rises in oil prices have increased risks to inflation, slow growth in money supply and bank credit suggest limited upward pressures on prices. In February, growth of loans to the private sector eased to 0.7, the lowest since June The European Central Bank still sees the fiscal crisis as a major downside risk to the economic outlook, although it also acknowledges that recent data have shown some signs of stabilisation. But with the inflation rate remaining above the ECB s target of 2, many expect the central bank to keep its policy on hold and refrain from launching further monetary easing measures. 4

5 Key Economic Forecast Update US Euro Zone Japan 2 Apr 2012 (Percent) F F F Real GDP CPI Inflation Rate Unemployment Rate Official Short Rate # Year Bond Yield # Notes: # End-of-period data; E Estimates F - Forecasts US Dollar Forecast Update EUR/USD USD/JPY GBP/USD AUD/USD NZD/USD USD/CAD USD/CNY Notes: End-of-period figures; F denotes forecast Interest Rate Forecast Update US Fed Funds Target Rate Japanese Target Rate Euro Refinancing Rate British Repo Rate Australian Cash Rate New Zealand Cash Rate Canadian Bank Rate Notes: End-of-quarter figures; F denotes forecast Sources: Central Bank Data, Bloomberg L.P., Reuters, Hang Seng Bank This document has been issued by Hang Seng Bank Limited ( HASE ) and the information herein is based on sources believed to be reliable and the opinions containe herein are for reference only and may not necessarily represent the view of HASE. The research analyst(s) who prepared this report certifies(y) that the view expressed herein accurately reflect the research analyst s(s) personal views about the financial instrument or investments and that no part of his/her/their compensatio was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. Nothing herein shall constitute as offers o solicitation of offers to buy or sell foreign exchange contracts, securities, financial instruments or other investments. Re-distribution of any part of this document by an means is strictly prohibited. The information contained in this document may be indicative only and has not been independently verified and no guarantee, representation, warranty or undertaking express or implied is made as to the fairness, accuracy, completeness or correctness of any information, projections or opinions contained in this document or the basi upon which any such projections or opinions have been based and no responsibility or liability is accepted in relation to the use of or reliance on any information projections or opinions whatsoever contained in this document. Investors must make their own assessment of the relevance, accuracy and adequacy of the informatio and opinions contained in this document and make such independent investigations as they may consider necessary or appropriate for the purpose of such assessmen All such information, projections and opinions are subject to change without notice. HASE and its affiliates may trade for their own account in, may have underwritten, or may have a position in, all or any of the securities or investments mentioned in thi document. Brokerage or fees may be earned by HASE or its affiliates in respect of any business transacted by them in all or any of the securities or investments referre to in this document. The investments mentioned in this document may not be suitable for all investors. Investors must make investment decisions based on their own investment objectives financial position and particular needs and consult their own professional advisers where necessary. This document is not intended to provide professional advice an should not be relied upon in that regard. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. Investment involves risk. Investor should note that value of investments can go down as well as up and past performance is not necessarily indicative of future performance. This document does no purport to identify all the risks that may be involved in the securities or investments referred to in this document. Hang Seng Treasury Joanne Yim Thomas Shik Hang Seng Bank Limited 83 Des Voeux Road Central Hong Kong 5