June 24 th FX Market Headlines. United States. United Kingdom. Australia. China

Transcription

1 June 24 th 2013 FX Market Headlines United States United Kingdom Australia China

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3 United States: Fed officials unveiled new quantitative guidance on a tentative plan for phasing out asset purchases that Citi Analysts think will begin at the September Federal Open Monetary Committee (FOMC) meeting. The timing reflects greater confidence in the outlook and a judgment that downside risks have diminished, in Citi Analysts view, and does not signal a more hawkish approach to policy. As expected, policymakers have pushed back against the view that early tapering implies earlier rate hikes. Officials' baseline suggests another $650 billion to $700 billion of Quantitative Easing (QE) assuming the jobless rate doesn't reach 7% for 12 months. Rate guidance remains especially accommodative with a widening gap between median expectations of a yearend % funds rate and traditional policy rules advising a rate well north of 2%. Stronger housing markets have played a key role in policymakers' upgraded view of the outlook. Data out this week on homebuilding, sales and buyer traffic as well as inventories reinforce the case for a leading role in recovery. Moderately higher mortgage rates would leave affordability at historically high readings. United Kingdom: The sharp selloff in rates markets is at odds with the UK economy s position and prospects, in Citi Analysts view. Growth is modest and, although headline Consumer Price Index (CPI) inflation remains above target, the overshoot is entirely due to large regulatory-driven and tax-driven price increases for a narrow range of items. Median inflation is subdued, below 2%, and the UK s underlying inflation rate (ie CPI inflation excluding utilities, tobacco, education) is similar to the weak euro area pace. The UK rate selloff partly reflects spillovers from external trends. But, Citi Analysts suspect that the selloff partly reflects uncertainties over the Monetary Policy Committee (MPC) s commitment to ultra-low rates if, as seems likely, the economy gradually improves while regulatory-driven effects keep CPI inflation slightly above the 2% target for a while. Would the MPC seek to tighten to push headline inflation down to 2% even with large regulatory-driven effects? Or, would it tolerate headline inflation slightly above 2% provided that underlying inflation is at or below 2%? Forward guidance could usefully reduce these market uncertainties, reducing risks that the nascent recovery is throttled by rising rate expectations. Citi Analysts expect Carney will lead the MPC to introduce guidance in H2 this year. AUSTRALIA: Lower AUD takes over the rebalancing challenge. The sharp fall in the AUD last week should boost the prospects for rebalancing of the Australian economy and help cushion the economy from the slowdown in China and other emerging economies. Citi Analysts expect growth to remain moderately below trend for most of this year but for a return to trend growth of around 3% next year. Underlying inflation to remain favourable to the Reserve Bank of Australia (RBA) - Citi Analysts new inflation forecasts show price pressure remaining benign, affording the RBA the option of cutting rates further should the economy require it. CHINA: Liquidity crunch temporary Interest rates on the Shanghai interbank money market (Shibor) have surged since late May. The overnight rate touched 9.6% on 8 June, the highest since 2006 before falling back to 7% on 14 June and 4.8% yesterday. The 1- and 2-week rates increased accordingly, reached 7.6% and 8.2% respectively on 8 June. The Shibor was mainly driven by unwinding capital inflows, payment of reserve requirement and tax, and tightening in the wealth management products and the bill market. If capital outflow persists due to two-way volatility of the CNYUSD, Reserve Requirement Ratio (RRR) cuts are expected to maintain a reasonable liquidity level. A slowdown in FX purchase is mainly responsible for the rate hikes In May, the position for FX purchase increased by Rmb66.9bn, significantly lower than the increase of Rmb295bn in Feb, Rmb236bn in Mar and Rmb294bn in Apr. Commercial banks have started to buy US dollars to meet the required lending deposit ratio for foreign currencies by the end of June following the SAFE s recent rule. It is estimated that the purchases of foreign exchange by commercial banks may amount to over Rmb150bn, lifting the demand for funds on the interbank money market. Capital outflows were also driven by the expectation of the dollar appreciation and the dividend repatriation of Chinese companies listed overseas which concentrated in June and July. Payments for reserves and taxes further raised the demand for RMB The RMB deposits of Chinese commercial banks increased by Rmb1481bn in May, compared with a reduction of Rmb100bn in Apr. The commercial banks are expected to pay an extra

4 Rmb200bn reserve funds in early June. Banks are also expected to borrow more RMB from the money market in May, the last month for the enterprises to pay their 2012 profit taxes. With an increase in corporate profits for 2012, over Rmb300bn would have been paid as profit taxes. New rules on WMP may have added to the panic in the money market Following the new CBRC rules on WMP, the banks have to raise more funds from the money market for their WMP. The increased demand for RMB derived from the maturity mismatch of WMP is however limited in May and early June, as such a demand often rises at the quarter end. The PBOC may start reverse repo or cut RRR if high Shibor sustains The PBOC has tolerated some higher cost of capital in order to discourage the bill financing market, which was often used by commercial banks to occupy loan quotas. But PBOC would have to start reverse repo or even cut RRR to insert liquidity into the market, if tight liquidity condition lasts, possibly due to strong capital outflows in expectation of a strong US dollar and weak RMB. Pending policy reforms are also important to restore market confidence on growth in the medium term and would thus change the direction of capital flows. CNY - Fundamentally the RMB still seems to be moderately undervalued (running trade surpluses consistently although recent surpluses may have been inflated a bit by over-reported exports), but not overwhelmingly and therefore the exchange rate is now subject to swings in market sentiment. Currently market forces still push for appreciation with spot remaining below the fixing even as PBOC intervenes to slow down the appreciation. The trade and growth slowdown may shift the direction of capital flows -- as was the case last year. Ahead of the Sino-US Strategic and Economic Dialogue scheduled in early Jul, Citi Analysts may continue to see strong fixings of USDCNY near term. The expected shift in market sentiment and capital flows will likely introduce two-way volatility, reducing the room for appreciation in 6-12m. USD: The Week Ahead Jun 24, Dallas Fed President Fisher to speak on U.S. monetary policy and the economy in London. Jun 26, Minneapolis Fed President Kocherlakota to speak on monetary policy in Seoul. Jun 26, Dallas and Richmond Fed Presidents Fisher and Lacker to testify before the House Financial Services Committee. Jun 27, New York Fed President Dudley to speak on employment conditions for recent college graduates and the economy. Jun 27, Federal Reserve Governor Powell to speak at the Bipartisan Policy Center on monetary policy and the economic outlook. Jun 27, Atlanta Fed President Lockhart will speak and participate in a Q&A session on the U.S. economic outlook. Jun 28, Federal Reserve Governor Stein to speak and participate in a Q&A session on monetary policy. Jun 28, Richmond Fed President Lacker to speak about the US economic outlook in West Virginia. Jun 28, Cleveland President Pianalto to speak on labor market trends and implications for monetary policy and development. Jun 28, San Francisco Fed President Williams to deliver a speech on the economy and monetary policy. Q&A to follow. Jun 25, May Durable Goods Orders (Percent Change): New Orders Total Citi. 2.6 %, April 3.5 %, March -5.9 %, Feb. 6.4 %; Excl. Transportation Citi. 0.5, April 1.5, March -1.6, Feb Citi Analysts expect that durable goods jumped again on big gains in transportation equipment orders, especially civilian aircraft. Airplane bookings tend to dominate the monthly pattern of this report, yet on a trend basis, they do not account for much of the growth in durable goods. Citi Analysts tend to focus on the non transportation sectors, especially core capital goods, to get a read on capital spending. After a lull in the middle of last year, core capital orders have increased by 9%. And although Citi Analysts are well aware of the volatility in durable goods, Citi Analysts do expect over time to see further gains as the economy strengthens in the second half. Note: Citi Analysts expect a rebound in core capital goods shipments after the surprising drop in April. Jun 25, May New Home Sales (Thousands): Citi. 460, April 454, March 444, Feb. 429, Jan. 458, Dec New home sales probably continued to advance in May, as nearly every other housing market indicator continues to signal recovery. Citi Analysts were particularly impressed by the jump in the housing market index for June, which indicated that builders have become much more confident in the housing outlook. The index increased by eight points to 52, approaching normal levels, based on large gains in sales, sales expectations, and buyer traffic. Note: Citi Analysts view the rise in inventories of unsold new homes as a positive development. Citi Analysts have maintained that the extremely low level of inventories was a limiting factor for sales, so Citi Analysts welcome this nascent rise. Jun 25, June Consumer Confidence: Citi. 75.0, May 76.2, April 69.0, March 61.9, Feb Citi Analysts think the Conference Board s consumer confidence measure consolidated after a big jump in May. High frequency data suggest that consumers were more optimistic early in the month, but Citi Analysts suspect that the sudden rise in rates and the attendant pullback in equity values stalled those gains. Jun 27, May Personal Income and Spending (Percent Change): Personal Income Citi. 0.3 %, April 0.0 %, March 0.3 %, Feb.1.2 %; Personal Spending Citi. 0.2, April -0.2, March 0.1, Feb. 0.8; Core PCE (12-Month Percent Change) Citi. 1.1,

5 April 1.1, March 1.2, Feb Although there was no gain in the workweek or average hourly earnings in May, Citi Analysts still look for a modest rise in personal income. It has been hard to see, given the volatility around yearend due to adjustments ahead of the fiscal cliff, but income has been rising at a steady 3% pace since Meanwhile, consumer spending probably posted a modest gain (held down by a weather-related drop in utilities usage) that puts it on track for real spending growth in the second quarter of slightly less than 2%. Note: The core PCE deflator has been rising at an exceptionally slow pace this year. Like the Fed, Citi Analysts think the deceleration has been caused by temporary factors, especially in the medical care sector, and is likely to pick up again later in the year. Importantly, inflation expectations have not been influenced by the pullback. Jun 28, June Chicago Purchasing Managers Index: Citi. 83.0, May 82.7, April 84.5, March The Chicago purchasing managers index has swung wildly in the past two months dipping below 50 in April (the lowest reading since 2009) and then spiking to nearly 59 in May. Judging from other manufacturing indicators, neither of these extremes was an accurate representation of the manufacturing sector. The manufacturing sector has slowed down due to a pullback in inventory accumulation and the stall in export growth due to the global slowdown. As a result, Citi Analysts expect the Chicago index to settle down to the low 50s in June, signaling moderate manufacturing activity. Jun 28, June Reuters/Michigan Consumer Sentiment Index (Final): Citi. 83.0, Jun (Prelim) 82.7, May 84.5, April Citi Analysts look for little change in consumer sentiment in late June. Sentiment dipped in the first part of the month, after a big upswing in May. There was nothing in the news that would have caused that decline, so Citi Analysts are chalking it up to normal volatility and maybe a slight pullback from the previous month s 10-point spike. AUD: 28 June, Private Sector Credit, June Forecast: 0.3%, previous: 0.3% - The record low cash rate continues to help boost housing credit, while personal and business credits are likely to remain subdued. EUR: Jun 24, German IFO Business Climate, Jun Forecast: Prior: Citi Analysts look for a second successive uptick in the German business climate measure in June, anticipating some improvement in both the current conditions (+1pt to 111) and expectations measures (+0.9pt to 102.5). While the further strengthening of the currency should be negative for business confidence, productions expectations have been recovering, stock market performance has improved and the stock market signals remain constructive. Jun 27, Euro area M3, May Forecast: 2.5% YY, 2.8% 3-M YY Prior: 3.2% YY, 3.0% 3-M YY - Base effects are likely to push the annual growth rate of M3 down again, after a small uptick in April (from 2.6% YY in March). This would confirm the slightly declining trend observed in the annual growth rate of M3 since autumn last year. Loans to the non-financial private sector probably fell further in May, after contracting by 0.4% MM in April, mainly to due still falling loans to businesses. Jun 27, Euro area Economic Sentiment, Jun Forecast: 89.8 Prior: Economic sentiment likely posted another small gain in June, which however would still leave the index slightly below the 1Q average. There is a risk that the flooding in central Europe may have affected firms production and order assessments and this creates some downside risks to Citi Analysts forecast. Industrial confidence is likely to have edged higher, while services and retail sectors have remained probably unchanged. Further small gains are expected in consumer confidence due to lower inflation and less fiscal drag than a few months ago. Jun 27, German Unemployment Change, Jun Forecast: +10K Prior: +21K; Unemployment Rate, Jun Forecast: 6.9% Prior: 6.9% - London Time Citi Analysts forecast a fifth successive increase in the total number of unemployed in Germany: the 10K uptick that Citi Analysts are pencilling in for June would imply a 37K increase in the quarter, the largest deterioration in four years. Note that the Ifo employment barometer rose in May for only the second time this year, pointing to some signs of stabilization in labor market dynamics. While Citi Analysts do not anticipate an increase in the unemployment rate in June, Citi Analysts anticipate that the German jobless rate will likely peak in 3Q-13. GBP: Jun 27, Balance of Payments, 1Q Forecast: Billion Prior: Billion - Figures already been released to show a slight drop in the deficit on goods and services trade to 8.5bn in 1Q from 9.6bn in 4Q, and Citi Analysts expect this will be reflected in a drop in the overall current account. A figure in line with Citi Analysts forecast would put the 1Q current account deficit at 3.1% of GDP, a little down from the 4Q-12 level (3.7% of GDP) but still above the pre-crisis norm (the CAD averaged 2.2% of GDP in ). Jun 27, GDP, 1Q (3rd Release) Provisional: 0.3% QQ, 0.6% YY Prior: -0.3% QQ, 0.2% YY - This release will include the annual Blue Book revisions to the national accounts data, with changes likely to stretch back over many years. A key issue to watch will be whether the revisions significantly alter the economic trends of recent years, in terms of the depth of the recession and the patchy recovery since then. Jun 28, Service Sector Output, Apr Forecast: 0.0% MM, 2.2% YY Prior: 0.2% MM, 1.6% YY - Service sector output rose quite strongly in recent months, increasing by 0.6% QQ in Q1. Surveys suggest that the trend of expansion is a little below that pace, and retailers already have reported lower retail sales in April. As a result, Citi Analysts expect that output will be roughly flat in April, although this would still leave the level of output 0.5% above the 1Q average. JPY:

6 Jun. 28, Nationwide Consumer Prices, Overall (May) Forecast: -0.4% YoY, Previous: -0.7% YoY; Excluding Fresh Food Forecast: 0.0% YoY, Previous: -0.4% YoY; Excluding Food (but not Alcoholic Beverages) and Energy Forecast: -0.5% YoY, Previous: -0.6% YoY - Citi Analysts estimate that the nationwide core CPI (excluding fresh food) remained unchanged from a year ago in May. The combination of a larger boost from special factors and a smaller fall in the core CPI excluding such factors likely resulted in an escape from negative territory in the month following a 0.4% YoY decline in April. The core CPI excluding special factors likely improved to a 0.51% YoY fall in May from a 0.61% YoY drop in April in line with a similar move in the Tokyo area reading for May (-0.45% YoY after -0.67% YoY in April). The overall nationwide CPI probably dropped 0.4% YoY in May (-0.7% YoY in April) while the CPI excluding food and energy likely declined 0.5% YoY (-0.6% YoY in April). Citi Analysts expect the core CPI to turn positive in June as upward pressure from energy prices increases. Jun. 28, Real Household Spending, All Households (May) Forecast: 0.7% YoY; 4.1% SA MoM, Previous: 1.5% YoY; -4.6% SA MoM - Real spending of all households probably increased 0.7% YoY and 4.1% MoM in May. Overall, an ongoing economic recovery likely bolstered expectations for better employment and income environment, providing support to healthy consumer spending in the month. The recent sharp correction in equity prices, which gained momentum in late May, is likely to be reflected in consumer spending in and after June, in Citi Analysts view. Jun. 28, Labor Data, Job Offers-to-Seekers Ratio (May) Forecast: 0.90, Previous: 0.89; Unemployment Rate Forecast: 4.1% of Workforce, Previous: 4.1% of Workforce - In May, Citi Analysts expect a flat unemployment rate at 4.1% with a slightly better reading (0.90) for the effective job-offers-to-seekers ratio. However, Citi Analysts expect a gradual decline in unemployment following a seesaw pattern through summer. Citi Analysts latest forecasts for the jobless rate are 4.1% for 2Q13 and 3Q13, 3.9% for 4Q13 and 3.8% for 1Q14. Jun. 28, Industrial Production (May) Forecast: 0.5% MoM; -2.4% YoY, Previous: 0.9% MoM; -3.4% YoY - May industrial production likely rose 0.5% MoM (+0.9% MoM in April), for a fourth consecutive monthly advance. Citi Analysts believe industrial production has remained in an upward trend supported by an export recovery and rising consumer spending. Citi Analysts projection suggests that output in April/May increased 1.6% over the first quarter average (+0.6% QoQ in 1Q), making another quarter of positive growth likely. Jun. 28, Retail Sales, Overall (May) Forecast: -0.5% YoY; 0.2% SA MoM, Previous: -0.2% YoY; 0.6% SA MoM - Retail sales probably decreased 0.5% YoY and increased 0.2% MoM in May. Overall, Citi Analysts think consumer spending remained healthy in May as the economic recovery encouraged expectations for better employment and income conditions. The recent sharp correction in equity prices, which gained momentum in late May, is likely to be reflected in consumer spending in and after June, in Citi Analysts view. Jun. 28, Housing Starts (May) Forecast: 6.9% YoY; 0.956mn units SAAR, Previous: 5.8% YoY; 0.939mn Units SAAR - Citi Analysts expect May housing starts to stand at 956k (+6.9% YoY) on a seasonally adjusted annualized basis. Frontloaded demand ahead of the planned consumption tax hike in April 2014 has already shown through to sharp increases in condominium sales and other data. Citi Analysts previous experience in 1997 indicates that housing starts and residential investment will likely peak in the third and fourth quarters of 2013, respectively. If the government officially decides on the hike, housing starts are likely to increase sharply into this autumn followed by a drastic fall towards the end of the year and beyond.