Global FX Jan The euro area s sovereign debt crisis has been dominating trading in financial markets over the past year and the currency market was no exception. The region s debt problems spread from the peripheral to the larger euro bloc countries such as Spain and Italy. With credit rating agencies threatening to downgrade even the core countries including France and Germany, and the region s leaders unable to come up with decisive measures to quell the crisis, the euro came under selling pressure. After reaching its high of.9 against the dollar on May, the single currency has been trending lower, to close the year at.. For the year as a whole, the euro was down.. The euro s woes and concern about global growth also took a toll on other riskier assets such as the commodity-linked currencies. The Australian and Canadian dollar lost. and. respectively during the year against their US counterpart. In contrast, safe havens such as the Swiss franc gained ground, and the Swiss central bank had to put a cap on the Swiss franc at. per euro.....9.8.7. AUD/USD Spot Exchange Rate....9.8.7. 7 8 9 -Day Moving Average The euro region s debt crisis is likely to further weigh on the single currency going forward. Rating agency S&P s is expected to release its verdict on debt ratings for eurozone countries in January, after placing nations including top-rated Germany and France on credit watch negative in early December. Meanwhile, the Fed s policy stance could also have a potential impact on the dollar s movement. It has decided to stand pat for the time being, but if the US economy deteriorates, it may well resort to another round of quantitative easing to ensure that the economy does not fall back into recession. Q QF QF QF QF EUR/USD.99..8.8.8 USD/JPY 7.9 77. 78. 78. 78. GBP/USD.9.... AUD/USD...98.. NZD/USD.777.78.7.78.8 USD/CAD..... USD/CNY.9.7... Notes: End of period figures; F denotes forecast Sources: Bloomberg L.P, Hang Seng Bank
Interest Rates Jan Global economic uncertainty and the persistent eurozone debt crisis have been forcing major central banks to reverse their monetary policy stance. Those that started tightening policy, including the European Central Bank and Reserve Bank of Australia, had to cut interest rates, while some, such as the US Federal Reserve, had to keep their loose monetary policy for longer. These trends are likely to persist in the coming months as the euro bloc s sovereign debt crisis shows no signs of ending. In the advanced economies, both the Fed and the Bank of England would not only keep monetary policy loose, but may even ease further should conditions deteriorate. Possible actions that they may adopt include further purchases of government bonds and other debt securities as they try to lower the costs of longer term borrowing even further. Similarly, the ECB, under the helm of its new President Mario Draghi, has already shifted to an easing bias. The central bank unexpectedly lowered interest rate by basis points to. after its regular policy meeting on November. This was its first rate cut since June 9, representing a reversal of its monetary policy stance. The ECB raised interest rates in both April and July this year as inflationary pressures rose on the back of higher food and energy prices. Further interest rate cut could be expected. In addition, the ECB has been purchasing government bonds in the secondary market as yields on Spanish, Italian and even French government bonds have been surging. Developing countries such as mainland China are likely to shift further to an easing bias. The People s Bank of China cut banks required reserve ratio (RRR) on November for the first time in three years by. percentage point. More RRR cuts are expected in coming months. Interest rates will also be lowered gradually in the coming year. () Q QF QF QF QF US Fed Funds Target Rate -. -. -. -. -. Japanese Target Rate -. -. -. -. -. Euro Refinancing Rate..... British Repo Rate..... Australian Cash Rate..7.7.7.7 New Zealand Cash Rate....7. Canadian Bank Rate..... Notes: End of period figures; F denotes forecast Sources: Central Bank Data, Bloomberg L.P., Reuters, Hang Seng Bank
US Economy Jan - - - - - - Housing Starts US Housing Starts and Building Permits (year on year change) 7 8 9 Building Permits - - - - - - Recent reports show that the US economy might be on the mend, with consumer sentiment rebounding and labour market conditions stabilizing. Even the housing market showed tentative signs of improving, though house prices continued to decline. US consumers have become more upbeat. Consumer confidence, as reflected by the Conference Board s index, rose to an eight-month high of. in December. The rise largely reflects a better tone in the labour market. The unemployment rate dropped to a -/ year low in November and applications for first-time jobless benefits are the lowest since April 8. Despite the improved sentiment, however, consumers continued to hold back and would not spend unless retailers offered large discounts. Personal spending rose. for a second month in November. Other reports pointed to a steady recovery of the housing market. Existing home sales rose to an annual rate of. million units in November. At such a sales pace, the.8 million unsold homes on the market represented a 7 months supply, the lowest since February 7. Home builders are also more optimistic about the sector s outlook and started building more houses in November than at any time in the past 9 months. Housing stars surged 9. to a 8, annual rate, and building permits, a proxy for future construction, also climbed to a more than one-year high during the month. Despite the improved sentiment, the overhang of distressed properties in foreclosure continued to weigh on prices. According to the S&P/Case- Shiller index, property prices in US cities declined. in October on an unadjusted monthon-month basis, and by. year-on-year. While the US recovery is on more solid footing, growth is likely to be tepid at best. Consensus forecast calls for an overall GDP growth of. in, which is only slightly faster than the.8 estimated for.
Euro Zone Economy Jan -year gov't bond yield over the German Bund yield The pace of recovery slowed in the euro area last year, in large part reflecting the intensification of the region s sovereign debt crisis, as well as the effects of Japan s disaster in March and the economic slowdown in the US and the UK, its biggest trading partners. The annual growth of gross domestic product was. in the third quarter of, down from. and.7 in the first and second quarter respectively. 9 Spain Italy Belgium France Looking forward into, underlying growth momentum is likely to remain weak as the eurozone crisis is still unresolved. Although the leaders at a recent summit agreed to move towards closer economic and fiscal integration, it is uncertain whether the measures like tighter budget rules and a bigger rescue fund can resolve the crisis once and for all. In any case, troubled countries have to continue with their fiscal consolidation plans to restore investor confidence, and this will no doubt weigh on eurozone growth in the near term. In its latest forecasts, the European Central Bank revised down its GDP growth projection for to a range with a mid-point of. from., suggesting that the eurozone economy will grow only at a modest pace. To promote a stronger recovery, the ECB in early December cut its policy rate for a second consecutive month, from. to. It also took measures to ease strains in financial markets including offering longer-term loans to banks and reducing collateral requirements. But as long as the debt crisis remains unresolved, economic and financial uncertainty is likely to persist. Just days after European banks borrowed almost half a trillion euros for three years from the central bank, they placed record amounts of cash overnight in the ECB s deposit facility. Since the deposit rate at the ECB is only., compared with the at which the ECB offers loans, the high use of the facility suggests that financial strains may be too soon to be over.
UK Economy Jan 7.... -. -. -7. 7 9 7-8. 7.... UK GDP and Household Expenditure (in real terms, annual growth, s.a.) 9 9 9 9 98 8 -. -. -7. Households spending of final consumption expenditure (YoY ) Gross domestic product (YoY ) UK Unemployment and Claimant Count 7 8 9 Unemployment rate (all aged and over, ILO, s.a.) Overall claimant count (seasonally-adjusted) UK Consumer Price Inflation 7 8 9 8. 7.... 7.... 7 9 7 Consumer price index excl. energy, food, alcoholic beverages & tobacco (YoY) Consumer price index (YoY) - UK gross domestic product rose. in the third quarter of last year, revised up from the previous estimate of a. increase. However, the faster pace of growth probably reflected a rebound from the unusual factors in the second quarter, such as the bank holiday for the royal wedding and supply chain disruptions caused by the Japanese disaster. With the economy earlier stagnated, output growth over the past months was just.. Even with the upward revision, the fundamentals of the economy remained weak. Two years since the recovery began in the third quarter of 9, the economy has recovered only about half of the output lost during the contraction. Further, as the Office for National Statistics noted, growth is quite concentrated in a small proportion of components and is not broadly based. Growth based on output was very much concentrated in the business and financial service industry, which contributed. percentage point to GDP growth. In the expenditure approach, growth was primarily driven by increases in inventories. Derived from the contribution of gross capital formation, inventory accumulation could account for as high as. percentage point, whereas both household spending and government consumption made negligible contributions. The UK economy is now entering the new year with substantial challenges. The eurozone crisis continues to affect the British economy through the trade and financial channels. Household spending, which accounts for about of GDP, remains weak as the unemployment rate stays at the highest level since 99, while the government continues implementing its austerity measures. After the December meeting, the Bank of England kept monetary policy on hold. It maintained the policy rate at. and the existing programme of asset purchases totalling GBP7 billion, which should be completed in about a month s time. But with the UK s growth outlook weakening, some believe that the central bank may further increase the size of its gilts purchases to stimulate the economy in.
Key Economic Forecast Update US Euro Zone Japan Jan (Percent) F F F F F F Real GDP..8..8. -.. -.8.7 CPI Inflation Rate.....7. -.7 -. -. Unemployment Rate 9. 9. 8.8...... Official Short Rate # -. -. -.... -. -. -. -Year Bond Yield #..88.8.9.8.8..99. Notes: # End-of-period data; E Estimates F - Forecasts US Dollar Forecast Update Q QF QF QF QF EUR/USD.99..8.8.8 USD/JPY 7.9 77. 78. 78. 78. GBP/USD.9.... AUD/USD...98.. NZD/USD.777.78.7.78.8 USD/CAD..... USD/CNY.9.7... Notes: End-of-period figures; F denotes forecast Interest Rate Forecast Update Q QF QF QF QF US Fed Funds Target Rate -. -. -. -. -. Japanese Target Rate -. -. -. -. -. Euro Refinancing Rate..... British Repo Rate..... Australian Cash Rate..7.7.7.7 New Zealand Cash Rate....7. 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 8 Des Voeux Road Central Hong Kong