09.07.2013, Time of writing: 03:30 GMT The Big Picture Short-lived rebounds ahead of Fed minutes? US is mostly lower this morning on what seems to be just profit-taking or position-squaring on recent moves. The biggest gainers overnight were the biggest losers yesterday, namely NOK and SEK. The across-the-board rally in European stocks yesterday gave rise to some optimism that the recent sharp drop in some currencies has been overdone, and few of the majors have dropped as much as NOK. But Norwegian stocks were up nearly 3% yesterday, double the rise in European stocks as a whole, leading to outperformance of the currency. SEK dropped vs EUR and NOK after Sweden reported a 2.6% mom decline in industrial production in May, but still managed to gain against the dollar. I would not put too much emphasis on sharp movements in such thinly traded currencies, though. By contrast, AUD and NZD were the only major currencies to lose ground vs USD, because of the fall in the National Australia Bank (NAB) business confidence to -8 in June from -4 and a rise in Chinese inflation to 2.7% yoy from 2.1%, which could encourage the Chinese government to take further steps to cool the economy. AUD and NZD were the currencies that benefitted most from the Fed’s QE program and we think they are the ones where the dollar has the most room to rebound. We remain negative on both of them. The positive action in European stocks yesterday only underscores how central banks are calling the tune. Actually, the main news out of Europe was negative yesterday: German exports collapsed and industrial production was sharply lower, calling into question the ECB’s forecast of a Eurozone recovery in 2H. The 9.6% plunge in German exports to the Eurozone shows that Germany cannot isolate itself from the problems in the rest of the region. Yet the DAX was up 2.1% as investors listened to ECB President Draghi reaffirm his commitment to keep rates low. What this suggests to me is that investors in Europe, like the US, are putting their faith in the central banks. With growth prospects in Germany fading, the ECB is likely to have to push even harder on its monetary policy to keep these hopes alive. That means moving further and further down the road of forward guidance, probably moving into conditional guidance that sets specific conditions for exiting monetary policy (as the Fed has done). This means to me further EUR depreciation to come. Ditto for GBP. After yesterday’s disappointing German industrial production figure for May, expectations cannot be that high for today’s UK IP figure, which rarely outperforms Germany. It’s expected to show a small rise of +0.2% mom vs +0.1% in April, while manufacturing production is expected to rise 0.4% mom, a turnaround from -0.2% mom in May. But even that would bring the yoy figure only to -1.6%, down from -0.6% yoy in April. That would not really encourage anyone to think that the UK economy is turning up convincingly and so I would consider it probably GBP-negative. The UK visible trade balance for May continues deeper into disaster territory,; including services, the total trade deficit is expected to be approximately unchanged from April at GBP -2.6bn. That should be GBP-neutral. In the US, the National Federation of Independent Businesses (NFIB) small business optimism survey is expected to show a small increase, following rises in consumer confidence. That could help the dollar further, although an early release of part of the survey showed no increase in jobs, which may be disappointing.
Posted on: Wed, 10 Jul 2013 00:55:06 +0000
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