THE BIG PICTURE • The dollar continued to weaken. It fell against most G10 currencies and all 15 EM currencies that we track. (The only exception was AUD, which fell after announcing a surprising 10.8k fall in employment in August vs an expected 10.0k rise.) The biggest gainer among the G10 was vs NZD. While the Reserve Bank of New Zealand (RBNZ) left the Official Cash Rate (OCR) unchanged at 2.5%, as was generally expected, and repeated previous statements that rates would remain unchanged for the remainder of this year, it added that “OCR increases will likely be required next year.” This is the first G10 central bank to warn explicitly of rate increases. The market now expects a rate hike sometime in Q2 (previously it was expected sometime in the second half of the year) and it could come earlier if house prices continue to rise at their recent pace. NZD could appreciate furrther, in our view, as the currency’s gains after RBNZ statements tend to continue for some time. • The market recently revised up its forecasts for Norwegian rates following higher-than-expected inflation there; it revised up its forecasts for UK rates after yesterday’s better-than-expected employment data; and now New Zealand has moved to an explicit tightening bias. On the other hand, expectations for US rates as reflected in the Fed Funds futures are being revised down. Some degree of tapering seems to be fully discounted in the market meaning we could get a “buy the rumor, sell the fact” reaction after next week’s FOMC meeting. I have been bullish on USD but it now appears that until we see the US economy once again taking the lead globally, USD could suffer further. Perhaps it would be better to avoid USD entirely until the picture clears. Investors should look at the commodity currencies (AUD, NZD and CAD) as expectations of higher growth may boost them further, also SEK which is sensitive to improved global growth prospects. Against these longs, I believe JPY continues to be the most appropriate funding currency, as the Bank of Japan will be the last central bank to change policy. The ECB is also continuing to discuss ways of easing and Eurozone growth seems likely to disappoint, so I would also consider EUR on the short side. Note that EUR/JPY fell yesterday (see below). • Following yesterday’s surprise fall in UK unemployment, the focus today will be Bank of England Gov. Carney’s testimony to the UK Parliament’s Treasury Committee on the central bank’s August inflation report. It will be particularly interesting to see if he has recalculated the time that it might take for unemployment to hit his 7.0% trigger level in light of yesterday’s announcement. Eurozone industrial production is expected to have fallen 0.3% mom, a turnaround from +0.7% mom the previous month and bringing the yoy rate of change down to -0.2% from +0.3%. This calls into question the validity of the PMIs, as the Eurozone manufacturing PMI of 50.3 in the month should mean expansion. EUR could weaken on the news. Canada’s new housing price index is expected to rise 0.1% mom in July, a slowdown from 0.2% mom in June. In the US, the only relevant indicator for the FX market is the weekly jobless claims, which are forecast to rise to 330k from 323K, bringing the four-week moving average up slightly to 331k from 329k. •
Posted on: Thu, 12 Sep 2013 07:43:05 +0000