G10 Currencies USD: Well, actually not all questions remain open – but the most important one does: When will the Fed start tapering? Anyone who hoped to find a concrete answer in the July FOMC minutes yesterday was disappointed. Nevertheless, nothing in the minutes ran counter to what most market participants expect, namely a start in September. Quite the contrary. Most FOMC members were satisfied by the effects of the announcement of their contingent tapering timetable. While “some” members were concerned about the rise in yields after the release of the timetable, “several others” explicitly said that they were not. In Fed-minute-speak, that means that the doubters were in the minority. I think that is the most important message. As long as the Fed does not regard the increase in US yields as excessive, it can implement the tapering as planned. Between the announcement of the contingent tapering timetable and the July meeting, US yields rose “only” from a level around 2.20% to 2.60% (T-notes with a remaining maturity of ten years). By now, 10yr T-notes trade at yield levels above 2.90%. At this level, more FOMC members might be concerned. This uncertainty is inherent in the fact that the minutes are published with a delay. However, the minutes’ effect on the USD exchange rates should depend on any new information they contain. And the news was at least moderately favorable for the Greenback. Still, the reaction of the USD exchange rates was very subdued. After the release of the minutes, EUR-USD initially moved wildly into both directions. The market appeared to need some time to digest the long and partly complex minutes. In the end, EUR-USD lost about 40 pips and currently trades at about 1.3340. The move appears minor, considering the heated discussions about the beginning of the tapering. However, (1) the favorable aspects for the USD were none too strong, and (2) a majority of market participants expects tapering to start in September anyway (65%, according to a Bloomberg survey). That means that not many of them were surprised yesterday. Now, the issue will be hopefully off the table until the US labor market report on 6 September. The labor-market figures will probably key for the Fed’s decision about the starting date – September or December. After all, the timetable is contingent on developments in the real economy, particularly an upswing on the labor market. JPY: I would have expected the release of the FOMC minutes to have a smaller impact on USD-JPY than on EUR-USD. The opposite was true. As the VIX index and other short-term risk indicators remained relatively unaffected by the minutes, there was no reason for a more pronounced flight into the yen as a “safe haven”. Several emerging-markets currencies (INR, THB, ZAR) are continuing to sell off. However, the fate of these currencies will not depend on whether tapering starts in September or in December. A start in December will not help the Indian rupee, which is suffering from India’s structural problems. The “risk-off” factors which have recently supported the yen are probably priced in to a large extent. NOK: Times are bad for the NOK – at the moment, the currency is clearly an underperformer. Thin liquidity makes it easy for the market to run from one stop loss to the next. We are therefore not surprised that EUR-NOK broke through the 8.10 threshold yesterday. Going against the trend does not make much sense in view of the current momentum. However, EUR-NOK is likely to run out of steam around 8.12 - 8.15. The pick-up in inflation in July and the weakness of the crown another rate cut by Norges Bank this year is gradually becoming less likely. The upcoming economic data, such as the PMI and industrial output figures, will provide us with more information about the central bank’s future course. NZD: The kiwi dollar is up against two problems: pessimistic sentiment in Asia and the fact that mortgage lending rules for banks in New Zealand will be tightened from 1 October. From that date, banks will be required to restrict new residential mortgage lending at loan-to-value (LVR) ratios of more than 80% to no more than 10% of the dollar value of their new housing lending flows. Central bank governor Graeme Wheeler explained that, as housing represents almost ¾ of total household assets and mortgage credit accounts for over half of banking system lending, it is an important source of both value and of risk to the household sector and the banking system. The RBNZ has been closely observing the rise in house prices for months. The new LVR restrictions will help to slow the rate of housing-related credit growth and house price inflation. Hiking the key rate would be another option, but the RBNZ believes that such a step would currently be inappropriate as inflation pressure is moderate. Moreover, a rate hike might cause a sharp NZD appreciation, which in turn would put pressure on the export sector. At the moment the RBNZ is achieving the opposite: the NZD is depreciating. As long as sentiment in Asia remains in the doldrums, nothing will change for the NZD. Emerging Market Currencies TRY: As the hike of the O/N lending rate had almost no effect on the market and depreciation pressures on the TRY continued, the CBRT had to act again yesterday. It announced daily additional monetary tightening measures until further notice. These measures include daily foreign currency auctions of at least USD 100 m. In addition, the central bank might suspend the regular 1-week repo auctions, if necessary. The banks would then be obliged to refinance themselves at the top financing rate. However, it quickly became clear yesterday that even these measures will not do much to counteract the TRY weakness. Following a temporary dip towards 1.9550, USD-TRY reached a new high around 1.9868 this morning. The general market environment remains the key driving force for the TRY exchange rates. Only when speculation about a QE tapering abate will the TRY be able to take a breather.
Posted on: Thu, 22 Aug 2013 08:37:13 +0000
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