BBH CurrencyView: Choppy, Largely Range-Bound Activity Continues
Marc Chandler is the global head of Brown Brother Harriman’s top ranked Currency Strategy Team. For more of BBH’s currency views, please visit the BBH FX website here.
Highlights
The US dollar is firmer, but still stuck in trading ranges, even if the edges have frayed a bit. Many observers will attribute the greenback’s gains to continued tension in Europe over Greece, but Greek bond yields have fallen today. Sterling is under pressure too, giving back more than half of yesterday’s gains. Margin new lows, just below $1.50 were recorded after a slightly softer than expected CPI report (0.4% vs expectations 0.5%). The dollar remains largely confined to a JPY90-JPY91 trading range against the Japanese yen, showing little impetus to convincingly break the range. Emerging market currencies are also mostly softer, the of note the South African rand has recouped most of its earlier losses after the Q4 09 current account deficit unexpectedly shrank to its smallest in 4 ½ years.
Yesterday’s recovery in US equities helped Asia and European markets trade higher today. Although the MSCI Asia-Pacific Index was largely flat, good demand was seen for Korea, Malaysia, Philippine and Thai shares. Indian shares recouped some of the ground lost after last week’s surprise rate hike. Finance and resource sectors were among the strongest. Basic materials and financials are also leading the way higher in Europe, with most bourses up 0.5%-1.0%. The FTSE has made a new post-crisis high. S&P 500 are called higher. The post-crisis high was set last week just below 1170.
Sovereign debt markets are generally firm, with benchmark 10-year yields off mostly 1-2 bp. Despite the softer UK inflation data, the gilts are largely sidelined ahead of tomorrow’s budget, though the shorter end is firm. Greece’s 10-year yield is off 15 bp and the 2-year yield is 24 bp lower. The Greek-German spread stands at about 323 bp today, down from 338 yesterday and the 396 peak in January. The US auctions a record-matching $44 bln 2-year notes today. The 2-year yield has backed up around 25 bp over the past month, hitting a two month high yesterday. The auction may be the best received of the three-part $118 bln sale this week.
Currency Markets
Many European officials seem to be trying to defuse the heightened expectations that this week’s EU summit will prove a turning point in the debt crisis. While the ECB would reconsider its collateral rules if necessary, Trichet seemed adamant that there should not be low interest rate loans for Greece, rejecting any subsidiary or concessionary elements. Eurogroup’s Juncker saw no need for a key decision at the summit, but Europe is not abandoning Greece, he intoned. EU’s new president Van Rompuy, ever the compromiser, is reportedly seeking some kind of agreement prior to the EU summit. Such attempts may prove too ambitious, like last month when Van Rompuy delayed the Feb 11 summit that sought a similar accord “to take determined and coordinated action if needed to safeguard financial stability in the euro area as a whole.” Greek PM Papandreou continues to urge Europe to “put the gun on the table”, i.e. by abandoning strategic ambiguity European can help ease the market-generated pressure on Greek interest rates. Many vocal officials continue to warn against the IMF taking a lead role. Outside some embarrassment, few though have offered a real argument. The idea that the US has a large vote at the IMF did not stop Europe from calling in the IMF in 2008 in central and Eastern Europe. On the other hand, even Papandreou’s own political party seemed to be critical of the IMF option, warning that it would require a national coalition government in Greece. Some euro zone skeptics suggest that going to the IMF would be a slippery slope ultimately leading to Greece’s exit from the euro zone. Would a member leaving be any less embarrassing than going to the IMF?
Once widely respected, the Swiss National Bank seems to be pouring gasoline on a fire. SNB’s Chairman Hildebrand says the central bank will act decisively if the Swiss franc’s strength jeopardizes price stability. While this would sound like a threat of intervention, by suggesting that the current strength of the Swiss franc is not threatening price stability, he gives the market little reason not to press the franc higher. There seemed to be not real protest of what the market has done in recent days. The euro has fallen more over since March 12 against the Swiss franc than it did in the previous 2 ½ months. The strength of the Swiss franc, we have suggested, has negative implications on a number of eastern and central European countries were CHF denominated mortgages have been popular. Although there are a number of other factors that have played a role, like general risk appetite and specific economic data, but we not that since March 12 when the franc’s crawl turned into a run, the Polish zloty is off 2.27% and the Czech koruna is off 1.4% and the Hungarian forint is 1.16% lower.
The main economic report of the day thus far was the UK’s Feb inflation. The key take away is that inflation pressures were slightly less than expected and BOE Governor King does not have to write an explanatory letter to Darling as he did in December and January. The headline CPI rose 0.4%, slightly less than the market expected. The year-over-year rate slipped for the first time since last September (3.0% vs 3.5% in January). The details were less inspiring as ONS said the biggest downward impact was from toys and game. That said, of 12 categories of prices, eight were lower on a year-over-year basis. Yesterday King repeated his view that inflation will move back inside the target in the medium term and with the slack in the economy this seems like the most reasonable scenario. Core inflation, which in the UK excludes energy, food, alcohol and tobacco, slowed to 2.9% from 3.1%. Core measures of inflation are generally soft throughout the major industrialized countries. US core CPI could fall below 1% in the coming months, something not experienced since 1966. Core inflation in the euro zone is already below 1%. Japan’s deflation persists with a -1.1% core (excluding all food and energy).
Senior Chinese officials are playing up the likelihood that the PRC will a trade deficit in March when the data is reported on April 10th, a few days before the US Treasury report on currency market activity is due. It would be China’s first monthly trade deficit in six years. Premier Wen Jiabao reportedly told a meeting of foreign business executives that China recorded an $8 bln trade deficit in early March. The Commerce Minister hinted at the same thing over the past weekend. Meanwhile, the 12-month NDF slipped today to its lowest level since Xmas, implying a 2.3% appreciation over the next year.
Upcoming Economic Releases
The US reports February existing home sales. The consensus looks for around a 1% decline to 5.00 mln unit annual pace. Canada reports Feb leading economic indicators and the consensus look for a 0.9% increase to match the Jan gain.
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