BBH CurrencyView: Dollar Begins May Firm
Highlights
The US dollar is firmer across the board. The deal worked out by Greece and EU/IMF/ECB is helping to ease strains in the European debt market, but does not appear to have dealt a significant blow to those who think that some form of debt restructuring remains. Support for the euro is seen near $1.3200, while resistance in the North American session is in the $1.3250-60 area. Sterling has shown little reaction to the barrage of newspaper endorsements for the Tories or the polls that suggest the Tories have widened the lead to 10 percentage points. Sterling appears comfortable in a $1.5200-$1.5300 range for the very near-term. The dollar held support in front of the 20-day moving average near JPY93.40. Offers are seen in the JPY94.30-40 area.
Many markets were closed in Asia today, including Japan, China, Thailand and the Philippines. The markets that were open generally fell under the weighted of weakness in commodities and financials. The MSCI Asia-Pacific ex-Japan fell 1.1%. Malaysia was the only Asia market that seemed to buck the regional decline as consumer services and industrials offset the other sectors’ losses. News that Australia is going to impose a 40% resource “super-tax” (mid-2012) sent local resource companies lower. In Europe, London is closed, which is saving it from the 0.5% loss on average being seen near midday in Europe. Financials and industrials are the weakest sectors, with the lone sector higher on the day. Athens market begins the new month with around a 1% loss, with consumer goods, industrials and financials the hardest hit. Technology, utilities and health care are higher.
Greek bonds continue to recover. The 10-year yield peaked in the middle of last week near 10% yield (closing basis) and today is near 8.66%, off another 29 bp on the session. Little improvement in other peripheral 10-year bonds. It is in shorter coupons that the easing of anxieties is most clear. The Greek 2-year yield is off 258 bp to 10.04%, while Portugal’s 2-year yield is off 22 bp, Ireland 9 bp and Italy 6 bp. The other important interest rate story is out of China. For the third time this year it raised reserve requirements by 50 bp effective May 10th. A 50 bp increase in reserve requirements drains an estimated CNY300 bln from the banking system.
Currency Markets
The euro initially opened in higher in Asia in response to the Greek/EU/IMF package. However, it trended lower in Asia, though lost its momentum in Europe ahead of $1.3200. The generally firm manufacturing PMIs failed to elicit fresh buying. Many remain skeptical of the lasting impact and are not convinced that closure is really at hand. And in any event, a weaker euro may still be desirable given the drag on aggregate domestic demand. The broad details of the plan were leaked toward the end of last week, so European officials denied themselves of much of a surprise factor. German Chancellor Merkel, who stopped campaigning for the May 9th election in North Westphalia, congratulated herself on correctly seeing that Greece could be in for more concessions. Greece did announce a package of additional 30 bln euros in savings, including wage cuts, a three year freeze on pensions, abolishing the 13-14th month wage payments to civil servants and the second increase in the VAT this year (latest to 23% from 21%). While this may helped Merkel protect here own flanks, the cost will be greater social upheaval in Greece and the undermining of the support of the Greek government. Large scale protests are planned for this week and support for the Socialist government continues to decline.
If there was one new development, it is that the ECB has also entered the fray. It has agreed to suspend the minimum credit rating for Greek collateral. This means that even if the other rating agencies cut Greece’s creditworthiness below investment grade, as S&P did toward the end of last month, the ECB will still accept Greece’s sovereign bonds as collateral. This is important because it means that ECB policy is no longer hostage to the rating agencies, which has at best a tarnished reputation in the market. However, it does raise questions over the politicization of the ECB. There have been a couple of times during the crisis, where the ECB officials have had to backtrack from initial positions staked out. Recall that as recently as last Friday, the ECB’s Nowotny was arguing that there was no immediate need to change ECB collateral rules. There are a number of market participants that believe that before the crisis is over, the ECB will be compelled to buy sovereign bonds. Note that ironically the ECB meeting this week will be held in Lisbon, Portugal.
The April Purchasing Managers surveys generally point to a deepening of the global recovery. China’s PMI rose to 55.7 from 55.0 in March. Output and orders continued to rise. The euro zone PMI rose to 57.6 from 56.6; a little bit better than the flash reading. This is the best reading since 2006. Even Greece’s PMI rose (43.6 from 42.9). Outside the euro zone, note the Swiss PMI rose a 65.9, a three-year high. Norway’s PMI rose to its best level since April 2008. Sweden’s PMI jumped to 64.0 from 60.5 and reinforced ideas that the Riksbank will likely hike its report rate 25 bp and raise its deposit rate, which is now -25 bp.
There are a number of other developments that are on radar screens today. China’s reserve requirement increase is largely perceived to be instead of a rate hike or an imminent change in the currency regime. The 12-month non-deliverable forward is pricing in about a 3.2% appreciation of the yuan. Australia’s resource tax is part of a larger tax overhaul but appears to be in the direction of higher taxes. Since the implementation is not for a couple of years, it is unlikely to alter the RBA’s path. The market has 25 bp hike largely discounted for tomorrow at 4:30 GMT. South Korea reported a 0.5% rise in April inflation for a 2.4% year-over-year rate. The central bank meets on May 12th and with inflation still at the lower end of its 2-4% target, the BOK can still bides its time. Lastly, Turkey reported inflation accelerated in April to 10.2% from 9.6%. This is a 17-month high, even though the consensus was for a slightly higher figure. Last week Central Bank Governor Yilmaz acknowledged that this year’s inflation target of 6.5% would likely be missed, but did not seem prepared to hike rates from the record low 6.5% until Q4.
Upcoming Economic Releases
US consumption and income data for March (8:30 EST/12:30 GMT) was contained in Q1 10 GDP figures before the weekend. More important will be the manufacturing ISM at 10:00 EST/14:00 GMT. A small rise is expected that would be sufficient to lift it to a new cyclical high. Construction spending’s decline may be moderating, but auto sales are unlikely to maintain March’s strength.
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This was the BBH CurrencyView by Marc Chandler. Marc is the Global Head of Currency Strategy at Brown Brother Harriman. For more of BBH’s currency views, visit the BBH FX website here.
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