BBH CurrencyView: Euro Gets Some Relief, for Now
We are seeing some respite for the euro but the underlying bearish forces have not gone away and this latest bounce is a good selling opportunity. The single currency rallied to a high $1.2437 in early European session (nearly three big figs higher from yday’s low of $1.2144) but has lost momentum and eased towards $1.2350 in early US session. EU’s Juncker confirmed our view that Fx intervention is not on the agenda for now while France reiterated that naked short-selling ban highly unlikely. Clearly no coordination on the policy response front (see below). Greek protests monitored. UK April retail sales beat expectations but cable was unfazed, trading close to the $1.43 mark. The Aussie was the worse G10 currency performer for the 2nd consecutive session (down 2%), with political uncertainty adding on to the more bearish sentiment that has recently developed (see below). Kiwi outperformed, with the Budget well received and S&P maintaining the AA rating. Japan’s Q1GDP came out on the soft side of expectations but limited mkt impact (see below). EMEA currencies maintained a weak tone in the post German naked short selling ban context, with the PLN and CZK the weakest links, down 2.4% and 1.6% respectively. Emergency holiday for the Thai market due to recent escalating violence. Just US Phili Fed index due today and a couple of ECB/BoE members are speaking.
Another poor session for the Asia equity mkt, with the softer than expected Japanese Q1GDP data exacerbating the bearish sentiment already in place. The MSCI Asia Pacific index was down another 1.5% on the session, with weakness across the board. Negative close were seen on the Nikkei (-1.5%), the Hang Seng (-0.2%), the Kospi (-1.8%), the S&P/ASX 200 (-1.6%) or again the Shanghai SE (-1.2% – down 22% ytd). European bourses were trading flat by mid-day and the S&P future points at a negative open on WS later on. WTI crude oil prices have eased back below the $70brl mark.
JGBs had another good session, with the confirmed deflation forces emerging from the Japanese Q1GDP figs providing fresh ammunition to JGB bulls. 10 year JGB yields were trading down 3bp (at 1.246%) and the 20 year JGB auction results were strong (see bid-to-cover ratio reported at a high 3.93). A relatively quiet trading environment dominating in the European bond mkt, with periphery underperforming – déjà vu. French oat, UK 10 yr Gilt auctions due today.
Soaring risk aversion, falling commodity prices, a pause in the monetary tightening cycle, softer monthly economic indicators or the latest tax on mining, this has become a bearish world for the Aussie. In fact,there was fresh bearish news for the Aussie overnight, with an opinion poll suggesting that Australia faces a hung Parliament in elections due later this year. We sent a note recommending short AUDCAD positions yesterday and overnight developments have reinforced this view. Our interim support target of 0.8797 was broken overnight, with additional support identified at 0.7727 (Feb low) and 0.7227 (Oct08 low). In Japan, attention briefly re-centred on domestic economics overnight. The first quarter GDP data was reported at a weaker than expected 1.2% q/q, adding on to a 1.0% quarterly increase in Q409 and bringing the annualized growth rate higher and well above trend – at 4.9% from 4.2%. Deflation remains an issue: the GDP deflator fell further in negative territory, at -3% y/y (from -2.7% y/y).
A marginally calmer market environment has been restored in the EZ, but Germany’s naked short-selling ban has not been received well. The fact that it has not been followed by other EZ members confirms uncoordinated policy responses to the current crisis and can only prove detrimental. In fact, throughout this crisis, the EZ uncoordinated and sometimes unorganized responses are as much to blame as the actual crisis situation and this gives a free ride to euro bears. Unfortunately, this is unlikely to change anytime soon and so the euro remains vulnerable despite this recent bounce. Economic news has become totally irrelevant at this point. Germany’s April PPI was reported up 0.8% m/m (from 0.7%). Later today, we have the May consumer confidence data to look forward to. The market is expecting a small decline (to -16.0 from -15.0) but the risk is tilted to the downside considering the EZ market and social developments of the past few weeks. In the UK, April retail sales are expected down 0.1% on the month (from +0.2% m/m), for a yearly rate at 3.2% from 4.0%. UK consumers have held relatively well so far this year, but we note that the higher inflation environment in a moderate wage growth context means that real income growth will be depressed and this cannot bode particularly well for the outlook for UK consumer spending. In the US, we have just the May Phili Fed (seen at 21.3 from 20.3) and April leading indicators (expected at +0.2% m/m from +1.4%) due for release.
With market fallout from the European crisis intensifying, risk off trading has remained in play and is taking a toll on EM FX. While we continue to think that EM fundamentals remain strong in Asia and Latin America (arguably stronger than developed market fundamentals), there is no way that EM FX can mount a sustained rally until the European crisis has been addressed once and for all. Looking over the past five days, as euphoria over the European stabilization plan wore off, worst EM performers have been PLN (-6%), HUF (-5.4%), ZAR (-4.4%), TRY (-4%). CZK (-4%), MXN (-3.8%), and BRL (-3.3%). EMEA remains the weak link in EM, due to poor fundamentals as well as too much reliance on Western Europe for trade and growth. Not surprisingly, Asia has held up the best, with THB (-0.3%), IDR (-0.9%), TWD (-1%), and SGD (-1.3%) amongst the top performers over the last five trading days. We think this sort of sectoral divergence will continue, with Latin America somewhere in between. No EM currency has gained against the dollar this past week. While we think most EM policy-makers will welcome this latest bout of currency weakness, it’s only if it doesn’t turn into a rout. At this stage, we do not think any EM central banks will hike rates to counter currency weakness. For now, the fallout, while negative, has been fairly orderly for most of EM. There are some implications, though. Recent HUF weakness could delay Hungary’s rate cutting timetable, as minutes from the April meeting showed a 5-2 vote in favor of the 25 bp cut. However, the bank noted that improving risk appetite allowed for that cut. Czech resumed its rate cut cycle this month with a surprise 25 bp cut, but further cuts are unlikely if the koruna remains weak.
Upcoming Economic Releases
America: US latest jobless claims, May Phili Fed index, April leading indicators, Canadian April leading indicators.Events: BoC to publish its latest quarterly review.
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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