Waiting for Trichet

BBH CurrencyView


The US dollar is mostly softer, though within yesterday’s ranges as market participants await the ECB’s press conference and US economic data. Sterling is under-performing perhaps being impacted by the softer string of recent data, including today’s construction PMI (52.1 vs 53.2 consensus and July’s 54.1) and the fifth consecutive monthly decline in Hometracks’ house price index. The euro is firm, but like yesterday the band of resistance in the $1.2850-$1.2875 may prove sufficient to check upticks ahead of tomorrow’s US employment report. The dollar remains pinned near recent lows against the yen, but the momentum remains stalled. Range trading between JPY83.50 and JPY85 looks set to continue. Emerging market currencies are generally firmer as the recent string of data—especially yesterday’s better than expected China’s (especially the increase in new orders) and US purchasing managers reports.

The strong US equity advance yesterday helped underpin Asian markets today. The MSCI Asia-Pacific Index’s 1.1% advance lifted the benchmark to a new two week high. The Philippine’s market led the way with a 2% advance to reach its best level since December 2007. News that Chinese auto sales rose 59% in August, 3-times July’s pace, helped the auto shares in the region. Foreigners were mostly net sellers of Asian shares during last month’s down draft, but appear to have returned to the buy side. European bourses are narrowly mixed after posting the biggest gain in more than three months yesterday. The raw material and technology sectors are generally stronger, largely offsetting the losses in telecom and health care.

The decline in pessimism over the global economic outlook is sparking a backing up in bond yields. European bonds yields are mostly 3-5 bp higher. The new supply from Italy, France and the UK was absorbed with out much problem and most peripheral spreads are coming in a couple of basis points, though Greece is an exception. Sweden’s Riksbank hiked the repo rate 25 bp to 0.75%. Surveys favored a hike by roughly 3 to 1, but the krona has marginally extended yesterday’s gains against both the dollar and euro.

Currency Markets

There are two sources of event risk. The first, and lesser of the two, is the US weekly initial jobless claims. The modest pullback from the above 500k reading in mid-August was a constructive development, but the 4-week moving average still ticked up to its highest level of the year (486k). It will take a weekly reading today below 482k to bring the 4-week average down (assuming no revisions). Now of course with the monthly national report out tomorrow, the market’s reaction may be more subdued. The market’s response may be asymmetrical in the sense that a move back above 500k may elicit a bigger market response than a decline in initial jobless claims. At the same time, note that recent comments from the Fed’s Plosser and Fisher have played down the near-term need for Fed to buy more long-term assets.

The second and more important of the event risk comes from the ECB meeting. There will be no change in rates, but there are two elements the market expects to be addressed today: decision on lending facilities and updated economic forecasts. Following confirmation that the euro zone expanded by 1% in Q2, the ECB is likely to revise up this year’s GDP estimate to reflect this. This is what economists will be trying to assess: how much of the likely upgrade reflect what has already happened and how much reflects new information—ECB’s real expectations going forward—and revisions to 2011 forecasts will also be important. Turning to the lending facilities, the BBK’s Weber opined earlier that the weekly, monthly and 3-month facilities should be extended into next year. Weber has been criticized in some quarters for apparently preempting the ECB, but this seems reasonable given the stresses that still are apparent.

The premium Greece, Spain and Portugal pay over Germany on 10-year bonds is greater than it was when Europe announced their so-called 750 bln euro package. We argue that “real water” was half as that when taking out the 250 bln euro that was said to come from the IMF but there was no commitment to give any funds to a region in general, and EU’s 60 bln euro contribution (as EU members not in the euro zone balked). Lastly, given that the vast majority of members do not have triple A ratings, the only way the EFSF could issue tripe-A paper is if the amount guaranteed was about 20% more than the amount of bonds issued. There is a modest risk that rather than simply indicate the extension of its liquidity provisions, the ECB announces something more to help address the 225 bln euro maturing long-term repo operation expiring this month.

Doubts about the trajectory of the global economy were not sufficient to keep Sweden’s Riksbank on hold. The 25 bp rate hike was partly justified by the upgraded economic assessment. This year’s GDP forecast was revised to 4.1% from 3.8% previously, though next year’s forecast was shaved to 3.5% from 3.6%. Inflation forecasts were skimmed 1.1% this year form 1.2% and 1.9% next year form 2.0%. The board still contains divergent opinions, mostly seemly over timing, but barring a major negative shock continued gradual tightening by Sweden the most likely scenario. Even though the euro losses against the krona have been extended, the momentum appears be flagging. Ironically, and counter-intuitively, Norway’s central bank edged its growth forecasts lower and the Norwegian krone is outperforming the Swedish krona (marginally). Note that the head of Norway’s stats offices Olsen is seen as the likely successor of the central bank governor Gjedrem who will step down at the end of the year, seems more dovish, warning that recessionary conditions persist in Norway.

Apparently for the first time recently, there has been market talk that quasi-government pension arms were selling yen. Some participants see this as mild intervention. That seems an unlikely interpretation. If Japanese officials think that intervention is needed to break the one-way market, they would want to make a big splash with the intervention. If there were intervention, there would be no doubt. Whether it would be effective or not is a different issue. In the past, Japanese intervention was sterilized through issuing financing bills, but intervention now might not be sterilized. In addition, there are tactics that officials could adopt that could also increase the impact of intervention, such as all-or-none type of orders.

Upcoming Economic Releases

The 8:30 EST/12:30 GMT productivity and unit labor cost reports do not contain new information. They are functions of the Q2 GDP report. This means that Q2 productivity will be revised down and unit labor costs higher. Weekly initial jobless claims will be watched closely and are reported at the same time. Factory orders at 10:00 EST/14:00 GMT may also attract attention and could continue the string of non-housing data that suggest the US economy may be stabilizing after slowing in Q2 and early Q3.

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