From the BBH Currency Strategy Team
Highlights
US dollar is mostly softer so far today vs. the majors, as sentiment remains overall good after the stress test results were released (see below). Price action since the results came out and the lack of euro follow-through buying suggests real doubts remain in the markets, however (see below). The yen is mostly firmer, supporting the view that risk aversion has not yet entirely disappeared, while the Swiss franc is mostly firmer too. EM FX was firmer, with Hungary recovering along with the rest of EM despite poor fundamentals (see below). Strong Asia data should help underpin that region, while we think ongoing stresses in Hungary and Romania are likely to highlight poor fundamentals in Eastern Europe. Biggest gainers on the day so far vs. USD are KRW, ZAR, PLN, GBP, and JPY, while the only losers vs. USD so far today are NOK, SEK, ILS, and INR.
Asian markets were higher on carry over from US rally Friday, and MSCI Asia was up 0.5% today. Japan, China, and New Zealand markets outperformed, while India, Singapore, and Indonesia underperformed and fell on the day. European markets are modestly higher today, with Euro Stoxx 50 up 0.1% so far. Futures markets are currently pointing to a down open for US equity markets today.
US bond market is mixed but likely to hang on to recent gains as US growth outlook remains in question. Japan bond market was flat as 10-year yields were unchanged, while European bond markets are mixed, as 10-year yields in UK, France, and Germany are down 2 bp, up 1 bp, and up 1 bp, respectively. Greek 10-year yields are flat, Portugal up 1 bp, Ireland flat, Italy down 2 bp, and Spain down 4 bp.
Currency Markets
It’s worth commenting on the price action seen since results of the European bank stress tests were released. Euro initially plunged, but came back afterward on Friday. Since then, the euro has been unable to surmount the 1.30 area that capped euro rallies last week. Clearly, markets are relieved that the stress tests are out, but lack of follow-through euro buying suggests that healthy skepticism remains in play. We also note that 3-month Euribor rose today to a new 3-month high, while dollar libor remains elevated and so the interbank stresses that developed from concerns about counterparties and lack of banking transparency have not yet eased. Interbank loan rates are one key indicator of whether the stress tests shone enough of a light on bank balance sheets to help relieve the interbank markets. Most analysts (us included) have been a bit more negative on the results, with key sticking points being the lack of stress testing on banking books and also (so far) the lack of details regarding bank holdings of sovereign debt overall. Until those two main concerns are addressed, we believe markets will continue to downplay the stress test results. Yes, some uncertainty has been cleared up but questions still linger. Break of the 1.30 is needed to keep the euro uptrend going, but the rally has clearly run out of a bit of steam this past week.
Equity markets continue to react favorably to strong economic data, this time from Asia today. Asian data reported today was mostly stronger than expected. Korea Q2 GDP grew 1.5% q/q vs. 1.3% expected and 2.1% in Q1. The y/y rate was 7.2% vs. 6.9% expected and 8.1% in Q1. The won was hit hard in May and June but has since recovered. Given what we view as good Korean fundamentals, KRW should continue to benefit from the improved market sentiment. Singapore IP rose 26.1% y/y vs. 38.4% expected and a revised 58.4% (was 58.6%) in May, while Japan exports rose 27.7% y/y vs. 23.5% expected and 32.1% in May. We continue to believe that Asia will outperform in terms of growth in the coming quarters, and should keep regional central banks in tightening mode which in turn should boost currency attractiveness. Low yields have been the one knock against Asian currencies, but that is clearly changing. RBI meets this week and is expected to continue its tightening cycle. RBNZ meets this week two and is expected to continue hiking as well.
Today, only US data scheduled for release is new home sales. We note again that there is not much on the major data side to disperse the gloom surrounding the US economic outlook until July jobs report due out August 6. Q2 GDP comes out this Friday, but may not be enough to change sentiment just yet. Market is looking for a SAAR rate of 2.5% compared to 2.7% in Q1. That’s not bad, but markets have gotten more negative on the US outlook in recent weeks. With regards to the July jobs number, analyst forecasts are finally trickling out and the Bloomberg consensus is for -98k nonfarm payrolls vs. -125k in June. Census workers continue to distort the headline number, as markets are looking for +115k in private payrolls vs. +83k in June, so a marginal improvement in the job market is seen, though hardly robust. Unemployment is seen ticking up to 9.6% from 9.5% in June.
Hungary retail sales fell 4.7% y/y in May vs. -3.8% y/y expected and -5.0% y/y in April, and underscores the lagging nature of Hungary’s recovery. Lower interest rates are needed to boost the economy, and yet poor risk appetite and an unknown fiscal outlook have conspired to prevent any further easing now. Perhaps if the government had handled the fiscal situation, markets would be willing to give them the benefit of the doubt, but continued missteps should keep sentiment negative. Yes, risk on trading will see the forint benefit but we think it will continue to underperform its EMEA counterparts. Today, HUF gains lag PLN gains vs. both USD and EUR. We still look to sell into HUF rallies, as the fundamental, technical, and political picture have all deteriorated significantly in recent weeks.
CFTC data shows that for the week ended July 20, speculative bets on a stronger US dollar were overall lower. Net short euro positions fell to -24,251 from -27,050 previously, Swiss franc net long positions rose to 15,113 from 14,590 previously, and sterling net shorts fell to -26,767 from -34,671 previously. AUD net long positions rose to 32,886 from 23,480 previously, CAD net longs fell to 16,424 from 22,038 previously, and NZD net longs rose to 8,973 from 5,452 previously. MXN net longs increased to 35,886 from 28,135 previously. Lastly, yen net longs eased to 40,911 from 47,359 contracts previously. With all of the major currencies stronger vs. the dollar since July 20, last week’s trend of lower bets on a stronger dollar should continue this week as well.
Upcoming Economic Releases
Brazil current account data for June due out 9:30 EST/13:30 GMT and expected at -$3.2 bln vs. -$2.02 bln in May. At 10:00 EST/14:00 GMT, new US homes sales for June due out and expected to rise 3.7% m/m after dropping 32.7% in May. At 10:30 EST/14:30 GMT, Israel central bank announced policy decision. Rates expected to be kept steady at 1.5%. US Tsy’s Brainard delivers address in Washington at 12:00 EST/16:00 GMT.