BBH CurrencyView
The US dollar continues to pare its recent gains as optimism builds that a confirmation of a Greek bailout deal is closer. Adding to the positive tone was the momentum from yesterday’s strong data reports in the US, which also continues to underpin risk appetite. The euro is currently flat after failing to sustain a move in the Asian session to 1.317, while sterling is a bit firmer around 1.583 following the unexpected jump in January retail sales. The yen is weakest performing currency against the dollar, currently down 0.2%. Near-term support seen at 77.85 with resistance expected to come in near the October 2011 high of 79.53 followed by the August 2011 high of 80.24. The Australian dollar held steady ahead of the open amid ongoing dip buying towards 1.075, but was unable overcome large standing offers ahead of 1.08. European shares are higher for the third day, pushing the EuroStoxx to a 6-month high, with bank shares leading the move, up 1.5%. S&P 500 futures point to a flat open on Wall Street. On the data front, Canada CPI accelerated to a 2.5% y/y pace in January, contrary to expectations for a growth rate that was identical to December’s 2.3% pace.
The yen is the weakest G10 currency this week, following the BOJ’s unexpected JPY10 trillion extension of its Japanese government bond purchase program. It is off about 1.8% this week. The yen is also the weakest currency of the year thus far off 2.7%. This suggests it may not be simply QE weighing on the yen. One of the factors may be a shifting pattern among stock and bond flows. The weekly Ministry of Finance data shows Japanese investors are buying an average of JPY592 bln a week of foreign stocks and bonds this year, a marked increase from the JPY264 bln weekly average during the same year ago period. At the same time, foreign investors have slowed their purchases of Japanese bonds and stocks to a weekly average of JPY142 bln compared with JPY223 bln average in the year ago period. The exchanges reports that foreign investors have bought $7.6 bln of Japanese shares this year, which represents a 40% decline year-over-year. Flows into many of the other Asian equity markets have been notable after foreign investors took profits at the end of 2011. Inflows into South Korean equities, already $8.2 bln this year, are 6.2x more than during the year ago period. India has seen foreign investors purchase $4.4 bln of equities, 3.6x more than a year ago. Taiwan reports only a 1.5x increase, but that is still almost $3.3 bln. The MSCI Asia-Pacific Index has risen for 9 consecutive weeks now and is up about 11% this year, a third better than the S&P 500 and DJ Stoxx 500.
U.K. January retail sales unexpectedly surged 1.9% m/m versus the -0.1% consensus forecast. The report highlights the general resilience of the UK consumer despite indications by the January BRC and CBI measures of the retail sector. The BRC had reported that sales activity were the second weakest on its records for January, which followed a contraction in consumer credit in December. However, today’s broader ONS figure tells a different story, and the data ties with the robust weekly sales figures that bellwether John Lewis department chain store had been reporting throughout the month. Furthermore, the January Nationwide consumer confidence figure rebounded, albeit from low levels, while there have been tentative signs of stabilization in the labor market, together with a boost to real incomes as inflation continues to gradually decline. PMI surveys have also pointed to a basing-out and improvement in conditions from December onwards. While we expect household consumption to improve gradually this year as falling inflation boosts household’s purchasing power and improving economic conditions may boost consumer sentiment, we think that the current pace of retail sales is unlikely to be sustained. Indeed, this week’s inflation report indicated that “the drag on domestic spending from tight credit conditions and fiscal consolidation is likely to persist” making for a fragile recovery moving forward.
Poland January IP due out, expected at 9.5% y/y vs.7.7% y/y in December. Retail sales slowed to 8.6% y/y in December from 12.6% y/y in November, while IP slowed to 7.7% y/y from 8.7% y/y in November. Average IP and retail sales growth in Q4 was unchanged from Q3, and so slowing exports are likely to have only a modest impact on Q4 GDP growth. Poland central bank next meets March 7 and is expected to keep rates steady at 4.5%. Right now, Bloomberg consensus is for 50 bp of easing this year to 4%. However, stubbornly high inflation, rising inflation expectations, and strong momentum in the economy suggests this may overstate likely easing. Inflation expectations as measured by the central bank rose to 5.2% y/y in January, the highest since October 2008. Under these conditions, we cannot see the NBP cutting rates anytime soon. PLN remains a high beta currency, and subject to swings as risk appetite comes and goes. We do think PLN can outperform both CZK and HUF due to superior growth outlook and thus a more favorable interest rate trajectory. For EUR/PLN, 200-day moving average around 4.23 has proved to be resistance, but much will depend on external factors and Greek developments. If the EM correction continues, retracement levels of the January February drop come in at 4.2925, 4.3368, and 4.3810. Support is seen at the February low around 4.15.