BBH CurrencyView: Calmer Market Has Returned, US Dollar Is Mixed
A calmer market environment has returned and the US dollar is mixed. Talks of renewed problem in Dubai may help dollar bulls in the US session though. Attention has (for now anyway) moved away from the euro debt crisis onto the global recovery story. The Aussie was the best G10 currency performer overnight (+0.7%) (followed closely by the kiwi) after better than expected employment figures (see below). The loonie was bid across the board, with our bullish CADJPY trade likely to regain momentum (see below). Japanese trade figures were better than expected as exports surged to a record high but limited impact on the yen. The euro is weaker, breaking through $1.2600 support, next target at $1.2500 (see below). Cable softer too, close to $1.4750. EM currencies have lost some of their overnight gains in the euro session, with the HUF (-0.65%) and the ZAR (-0.55%) the weakest links. Malaysia hiked by 25bp (to 2.5% as exp) Q1 GDP was stronger than expected, at 10.1% y/y (from 4.4%).
Rising optimism about the global economy and better than expected earning results from Cisco have restored a more positive sentiment in the Asia equity market. The MSCI Asia Pacific index was up 1.8% by the end of the session, with strength across the region – including the Nikkei (+2.2%), Hang Seng (+1%), the Shanghai SE (+1.3%) or again the KOSPI (+1.9%). European bourses had a positive morning but note that the Ascension Day holiday has reduced volumes dramatically. The S&P future points at a slightly negative open on WS later this morning. Crude oil prices have eased back below the $75brl mark.
Flight to quality trades in the bond market are losing momentum. 10 year JGB yields were back up (+1bp) while the European bond market lacked direction this morning, with 10 year bond yields unchanged in France, Germany and Greece but down 2bp in Italy and rising by 1bp in Spain. Portuguese bond yields down 7bp with latest austerity measures welcome. UST 10 year auction was a touch disappointing, with a bid to cover ratio at 2.96 and a decline in indirect bidders (at 41.9%). US 30 yr auction is due today.
In the Asia session, a calmer environment has been restored and Economics came back to the forefront. Japan’s external demand remains crucial for the economy and this was confirmed by the March trade balance figures out overnight. In the event, the March trade surplus was reported at a high Y1.074tn following a Y778bn surplus previously and on the back of a record 65.1% y/y surge in export growth. A weaker yen outlook is highly welcome at this stage of the cycle, not only because it reduces deflation forces via the imported inflation channel, but also because of the associated increased competitiveness on the export front. This argument was very well captured by the latest trade figures. Meanwhile, bank lending was confirmed in negative territory in April, at -1.8% y/y (from -2.0%), confirming a still depressed domestic demand. In Australia, it was good news on the economic front: April employment showed a stronger than expected outcome, at +33.7k on the month following an upward revision to the March outcome (at 27.7k from 19.6k). The unemployment rate rose to 5.4% from 5.3% as the labour force increased while the participation rate was unchanged, at 65.2%. Meanwhile, there was supportive news from the kiwi economy overnight too, with the manufacturing sector reported expanding by most in 5 years in April.The loonie remains our favourite currency in the G10 block (with macro, fiscal and monetary outlook all supportive) and we continue to argue that the recent CADJPY weakness provides a good opportunity to re-enter long positions. CADJPY has corrected from this morning’s high of 92.55 and is a good buy at current level (below 91.50).
Following the hectic trading environment of the past few weeks, it is all calmer on the EZ market front at this point. The euro is drifting lower and we stick to our sell on rallies strategy, with question marks over the longer term macro implications of the drastic austerity measures undertaken in the EZ and the lack of structural measures in the EU/IMF package weighing on sentiment. However, it seems that a calmer environment has settled. This is well captured in the bond and in the credit default swaps markets. The marked correction in 3mths euro volatility also captures a calmer market environment (back to just above 13.00 from 16.00 last week). There is not much likely to inspire the European market this morning and with most of Europe closed for Ascension Day, expect a quiet session. The ECB’s latest monthly bulletin will be a close repeat of last week’s post-meeting press conference, with the economic recovery acknowledged, but downside risks persisting in the current crisis context. Meanwhile, inflation risks are well contained at this point and the ECB would argue that QE will not have medium-term inflationary effects as the central bank will not sterilize its operations. In the UK, the March trade deficit is expected at £6.4bn (from a deficit of £6.2bn previously) while the non-EU trade balance is seen -£3.4bn from -£3.3bn previously. Sterling is remarkably stable, with no major surprise from key choices in PM Cameron new government. There are strong divergences in opinions as to whether this coalition government – which is a highly unusual situation for the UK – will work or not but at this point the market is ready to give David Cameron a chance. In fact, the fact that both Cameron and Clegg have acknowledged the urgent need to address the debt issue and that BoE King’s welcomed the Tories’ deficit cutting plans should provide support to sterling. We would buy the pound on the dips, especially against the euro.
In the EM world, three central bank meetings are held today. Malaysia hiked rates 25 bp to 2.5%, the second hike of the cycle started in March. SARB meets also, and while market is expecting no move, we think that there is a decent chance of another cut to follow its surprise March cut of 50 bp. Lastly, Chile meets later today and while it is expected to stand pat at 0.5%, 5 of 24 analysts polled by Bloomberg look for a 25 bp hike. We see no move, and target a Q3 start.
Upcoming Economic Releases
America: US latest jobless claims. Asia: Korea April export/import prices. Events: Fed’s Kohn, Fisher, Kocherlakota to give a speech. Fed’s Bernanke to participate to a Q&A session in Philadelphia.
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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