Daily FX Str Europe 19 July 2011

8/6/2019 Daily FX Str Europe 19 July 2011

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Foreign Exchange London 08:00

FX Daily Strategist: Europe

AUDUSD vs AUD rate expectations

06 07 08 09 10 11

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

AUD rateexpectations (12m)

AUDUSD (RHS)

Source: Reuters Ecowin Pro. The disconnectbetween AUDUSD and AUD rate (cut)expectations looks increasingly unsustainable,even allowing for the special factors such asincreased reserve manager demand supporting AUD. We suspect that a reconnect when itcomes is more likely via a forced revision tointerest rate thinking than a fall in AUD, though in

the meantime positioning for a reconnect viabeing tactically short AUD alongside a payer offront end rates has something to commend it.

This is not classified as objective research. Please refer to important information at the end of the report.http://www.globalmarkets.bnpparibas.com London: +44(0)20 7595 8086 NY: +1 212 841 2408 Sing.: +65 6210 3263/3347

GMT Country Release Mkt Last

08:30 ESSpain to sell 12mand 18m bills

09:00 DE (Jul) ZEW Expectation -11.5 -9.009:00 DE (Jul) ZEW Current Ass 85.0 87.612:30 US (Jun) Housing Starts K 575 560

12:30 CA (Jun)Leading Indicat %(m/m)

0.8

13:00 CABoC MonetaryPolicyAnnouncement %

1.00 1.00

Less hawkish RBA minutes can weigh on AUDNZD

No tangible evidence of progress with US deficit/debtceiling negotiations

Gold now outpacing CHF, but in absence capital controls

The RBA minutes released in Asia were considered to be lesshawkish, with the RBA dropping their explicit view that policywould need to be tightened at some point, referring to a softerdomestic economy and risks in Europe. However, the RBA didstate that it had more time to assess inflation and hence the focuswill invariably turn to the Q2 PPI/CPI releases next week.However, perhaps more important for the AUD besides the ratesview is the terms of trade boom driven by higher commodity

prices, and hence we do like AUD on certain crosses like shortGBPAUD for instance. However, those wanting to play a lesshawkish RBA would be well advised to do soewithin thecommodity block; consider looking to get short AUDNZD followinglast weeks stronger GDP print given that RBNZ rate movesappear under priced given the recent strength visible in the NewZealand economy.There has so farnot been any tangible evidence of progresswith US deficit/debt ceiling negotiations. We did haveplatitudes about a big deal but no sign of how it would beachieved and with the clock now ticking down more loudly giventhat Friday may be the last effective day for a deal to allow time forthe necessary legislation to raise the debt ceiling by August 2nd.We can fully expect this situation to persist until we hear news of

an agreement on US deficit reduction (and of a magnitude thatsignificantly reduces the threat to the US AAA rating) and the rightform of words if not yet hard actions out of the planned EUSummit on Thursday that assuages some of the current concernsnot just about the security of a second Greek bail out, but alsohelps bring GIPS spreads in general back down. See todaysMarket Focus for more on the latter. On the former, it may bemere co-incidence, but we note that Mondays May TICS datashowed the lowest net long term capital inflow since January2010, led by reduced appetite by private (not official) foreigninvestors for US securities. This was the first full month after S&Pput the US on notice that its AAA status was under threat fromfailure to raise the debt ceiling in a timely manner as well asputting the US fiscal position on a sustainable long term footing.

Turning to safe havens, considering that gold has hit a newnominal record high above $1600 but USDCHF and EURCHF didnot sustain the push to new record lows, is arguably symptomaticof concern about capital controls in Switzerland that would drive awedge between the currency and the gold price; but were not yetconvinced that the Swiss authorities will go down this route (if theydid, most likely via the attempted re-imposition of taxes on non-resident CHF deposits) until and unless upward pressure on CHFbecomes even more intense (e.g. EURCHF below 1.10).

Data/events focus Tuesday, outside of Euro-peripheral and USdeficit/debt ceiling headlines is on the German ZEW survey (whichexpected to drop sharply in July), the BoCs rates announcementand US housing starts and building permits. The BoC

announcement should be a side show; note that our economistfeels that with core inflation subdued and growth likely to slow inH2, the BoC is expected to remain on hold until at leastDecember.
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FX: Not much besides consolidation in Asia; USDmixed versus G10- USD gains versus NOK (0.40%),EUR, CHF (both 0.20%). USD flat against JOY, SEK,AUD. USD down near 0.08% vs. CAD, GBP. Asian FX isvery quiet, but posting modest gains vs. USD led byTHB, KRW (0.10-0.15%). PBOC set the yuan centralparity rate at Cny6.4684 against the dollar today,compared with Cny6.4680 set for the previous tradingday. Equities: Equity markets all trading around 0.50%in the red in Asia with SHCOM down 0.75%. US boursesovernight closed lower; SPX -0.81%, DHIA -0.76%,BOVESPA -1.08%.

DATA/EVENTS IN THE DAY AHEAD (MNI)

It is a fairly sparse calendar for Europe again on Tuesdaywith data limited to the 0900GMT release of both EMUconstruction output data for May and also the closer-watched German ZEW data for July, which is expectedto show the expectations index decline to -12.0 and thecurrent conditions slip to 85.0. US data starts at1145GMT with the weekly ICSC-Goldman Store Salesdata, which is followed at 1230GMT by Housing Startsand Building Permits data. The pace of housing startsis expected to rise to a 575,000 annual rate in June,which would be a second straight gain. US data thencontinues with the 1255GMT release of the weeklyRedbook Average

NEWS

Australia/ New Zealand

RBA minutes signal no immediate rate rise. A reviewof financial markets in the wake of European debt worrieswas the main topic of discussion at the RBA July 5 Boardmeeting indicating this would be main determinant ofmonetary policy in the near term, the minutes of themeeting showed. Domestic inflation took a backseat withthe minutes making no mention of expectations of a pick-up in inflation, rather saying there was more time at handto assess the likely strength of inflationary pressures inAustralia. The upcoming July 27 CPI data release wouldhelp shape views about inflation, and therefore the futurepath of interest rates, the minutes said.

Japan

Finance minister Noda cited by wires saying he willwatch markets carefully. No comment if will intervene inFX market, recent forex moves one-sided, Commentscome as dollar-yen slides to Y79.03 morning low,matching last night's NY low, while euro-yen has jumpedto Y111.72 high from Y111.46 earlier.

BoJ Deputy Governor Yamaguchi testifies at theHouse of Representatives Budget Committee. Mustwatch high yen's negative impact closely, watching firmsmoving operations overseas. To take appropriate policyaction for economy. High yen has benefit, loweringimport costs.

Summer bonuses climbed 4.21% to an average of

Y728,535 before taxes, rising for a second straight year,according to a survey of 645 firms by Nikkei Inc.

Europe:

ECB Trichet: Greek default or credit event "should beavoided". EUR continues to be "very solid currency".Euro area price stability underpins currency. Failure ofUS debt talks would create global problem. A stateexiting euro "not an assumption I envision"

Earlier, new French FinMin Baroin spoke to the press inWashington. He said talks were going well ahead ofThursday's EU leaders summit and he was confident EUleaders would respond to the crisis, with investors beingreassured. He added that France would not back asolution leading to a "selective default".

Eurozone governments are considering a levy onbanks as a way to involve private creditors in a bailoutof Greece, eKathimerini reports, citing a story inGermany's Die Welt newspaper.

Greek fin min on the wires overnight says the UScannot do much when it comes to buying Greekbonds. Says Greece has not yet accepted a solution ofselective default. Says if liquidity can't be secured by theECB it should be secured by the EFSF or the Eurosystem

Greek PM Papandreou might make another attempt to

find some common ground with opposition leaders aheadof a euro zone summit in Brussels on Thursday, whichGreek government sources referred to as the mostimportant such meeting in the last 20 years, Kathimerini'sEnglish website reports. It is likely that the prime ministeror Finance Minister Evangelos Venizelos will speak toopposition leaders, probably over the phone, before thesummit, the website says.

Germany's opposition Social Democrats (SPD) haveoffered Chancellor Angela Merkel their support to get a"Marshall Plan" for Greece through parliament amidgrowing nervousness in her own conservative camp, theIrish Times says. Ahead of Thursday's emergency

summit, the offer to back substantial debt for Athens andother unpopular European decisions indicates that Berlinpoliticians are beginning to take to heart criticism ofGermany's role in the euro zone crisis, the paper says.

Italy: As the first unpopular elements of SilvioBerlusconis austerity drive come into force this week,hitting the pockets of lower-paid Italians, pressure isbuilding to rein in the high cost of the country'spoliticians, who have amended the budget to protect theirown interests, the FT says.

UK

George Osborne must reverse his VAT hike to restoreconfidence and boost growth, according to a leadingbusiness lobby group, the Guardian reports. The rise to20% in January is battering hard-hit industries that have

Foreign Exchange Strategy Tuesday, 19 July 2011

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yet to recover from the recession, the Federation ofSmall Businesses said after its quarterly survey showeda dramatic decline in business confidence in the threemonths to the end of June, the paper says.

The FT says there is disappointing news for the Labourleader in Tuesday's Guardian where an ICM poll showsthe Tories have actually increased their share of the votein the last few weeks - seen by many as the best of EdMiliband's leadership. It showed a three point drop forLabour on 36 and a four-point gain for the Lib Dems on16 points, leaving the Tories one point ahead on 37 percent. A Populus poll for the Times shows similar results,with a fall in Tory headline vote, but no greatimprovement in the fortunes for Labour or its leader. Aplague on all your houses appears to be the public'sresponse.

China

The yield on the CNY5 billion in one-year paper sold bythe People's Bank of China remained unchanged atauction Tuesday for a third week at 3.4982%, traderssaid. The bank earlier drained CNY25 billion via 28-daybond repurchase agreements, they said.

China's money supply should be reduced whileproduction should be increased in order to curbinflation, an advisor with the PBOC advisor Zhou Qirenrecommended in comments published today.

US/Canada:

Foreigners net sellers of US assets in May Treasuryfor the first time in 11 months. Selling was heaviest inshort-term assets such as bills and deposits, contributingto an overall net outflow of $67.5 billion. That was thefirst net outflow since June 2010, and it reversed a $66.6billion inflow recorded in April 2011.

Republican lawmakers moved ahead Monday on adoomed plan to amend the US Constitution to require abalanced federal budget, one day after President Obamamet with the top two House GOP leaders in hopes ofreaching a debt-limit agreement that could win approvalfrom the hostile House, the Washington Post says.

Obama wants big debt deal but open to fallback plan White House spokesman Jay Carney said while Obamawould prefer the biggest possible package, he is leavingroom open for a safety valve to get an increase in thedebt ceiling by Aug. 2, when the federal government willrun out of money to pay its bills. "We must pursue afallback or last-ditch option," Carney said. "Conversationshave been going on about that." He also said there mustbe a mechanism in place to ensure the United Statesdoes not default on its debt obligations.

Few Signs of Progress in U.S. Debt Talks With fewsigns of movement over the weekend onnegotiations to raise the federal borrowing limit,Senate leaders are planning this week to unveil abackup plan that would force more budget wranglingbefore the end of the year. Washington seemsrudderless just two weeks before an Aug. 2 deadlinefor Congress to increase the $14.29 trillion borrowingauthority or risk having some government bills gounpaid

Moody's suggests US eliminate debt ceiling ongovernment debt to reduce uncertainty among bondholders. The United States is one of the few countrieswhere Congress sets a ceiling on government debt,which creates "periodic uncertainty" over thegovernment's ability to meet its obligations, Moody's saidin a report. We would reduce our assessment of eventrisk if the government changed its framework formanaging government debt to lessen or eliminate that

uncertainty," Moody's analyst Steven Hess wrote in thereport.

Foreign investors poured cash into Canadian debtmarkets in May, boosting overall securities purchases totheir highest level in a year at C$15.44 billion ($16.08billion), compared with C$8.52 billion in April.


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CDS Play a Large Part in EURUSD Decline

Our credit risk-adjusted yield spread explains therecent decline in EURUSD. Further bond marketconcerns likely will push EUR lower.

Markets will need to shift back to focus on ECBtightening prospects for the EUR to rally.

Over the past week, we have argued that the relativesize of the Italian bond market increases the gravity ofthe debt issues facing the eurozone. Additionally, wehave noted that the EUR is unlikely to rally untilEuropean policy makers successfully contain contagionfears that are weighing on the bond market. We nowanalyse the link between specific bond marketdevelopments and the outlook for EURUSD.

Our 5 year risk-adjusted eurozone US yield spread has

shifted significantly in favour of the US over the pastmonth and is consistent with the move lower in EURUSDto 1.40 (Chart 1). Indeed, if eurozone bond marketconcerns increase over coming sessions, this measurelikely will shift to signal EURUSD below 1.40.

As Italian and Spanish bond yields have reached newhighs, CDS (the cost of insuring against default) hasspiked accordingly. Our GDP-weighted measure ofEurozone CDS has spiked from a low of 141 bps in Juneto above 240 bps today (chart 2). Mounting concerns inthe Italian and Spanish bond markets are largelyresponsible for the widening of the eurozone spread.Italy (16%) and Spain (11%) together represent around27% of the GDP-weighted measure the same asGermany at 27%. It is the extra cost of insuring againstdefault in the two former countries that is effectivelyreducing the adjusted risk advantage of the eurozone.

If European officials do successfully address the currentbond market malaise through policy measures, eurozoneCDS will likely fall back towards more moderate levels.Such a move would bolster the eurozones yieldadvantage according to our risk-adjusted measure. Thisanalysis is consistent with our macro based opinion thatthe foreign exchange market remains event driven atpresent and that EURUSD is trading at a discount tonominal yield spreads. The analysis also suggests thatthe foreign exchange market has shifted focus away from

a EUR bullish view driven by expectations the ECB willcontinue to hike policy rates while the Fed remains onhold. An eventual shift back to such a view will likely bethe event that re-establishes the EUR rally.

In the interim, we expect the EUR will remain underpressure and we continue to focus on short exposure.Our favoured trades include short EURJPY andEURCAD.



Chart 1: EURUSD vs. Relative Risk Adjusted 5yNominal Yields

-0.40

0.10

0.60

1.10

1.60

Jul-2010 Nov-2010 Mar-2011

1.25

1.30

1.35

1.40

1.45

1.50

Relative Risk Adjusted Nominal YieldsEURUSD (rhs)

Source: BNP Paribas: Risk adjusted nominal yielddifferentials have moved in the direction of a lowerEURUSD. The EMU risk adjusted spread is calculatedby subtracting the respective EMU country 5Y sovereignCDS rate from its nominal bond yield, and then weightingthe country components relative to their contribution toEMU GDP. The US risk adjusted yield is formed bysubtracting the 5Y sovereign CDS rate from the 5Ynominal US Treasury yield. The spread of these twohave correlated reasonably well with EURUSD.

Chart 2: 5y US Sovereign CDS vs. 5y SovereignGDP Weighted CDS.

0

50

100

150

200

250

Jan-10 Jul-10 Jan-11

EU

US

Source: BNP Paribas


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FX Forecasts*USD Bloc Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14

EUR/USD 1.50 1.55 1.45 1.40 1.35 1.35 1.30 1.30 1.30 1.30 1.34

USD/JPY 78 83 85 90 95 95 95 95 95 95 114

USD/CHF 0.83 0.83 0.90 0.93 1.00 1.00 1.04 1.04 1.04 1.04 1.09

GBP/USD 1.65 1.68 1.59 1.56 1.53 1.53 1.53 1.53 1.53 1.53 1.70

USD/CAD 0.98 0.93 0.95 0.97 1.01 1.01 1.04 1.04 1.04 1.04 1.21

AUD/USD 1.09 1.13 1.07 1.04 0.99 0.99 0.96 0.96 0.96 0.96 0.78

NZD/USD 0.82 0.84 0.81 0.80 0.76 0.76 0.74 0.74 0.74 0.74 0.56

USD/SEK 5.93 5.48 5.93 6.21 6.67 6.67 6.92 6.92 6.92 6.92 6.94

USD/NOK 4.98 4.77 5.07 5.26 5.56 5.56 5.77 5.77 5.77 5.77 5.07

EUR Bloc Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14

EUR/JPY 117 129 123 126 128 128 124 124 124 124 153

EUR/GBP 0.91 0.92 0.91 0.90 0.88 0.88 0.85 0.85 0.85 0.85 0.79

EUR/CHF 1.25 1.28 1.30 1.30 1.35 1.35 1.35 1.35 1.35 1.35 1.46

EUR/SEK 8.90 8.50 8.60 8.70 9.00 9.00 9.00 9.00 9.00 9.00 9.30EUR/NOK 7.47 7.40 7.35 7.37 7.50 7.50 7.50 7.50 7.50 7.50 6.80

EUR/DKK 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46

Central Europe Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14

USD/PLN 2.60 2.48 2.69 2.75 2.81 2.78 2.85 2.77 2.85 2.85 2.65

EUR/CZK 24.3 24.5 24.1 23.9 23.8 23.5 23.7 24.0 23.5 23.3 23.1

EUR/HUF 275 275 269 265 265 260 260 255 260 260 250

USD/ZAR 6.80 6.60 6.55 6.60 6.50 6.50 7.20 7.10 7.00 6.90 6.69

USD/TRY 1.52 1.50 1.56 1.59 1.63 1.65 1.65 1.67 1.69 1.69 1.54

EUR/RON 4.20 4.15 4.20 4.25 4.15 4.10 4.20 4.20 4.10 3.95 3.90

USD/RUB 27.51 27.25 27.86 27.97 28.08 27.65 28.19 27.75 29.07 27.75 27.75

EUR/PLN 3.90 3.85 3.90 3.85 3.80 3.75 3.70 3.60 3.70 3.70 3.55

USD/UAH 7.8 7.8 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.3 7.4

EUR/RSD 100 100 98 97 96 95 93 92 91 90 85

Asia Bloc Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14

USD/SGD 1.22 1.21 1.21 1.20 1.19 1.18 1.17 1.16 1.15 1.14 -----

USD/MYR 2.95 2.90 2.87 2.85 2.83 2.80 2.77 2.75 2.73 2.70 -----

USD/IDR 8500 8400 8300 8200 8100 8000 7900 7800 7800 7800 -----

USD/THB 29.80 29.50 29.30 29.00 28.70 28.50 28.30 28.00 28.00 28.00 -----

USD/PHP 42.50 42.00 41.50 41.00 40.50 40.00 39.50 39.00 39.00 39.00 -----

USD/HKD 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 -----

USD/RMB 6.40 6.31 6.25 6.21 6.17 6.13 6.23 6.20 6.17 6.15 -----

USD/TWD 28.00 27.50 27.00 26.70 26.50 26.00 26.00 26.00 26.00 26.00 -----

USD/KRW 1060 1050 1040 1030 1020 1010 1000 1000 1000 1000 -----

USD/INR 45.50 45.00 44.50 44.00 43.50 43.00 43.00 42.50 42.50 42.00 -----

USD/VND 20500 20000 20000 20000 20000 20000 20000 20000 20000 20000 -----

LATAM Bloc Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14

USD/ARS 4.18 4.25 4.34 4.43 4.51 4.60 4.69 4.78 4.86 4.95 -----

USD/BRL 1.58 1.55 1.53 1.55 1.56 1.58 1.59 1.60 1.61 1.62 -----

USD/CLP 450 435 425 430 435 440 442 445 447 450 -----

USD/MXN 11.40 11.10 11.00 10.90 11.00 11.10 11.10 11.17 11.25 11.30 -----

USD/COP 1730 1690 1690 1700 1710 1720 1725 1730 1740 1750 -----

USD/VEF 4.29 4.29 4.29 4.29 4.29 4.29 8.80 8.80 8.80 8.80 -----

USD/PEN 2.70 2.65 2.63 2.63 2.64 2.66 2.67 2.68 2.69 2.70 -----

Others Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14

USD Index 72.30 70.76 74.87 77.62 80.72 80.72 82.99 82.99 82.99 82.99 83.88

*End Quarter




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FX - Global Strategy Contacts

Foreign Exchange

Ray Attrill Head of FX Strategy America New York 1 212 841 2492 [email protected] Saywell Head of FX Strategy Europe London 44 20 7595 8487 [email protected] Hellawell Quantitative Strategist London 44 20 7595 8485 [email protected] Kowshik Currency Strategist London 44 20 7595 1495 [email protected] Nicola Currency Strategist New York 1 212 841 2492 [email protected]

Emerging Markets FX & IR StrategyDrew Brick Head of FX & IR Strategy Asia Singapore 65 6210 3262 [email protected] Loo Thio FX & IR Asia Strategist Singapore 65 6210 3263 [email protected] Ryan FX & IR Asia Strategist Singapore 65 6210 3314 [email protected] Poh FX & IR Asia Strategist Singapore 65 6210 3418 [email protected] Qi FX & IR Asia Strategist Shanghai 86 21 2896 2876 [email protected] Pawlowski Head of FX & IR Strategy CEEMEA London 44 20 7595 8195 [email protected] Ahmad FX & IR Asia Strategist London 44 20 7595 8620 [email protected] Isik FX & IR Asia Strategist Istanbul 90 216 635 29 87 [email protected] Diego Donadio FX & IR Latin America Strategist So Paulo 55 11 3841 3421 diego.donadio@@br.bnpparibas.com

Production and Distribution, please contact :

Roshan Kholil, Foreign Exchange, London. Tel: 44 20 7595 8486, Email: [email protected]

Important Disclosures

This report has been written by our strategy teams. Such reports do not purport to be an exhaustive analysis and may be subject to conflicts of interest resultingfrom their interaction with sales and trading which could affect the objectivity of this report. (Please see further important disclosures in the text of this report).This report is a marketing communication. It is not independent investment research. It has not been prepared in accordance with legal requirements designedto provide the independence of investment research, and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Theinformation and opinions contained in this report have been obtained from, or are based on, public sources believed to be reliable, but no representation orwarranty, express or implied, is made that such information is accurate, complete or up to date and it should not be relied upon as such. This report does notconstitute a prospectus or other offering document or an offer or solicitation to buy or sell any securities or other investment. Information and opinions containedin the report are published for the assistance of recipients, but are not to be relied upon as authoritative or taken in substitution for the exercise of judgement byany recipient, are subject to change without notice and not intended to provide the sole basis of any evaluation of the instruments discussed herein. Anyreference to past performance should not be taken as an indication of future performance. To the fullest extent permitted by law, no BNP Paribas groupcompany accepts any liability whatsoever (including in negligence) for any direct or consequential loss arising from any use of or reliance on material containedin this report. All estimates and opinions included in this report are made as of the date of this report. Unless otherwise indicated in this report there is no

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Daily FX Str Europe 19 July 2011

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Transcript of Daily FX Str Europe 19 July 2011