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Sunrise Market Commentary: Currencies

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BoE Minutes surprise

Thu, May 24 2007, 07:43 GMT
by KBC Market Research Desk

KBC Bank

• US Treasuries cannot find their composure
  
• Euro zone national business confidence surveys in the focus
  
• BoE Minutes surprise
  
• Greenspan tries to crash the (Chinese) party

Global overview: Greenspan tries to crash the (Chinese) party

Yesterday’s calendar was again devoid of important macro-economic data. On such a day, a column writer can only hope that something comes out of the blue and that is what happened yesterday evening. During the US session, ex-Fed president Greenspan was active in his new job as market and economic guru.

In a teleconference he warned that the strong world growth over the previous five year won’t last and also feared a dramatic contraction on the Chinese stock markets as he considered the recent boom unsustainable. The Greenspan comments left some traces on the US stock markets, as major US indices gave up early gains to close the day with some, albeit small, losses.

Just some small remarks on the Greenspan intervention. Hs remarks (as far as they publicly available) were interesting, but question is whether they bring any new info to the market place. In this respect, the reaction probably tells more about market sentiment than on the content of the Greenspan comments. Over the previous days other sources like the PBOC (and they still have some real power to guide the markets) clearly proved their unease with the investor behaviour on the Chinese markets, but without much impact though. It will be interesting to see whether Greenspan will be able to pull the trigger that other factors failed to do. At least this morning in Asia this is not the case.

The Greenspan comments revive some reminiscence to his warning on ‘irrational exuberance’ he made in December 1996. Backward looking he got it right but, to comfort the bulls, this only happened three years later.

After his warning on the rising chances for US recession earlier this year, the time value of Mr. Greenspan’s call (bonds) and put (equities) options is counting down. Interesting to see whether he and his supporters can make some money out of it. As ever, from a market point of view, timing is important!

Currencies: BoE Minutes surprise

EUR/USD in the end was sideways yesterday, but there were some interesting intraday movements to be noted. At first EUR/USD tried to go lower, hitting week lows at 1.3420, but then things reversed and EUR/USD moved higher. Some analysts referred to comments of Weber in the morning, but everybody knows he is a hawk and the timing doesn’t match the (later) upmove. For the sake of completeness, Weber yesterday said that “we’re not done yet”, implying more rate hike(s).

EUR/USD ticked up intraday to the 1.35 zone, but there things cooled down again and the pair retreated towards the 1.3450 zone, around the levels where the day had started.

Today, the calendar should heat up with the US durables and the new home sales. In the EMU, the German IFO will of curse grab all attention. A stabilization at 108.8 is expected and should be good enough to confirm the solid momentum in the euro zone. A pullback would bring doubts and could hurt the somewhat more fragile euro at this moment. We don’t think this is the main scenario though and look for more bottoming out in this pair. On the day though, the data will decide the direction, as finally something tangible is on the agenda.

ST USD sentiment has certainly improved on the back of fixed income developments, while the euro was hugely overbought, but in the longer term, the dollar has more issues about the economy and rate cuts, which should keep gains limited for the US currency.

USD/JPY also had a sideways day on Wednesday, sticking close to the mid 121’s. There is not enough pull form data to go for a test of the year highs, but the yen also isn’t resilient enough to try and fight back, even after the recent sell-off.

Ex-Fed chairman Greenspan again made headlines for himself as he warned for a Chinese stock market bubble, saying he feared a “dramatic contraction”. He had an impact on US stocks, but Chinese stocks this morning do not seem very impressed. This storm in a teacup should blow over. The forex markets were not hit either. Not even the yen could gain on some sort of risk aversion play yesterday evening as these comments were aired. We believe Greenspan is yesterday’s man and shouldn’t hold a big impact over the markets anymore.

The US-China Strategic Economic Dialogue didn’t bring any useful headlines yesterday, sticking to the usual mantras. A new aviation pact and some deals on better access to the financial sector were agreed, taking the heat of the currency issue to some extent. Paulson asked for ”more short-term forex flexibility” once more. Today, a meeting is scheduled between Wu Yi and some malcontent US Congressmen, demanding action. This could be the most interesting part of the Chinese visit to Washington this week. Higher tensions could signify a negative impact on the USD especially versus Asian currencies. Besides risk aversion/US warnings, we still see little scope for a yen comeback near term, so prefer a test of the highs (in USD/JPY) first.

EUR/GBP really fell back quite hard yesterday, heading from the 0.6810 zone to the 0.6770 area. The reason: the BoE Minutes.

Indeed, the Minutes were very informative to say the least. The vote was more convincing than expected, with a 9-0 unanimous vote to hike, with some members even considering a 50 bp rate hike. This confirms the conviction of the Bank to go for an added rate hike. While this had been factored in, the conviction of the message is somewhat surprising in its aggressiveness and helped the sterling to more gains than we had foreseen. This means there is an upward risk to our scenario for policy rates in the UK and this is helping the sterling beyond what we had expected. We had put forward the idea to buy euro at the 0.68 zone. Now we’ve already fallen below this, having come to the 0.6780 area. Still, we believe the market may somewhat too enthousiastic for the UK for now, while the ECB still holds more hawkish cards to play too. This is a global context of higher rates, so things should even out. That would imply longer term sideways trading for this pair to continue. Therefore, in the longer term we feel the 0.67 zone lows should hold up and the pair could tick up towards the 0.6870 zone, if the emphasis/spotlight returns to ECB actions/ hawkish comments.

Today, attention should go to the prima donna release of the EMU, the German IFO business sentient survey. If this shows enough strength this will help the euro to find some solid ground under its feet.

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Published on  Thu, May 24 2007, 07:55 GMT