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The week ahead in FX (16−20 June 2008)

Fri, Jun 13 2008, 16:04 GMT
by John Hydeskov

Danske Bank A/S

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G7 finance ministers will meet in Osaka over the weekend without central bank governors. Without the power to set interest rates the meeting is without the usual edge and will probably not move markets much. In our view, coordinated intervention in the currency market is currently unlikely; the US is still mostly worried about the downside risks to the economy, the ECB has adopted a quite hawkish stance and the BoJ is left in the middle without any clear bias. Consequently, we can sit back and await conditions in monetary policies to change before the environment is ready for FX reserves to come into play.

Data out of the US can broadly be divided into three categories; sentiment indicators (empire manufacturing on Monday, ABC consumer confidence on Tuesday and Philly Fed and leading indicators, both on Thursday), housing data (NAHB on Monday and housing starts and building permits, both on Tuesday) and others (TICs on Monday, C/A balance on Tuesday). The sentiment indicators are generally expected to improve modestly, but these have limited market impact currently and are not set to dominate unless surprising heavily on the upside. The housing data is still terrible and we do not expect any significant improvement in the short-term. The TICS data have always had the potential to move the dollar; last month’s reading was horrible and did not report enough inflow to cover the trade deficit While a high TICs reading is dollar positive, a low – or even negative – number is bad for the USD. We believe it is pre-mature to expect an immediate dollar strengthen-ing. Accordingly, we still anticipate EUR/USD to be on range – with an upward bias.

Surging inflation combined with deteriorating growth prospects is the reason why many central bankers have difficulties sleeping these days. Since BoE’s governor King on Tuesday has to explain to Chancellor Darling why inflation has risen from 3.0% in April to the forecasted 3.2% in May, he has probably already written the letter and bought the stamps. And while the letter written in March 2007 proved out to be an arrogant one-off affair, King can keep the ink within reach as price control is lost for the rest of the year and at least one more letter is expected to be written. We expect the minutes from the last meeting on monetary policy due Wednesday will balance between inflation fears and growth scares and post an 8-1 voting result for keeping the base rate unchanged at 5% (with super-dove Blanchflower voting for a 25bp cut). Although EUR/GBP has drifted lower in the past week, we still believe the direction is upwards and that the pound should be under pressure as the UK faces both severe economic and financial headwinds.

Other data releases worth mentioning are: The German ZEW indicator is expected to decline further on Tuesday, expectedly rising producer prices are revealed in the Germany Friday, UK retail sales for May are expected to slow on Thursday while the Japanese Tankan report will be released on Thursday night. All in all, we prefer NOK, CHF, EUR and AUD relative to GBP, NZD and CAD. The JPY and USD are a bit tricky as there are drivers moving in opposite directions. EUR/USD is technically moving downwards but we do not expect a major fall. As data calendars are extremely thin in Scandinavia, SEK and NOK will primarily be driven by movements in other markets.

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Published on  Fri, Jun 13 2008, 16:07 GMT