An almost empty data slate will keep focus on equity sentiment for FX direction


MAJOR HEADLINES – PREVIOUS SESSION

  • US Apr. CPI out at flat m/m, as expected, -0.7% y/y vs. -0.6% expected

  • US Apr. Core CPI out at +0.3% m/m, +1.9% y/y vs. +0.1%, +1.8% expected respectively

  • US May Empire manufacturing Index out at +4.55 vs. -12 expected and -14.65 prior

  • US Mar. Net Long-term TIC flows out at 55.8b vs. 32.5b expected

  • US Apr. IP out at -0.5% m/m vs. -0.6% expected and -1.7% prior

  • US Apr. Cap. Utilization out at 69.1% vs. 68.8% expected and 69.4% prior

  • US May Prelim Michigan Confidence out at 67.9 vs. 67.0 expected and 65.1 prior

  • NZ Q1 PPI Inputs out at -2.5% q/q vs. flat expected and -2.2% prior

  • NZ Q1 PPI Outputs out at -1.4% q/q vs. +0.5% expected and +1.4% prior

  • UK May Rightmove House Prices out at +2.4% m/m, -6.2% y/y vs. +1.8%, -7.3% prior resp.

  • JP Apr. Consumer Confidence out at 33.2 vs. 31.0 expected and 29.6 prior

  • JP Apr. Nationwide Dept Store Sales out at -11.3% y/y vs. -13.1% prior


THEMES TO WATCH – UPCOMING SESSION

  • EU Euro-zone Trade Balance (0900)

  • EU ECB’s Weber speaks (0900)

  • US NAHB Housing Market Index (1700)

  • CA Victoria Day Market Holiday

Market Comment:

The EUR finished last week on a soft footing following the release of weak German GDP data. Q1 saw the German economy contracting at close to 7% on an annualized basis and down almost 4% versus the previous quarter. Weekend editorials in both the FT and the UK times continue to paint a gloomy picture for the Euro-zone economy and are likely to keep the single currency under the cosh.

First off, Wolfgang Munchau in the FT highlighted that the German banking system may be on shaky ground if the recently proposed bank bailout plan comes into effect in its current form. Comparing it with the Geithner/Summers plan in the US, he comments that the German plan may actually deter recapitalization of German banks given that the plan would allow them to create so-called SPV’s to take up bad securities from balance sheets, but still having ultimate responsibility for the SPV’s losses should they be incurred, thereby draining a portion of future earnings.

Next up, Anatole Koletsky in his FT column points out that continental Europe – and Germany in particular – has suffered far worse from the credit crunch than both the US and the UK. The German predicament, he outlines, comes from three factors; its dependence on exports, especially of capital goods, cars and other consumer durables ( the first to be hit in a consumer spending slowdown); some reckless lending to Central Europe and the Baltic States particularly by banks based in Austria, Sweden, Greece and Italy (in turn large borrowers from German investors); the constricting factor of the EUR, once a stabilizing factor for the “weaker” Euro-zone members but now risking being a new source of vulnerability for them. Members are no longer risk-free “sovereign credits” and are unable to merely print money to stave off the rising risk of default.

In all, the negative factors for the EUR appear to be snowballing and, once the over-enthusiasm for the US recovery story starts to abate, the EUR looks set to become the whipping boy of the markets, with a break of 1.3400 seeing accelerating losses.

In the UK’s Telegraph, Roger Bootle sees a weaker GBP as critical to the hopes of a UK recovery. He is concerned that the GBP is set to rally against the EUR (note sentiments expressed above) and notes that in order to reap the benefits of a weak GBP, it is necessary for producers to believe that it will stay at low levels for some time and therefore look to build up markets, sales forces and supply chains while investing in plant and machinery. A sharp rebound in the GBP will force them to think twice whether the time, effort and expense would be worth it.

The FT also takes the US stress testing program to the next level, by applying the same criteria to smaller and mid-sized US banks. It revealed that such banks may require an Addition $24 bln in capital. The total was made up from an extra $16.2 bln for the next 200 banks below the top 19 and $7.8 bln for the remaining 7,700. The Treasury has stated that it never intended to extend the stress tests beyond the top 19 financial institutions but news of the shortfall may prompt calls for further consolidation, takeovers and mergers within the sector before we see any chance to progress on the lending side.

Things Japanese will come into focus again this week. On Wednesday we will see preliminary growth forecast for Q1, and it is unlikely to make pretty reading. Median forecasts are looking for 16.1% annual contraction and a 4.3% decline versus the previous quarter, and this may put a dampener on the JPY’s recent shine. Add to this news earlier this morning in Asia that Moody’s would hold a press conference at 0600GMT about Japanese Government Bonds. This raised speculation that Japan’s Aa3 local currency debt rating may be questioned again and caused a minor sell-off in JGBs. However, it is noted that 97% of all JGBs are held by Japanese investors and any Moody’s impact may be limited. However, both these factors may suggest some caution on the JPY’s recent strength, though any blip is still only seen as temporary while we hold below 97.0