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The end of the US Labour Day weekend is traditionally marked by improved liquidity

Fri, Sep 11 2009, 12:44 GMT
by Kenneth Broux

Lloyds TSB Financial Markets

Macro Outlook

The end of the US Labour Day weekend is traditionally marked by improved liquidity and has regularly been associated with increased periods of volatility and swings in risk appetite across major asset markets. For currencies, the start of September has been characterised by a step-up in USD aversion, but the underperformance of GBP points to some stress points among G10 currencies. Central bank meetings could play a key role over the coming weeks and the G20 meeting of heads of state in Pittsburgh on September 24/25 could be forced to pay greater notice to currency swings than the finance ministers in London. As talk intensifies of USD diversification in international trade settlements, high yield currencies and commodities stand to benefit most, provided equities maintain this year’s gains. The bullish outlook for commodity currencies is backed up by a shift towards a more hawkish stance by some central banks including the RBA and Norges Bank.

• USD

  Markets will pay close attention to President Obama’s speech on healthcare to a joint session of Congress on Wednesday. Under the current circumstances, the Congressional Budget Office calculates that the gap between social security spending and revenues is likely to grow to such an extent over the next decade that it will be impossible to pay the full amount of scheduled benefits. Concerns about a further spiralling of the US public deficit will make it difficult for the USD to rebound unless confidence grows that the economic recovery can be sustained beyond Q3/Q4 and rate hike expectations harden.

  The Fed Beige Book is due on Wednesday and will give the latest detailed account of the US economy and traditionally sets a template for the September 22/23 FOMC meeting. The preliminary Michigan confidence index is due on Friday and is forecast to show the first rise in three months. Mixed messages from Fed members Bullard, Fisher and Dudley have emerged in recent weeks with regard to MBS purchases and are likely to stimulate discussions at the September FOMC meeting where the Bank may also decide whether or not further Treasury purchases are appropriate.

• GBP

  GBP/USD caught up with major USD crosses over the last 24 hours but the underperfomance against pro-risk currencies like the AUD and CAD underlines the diminished positive correlation of sterling with risk appetite over the summer. The BoE MPC meeting on Thursday should be a formality just one month after the Bank decided to raise the QE target by £50bn to £175bn. However, speculation surfaced in the press over the weekend that the Bank could make changes to the way it manages commercial bank excess reserves by imposing a negative deposit rate. BoE Governor King’s vote for a £75bn increase in QE has also fuelled speculation that the Bank could announce another QE increase before November. The Bank is implicitly targeting a weaker GBP so I am reluctant to call GBP/USD back at the August highs around 1.70.

• EUR

  The EUR has posted a mixed performance against its major G10 peers, on the one hand posting a new 2009 high vs the USD but losing ground against pro-risk currencies like the AUD on the other. A dovish ECB press conference last week only briefly dented the bullish momentum in EUR/USD. The broader bearish USD view is set to dictate price action over the coming week, but like GBP, we note the decoupling of the EUR vs G10 peers (NOK, AUD) on higher commodities and a divergence in central bank rhetoric. Positive surprises for euro zone economic data should temper the decline in EUR vs high yield and commodity currencies.

• JPY

  The JPY is showing remarkable resilience in the face of higher global equities and is now operating as a safe haven refuge as the USD weakens. A test of 91.95 support would clear the path for a move towards the summer low of 91.74. Machinery orders data for July could be a market mover on Thursday, though currencies continue to show a tendency to trade independently from short-term and high-frequency economic data. The consensus forecast is for a 3.5% drop. Strong net capital inflows in Japanese securities in the latest week back up a firmer JPY (see chart). The move lower in USD/JPY to 92.0 may eventually cause the Nikkei to underperform as the stronger JPY dims prospects for exporters.

• CAD

  Stronger-than-expected August employment data (gains concentrated in part-time workers) and the bounce back in Nymex crude above $70pb helped to drag USD/CAD down from Friday’s 1.1038 high. Four successive days of lower lows and a break below 1.0719 support clears the path for a retracement to 1.0633, the August 4 low. We don’t expect the Bank of Canada to make a major announcement on monetary or non-standard policy on Thursday. Following the G20 finmins meeting, we expect the offifcial policy rate to stay on hold at 0.25% and the Bank to reiterate that ‘the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target’. Manpower reports encouraging hiring trends for Q4.

• SEK

  The SEK has recovered smartly from the dovish Riksbank statement and weaker Swedish manufacturing PMI as the currency benefits from stronger risk appetite (associated with eastern Europe) and positive Q2 current account data. The current account surplus widened to SEK 67.9bn, boosted by a doubling in portfolio investment inflows to SEK137.6bn and the biggest rise in direct investment flows in three quarters (SEK23.7bn). July industrial output data are forecast to show a 0.5% drop on Wednesday. August CPI is the main market mover on Thursday. The consensus forecast is for a 0.1% rise in headline CPI (-1.0% y/y). Revised Q2 GDP is expected to show no revision from the preliminary flat q/q reading. The EU/SW 2y yield spread has narrowed to 20bps. Key support runs at 19bps and 15bps.

• NOK

  The NOK is one of my favourite currencies as Norges Bank moves closer towards tightening monetary policy. Fairly bullish economic data for Q2 GDP, July retail sales and credit growth and Q3 consumer confidence have boosted the probability that the Bank will reiterate a more hawkish bias next month, though this may be conditional on a rebound in the manufacturing PMI following the near 8-point setback this month. The move in USD/NOK below 6.0 signals a breakout from the recent range. Key support comes in around 5.90.

• AUD

  A strong bid in commodity prices set the AUD alight and has led me to raise near-term targets for AUD/USD to 0.88. Though speculation of a near-term rate hike by the RBA has subsided somewhat, a rate rise before year-end is still on the cards and is priced in by the AUD 3-month inter-bank futures curve. The NAB business confidence survey rose in August to the highest level since October 2003, underpinning this view. August employment data could be a market mover on Thursday (forecast -15K).

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Published on  Fri, Sep 11 2009, 13:14 GMT