German ZEW higher, HKD sell-off

Forex News and Events

German ZEW weakens (by Yann Quelenn)

Over the last three months German ZEW expectations have bounced back on hopes of a global recovery. Yet, global turmoil is far from being over. China is in the middle of a financial crisis which is weighing on overall sentiment. The ZEW has printed in this morning at 10.2 points, but way below December data which came at 16.1.

Earlier this morning, final German inflation data for December was released and remains at 0.3% year-on-year. Yet, we believe that the decline in energy prices should weigh more heavily on Germany's CPI. The fundamentals remain positive as Germany has been able to run a budget surplus for the past three years. Concerns persist as November retail sales and exports printed below expectations at 2.3% y/y vs 3.7% y/y and 0.4% m/m vs 0.5 m/m. Weakening German conditions could trigger discussions about further easing by the ECB, although not at this week’s meeting. We remain bearish on the EURUSD and we target the pair to head back towards 1.0800.

HKD sell-off but no de-peg (by Peter Rosenstreich)

USDHKD continues to rally reaching a 7.8093 high today. Aggressive selling for the HKD regained momentum after China announced that GDP grew 6.9% (in-line). Hong Kong’s close ties with China have caused investors to link the two nation’s currencies. China’s weaker growth, expected capital outflows and devaluation are also expected to become Hong Kong problems. Within the three-decade old currency peg regime, the value of the USDHKD can fluctuate within a 7.75 to 7.85 band. This current move feels more like positioning rather than a shift in sentiment over Hong Kong economic fundamentals or change in policy. In addition, given the real HKD effective exchange rate and inflation differentials with the US, this does not warrant significantly higher USDHKD. Hence, we do not see the Hong Kong Monetary Authority abandoning the peg any time soon. Furthermore, we suspect that the China proximity argument is weak and a devalued CNY should not necessarily trigger HKD selling. The HKD peg has been extremely positive for Hong Kong’s prosperity by providing stability and allowing the nations to become a hub of international finance. Monetary conditions in Hong Kong remain accommodating with the spread between US-HK interbank rates favouring the US by 17bp. Further capital outflow (estimated at $300bn) will need to leave before liquidity conditions tighten and push up short-term HIBOR.

EUR/CHF - On Its Way to 1.1000