Daily Currency Briefing

July 18, 2011

US debt ceiling: All or nothing

G10 Currencies
USD: The countdown towards 2 August is on and the Democrats as well as the Republicans are digging in as regards an increase of the debt ceiling. While the Republicans have excluded any form of tax rise instead demanding a strict savings programme, the Democrats are only prepared to agree to a compromise of tax rises and spending cuts. An ultimatum set by President Barack Obama on Friday expired over the weekend without any results. The exact details of the solution will be irrelevant for the FX markets, what will be important is the fact that a compromise will be reached at all. In just under two weeks time the Treasury will become unable to meet the majority of its payment obligations without causing a stay in other areas. Considering a monthly shortfall of approx. USD 125bn. even that would only bring temporary relief never mind the catastrophic effects on the American economy. Comments from the White House suggest that an agreement will have to be reached by Friday to leave sufficient time for the legislative process. So far the financial markets have ignored the political toing and froing after all the increase of the debt levels has repeatedly caused some wheeling and dealing between administration and opposition. The parties seem particularly entrenched this time round though and the fact that Moodys and S&Ps put a question mark over the US AAA rating created additional pressure. Considering what is at stake we assume that a last minute agreement will be reached. Even if the USD can then breathe a sigh of relief its image as a safe haven will have been severely tarnished. EUR: The result of the European banking stress test 8 of the 90 banks tested failed was only briefly reflected in EUR-USD on Friday and any gains were retraced very quickly. Hardly surprising: the European periphery remains the main battle ground for the FX markets. At present attention focuses on all parties working together to find a concerted, sustainable solution for the difficulties of the European periphery. There is an array of approaches and the positions of EU politicians and ECB remain contradictory. While politicians are dealing with a hair cut, voluntary defaults and the repurchasing of Greek bonds, the president of the Bundesbank Jens Weidmann made it clear once again over the weekend that neither a Eurobond nor any kind of debt cancellation would constitute a sustainable solution long term. An extraordinary summit of the European heads of state and government to convene this Thursday might provide further insight. Without momentum on the data front the euro therefore remains at the mercy of comments regarding the European solution and is not safe from setbacks. There is support in the area of 1.3950-80 and at 1.3840. CHF: There is no stopping the franc now. Against the background of the budget row in the US and the rescue efforts in the Eurozone it has emerged as the clear winner. Overnight EUR-CHF recorded new lows at 1.1365, USD-CHF at 0.8034. While market uncertainty remains high the franc is likely to appreciate further. The next important psychological levels in USD-CHF are located around 0.80 and at 1.10 in EUR-CHF. JPY: Due to increased market uncertainty the lower end in USD-JPY was already tested repeatedly last week. Minister of Finance Yoshihiko Nodas verbal interventions prevented a more pronounced downward trend though. Only if the Ministry of Finance becomes more outspoken the increased risk of interventions might cause the market to lose its yen appetite. Until then USD-JPY is however likely to remain below the 80 mark. NZD: The CPI results for the second quarter showed it once again overnight: Generally speaking the NZD has been outperforming the AUD for some time. Following the RBNZ rate cut in March in reaction to the devastating earth quake in Christchurch markets had already adjusted
nd

Carolin Hecht +49 69 136 41505 carolin.hecht@commerzbank.com

Carolin Hecht +49 69 136 41505 carolin.hecht@commerzbank.com

Antje Praefcke +49 69 136 43834 antje.praefcke@commerzbank.com

Carolin Hecht +49 69 136 41505 carolin.hecht@commerzbank.com

Antje Praefcke +49 69 136 43834 antje.praefcke@commerzbank.com

For important disclosure information please refer to the back pages

Daily Currency Briefing

their rate expectations for the NZD radically downwards. As a result there is hardly any more scope for downward speculation regarding interest rates in New Zealand. On the contrary: positive economic data (such as the Q1 GDP data last Thursday or high Q2 CPI data with +1.0% qoq and +5.3% yoy) quickly lead to rate hike speculation supporting NZD. Moreover, increased uncertainty is reflected more notably in AUD than in NZD. As the RBA has raised rates several times since October 2009 but then took a pause in November 2010 rate hike expectations have been postponed further and further by the markets. Most recently in early July when the RBA sounded more cautious regarding growth, inflation and credit than expected. In this context the RBA minutes due for publication tonight are important: if they confirm the RBAs cautious approach AUD-NZD is likely to come under renewed pressure. Therefore, we see strong resistance in AUD-NZD at 1.28 and think the cross is initially heading for 1.25. Only the Australian Q2 CPI data (RBA Governor Glenn Stevens repeatedly pointed out the th importance of this data) and the RBNZ rate meeting both due on 27 July might reshuffle the cards and lend the AUD support against the NZD. SEK: We do not expect the minutes of the Riksbank rate meeting on 5 July to provide much support for SEK. Despite the 25bp rate rise to 2.00% the central bank did not adjust the growth and inflation outlook, and left the rate path unchanged as well. So the Riksbank did not sound any more hawkish in July which was what the markets had expected. In fact, sounding more hawkish is hardly possible as the Rikbank rate path already implies a 25bp rate rise at every meeting this year. Moreover the Riksbank is aware of the fact that the rapid growth momentum is slowing somewhat. This means that general market sentiment will remain the driving force in EUR-SEK over the coming days, in particular as there is no Swedish economic data on the agenda this week. If market uncertainty increases again EUR-SEK will rise rapidly again. Once things calm down again EUR-SEK will begin to only slowly trend downwards. We see good resistance in EUR-SEK in the 9.2650-9.27 area. A test of 9.30 cant be excluded, though, in case sentiment worsens.
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Antje Praefcke +49 69 136 43834 antje.praefcke@commerzbank.com

Emerging Market Currencies

PLN: The fiscal situation in Poland was able to continue to surprise positively. In June the country reached a healthy 50.7% of the projected budget deficit for the year. Moreover the government announced that the deficit for the entire year will probably amount to only 5.6% of GDP thus remaining well below the original target of 6.5%. The current account deficit for May published on Friday also surprised on the upside. Contrary to an expected deficit of EUR 755m the account was balanced. However, the zloty was unable to benefit from the good news as markets were pre-occupied with the European banking stress test. The zloty is likely to regain some ground as soon as the situation on the markets calms down again. CLP: As expected the Chilean central bank left key rates unchanged at 5.25%. In its statement it made clear though that it has not yet reached the end of the rate hike cycle. The speed of the hikes is however likely to slow considerably in the second half of the year. We expect a further two 25bp rate hikes this year. The central bank did not refer to the issue of the peso despite the fact that the currency appreciated towards 460 against the US dollar over the past few days. As a result the volume of the daily dollar purchases, which the central bank has been executing since the beginning of the year, will not be adjusted. The peso is however likely to be running out of steam at current levels. The remaining rate hikes are likely to be priced in and the depressed sentiment on the financial markets entails the risk of an upward correction in USDCLP.
Thu Lan Nguyen +49 69 136 82878 thulan.nguyen@commerzbank.com

You-Na Park +49 69 136 42155 you-na.park@commerzbank.com

18 July 2011

Daily Currency Briefing

Todays Events
Time 23:45 00:01 08:00 13:00 14:00 15:00 Region Indicator NZD GBP TRY PLN USA USA Consumer prices Rightmove House Prices Consumer confidence Wages Tic data NAHB Housing Market Index Period Q2 Q2 Aug Aug Jun Jun Jun May Jul qoq yoy mom yoy mom yoy USD bn
13

Actual
+1,0 +5,3 -1,6 +0,1

Our Forecast

Survey
+0,8 +5,1

Last
+0,8 +4,5 +0,6 +1,1

Direction

Cross

+3,2 +5,5 40,0 14

92,9 -3,2 +4,1 30,6 13

Important Market Data

FX Current Change (%) Last trading day's high Last trading day's low FX Current Change (%) Last trading day's high Last trading day's low FX Current Change (%) Last trading day's high Last trading day's low FX Current Change (%) Last trading day's high Last trading day's low Forwards / Options EUR-USD 3M Money Market Rate (%) Bonds / Bond Futures Yield (%), Price Equity Indices Closing Change Change (%) Oil / Prec.Metals $ per unit EUR-USD 1,4077 -0,58 1,4200 1,4093 EUR-SEK 9,2370 +0,17 9,2411 9,1832 EUR-AUD 1,3270 +0,46 1,3302 1,3176 EUR-RUB 39,6109 -0,52 39,9883 39,6340 Fwd 3M -37,4000 EURIBOR 1,61 10Y Bund 2,70 EuroStoxx50 2675,38 -19,91 -0,74 Oil, Brent 117,10 EUR-JPY 111,22 -0,67 112,34 111,36 EUR-NOK 7,8648 +0,06 7,8755 7,8333 EUR-NZD 1,6701 -0,65 1,6877 1,6707 EUR-RON 4,2673 -0,10 4,2840 4,2609 Fwd 6M -69,1000 $ LIBOR 0,25 10Y T-Note 2,91 DAX 7220,12 +5,38 +0,07 Oil, Nymex 97,23 EUR-GBP 0,8738 -0,46 0,8795 0,8746 EUR-DKK 7,4569 -0,01 7,4598 7,4549 EUR-BRL 2,2164 -0,68 2,2404 2,2185 EUR-CNY 9,1034 -0,51 9,1742 9,1080 Fwd 12M -126,0600 LIBOR 0,20 10Y JGB 1,09 Dow Jones 12479,73 +42,61 +0,34 Gold 1597,20 EUR-CHF 1,1445 -0,99 1,1597 1,1507 EUR-HUF 270,12 +0,16 271,80 269,13 EUR-MXN 16,5695 -0,25 16,6571 16,5166 EUR-SGD 1,7162 -0,45 1,7274 1,7177 Vol 1M 13,60 LIBOR 0,83 EUR-CAD 1,3462 -0,98 1,3628 1,3480 EUR-CZK 24,452 -0,11 24,539 24,421 EUR-TRY 2,3330 +0,15 2,3372 2,3224 EUR-KRW 1493,9872 -0,20 1502,4857 1491,4601 Vol 3M 13,40 $ index 75,42 +0,22 75,42 74,99 EUR-PLN 4,0237 -0,00 4,0430 4,0147 EUR-ZAR 9,7346 +0,28 9,7842 9,6668 EUR-THB 42,3492 -0,64 42,7397 42,3822 Vol 12M 13,55

CHF LIBOR CAD LIBOR 0,18 1,17 10Y T-Note 10Y Gilt Bund Future Future 3,08 128,99 124,88 Nikkei 225 9974,47 +38,35 +0,39 Palladium 786,00 Zinc 2320,0 FTSE 100 5843,66 -3,29 -0,06 Platinum 1758,00 Tin 27260,0 1316,14 +7,27 +0,56 Silver 39,92

S&P 500

Industrial Metals Aluminium Lead Copper Nickel $ per ton 2450,0 2650,0 9606,0 24060,0 Sources: Bloomberg L.P., European Banking Federation, British Bankers Association, Dow Jones, Xetra, S&P, TSE, LSE, LME.

18 July 2011

Daily Currency Briefing

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