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Daily FX Str Europe 19 July 2011

Daily FX Str Europe 19 July 2011

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Published by: timurrs on Jul 19, 2011
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Foreign ExchangeLondon 08:00
FX Daily Strategist: Europe
AUDUSD vs AUD rate expectations
06 07 08 09 10 110.600.650.700.750.800.850.900.951.001.051.10-2.0-1.5-1.0- rateexpectations (12m)AUDUSD (RHS)
Source: Reuters Ecowin Pro. The disconnecbetween AUDUSD and AUD rate (cut)expectations looks increasingly unsustainable,even allowing for the special factors such asincreased reserve manager demand supporting  AUD. We suspect that a reconnect when it comes is more likely via a forced revision tointerest rate thinking than a fall in AUD, though inthe meantime positioning for a reconnect viabeing tactically short AUD alongside a payer of front end rates has something to commend it.
This is not classified as objective research. Please refer to important information at the end of the report.
: +44(0)20 7595 8086
: +1 212 841 2408
: +65 6210 3263/3347
08:30ESSpain to sell 12mand 18m bills09:00DE (Jul)ZEW Expectation-11.5-9.009:00DE (Jul)ZEW Current Ass85.087.612:30US (Jun)Housing Starts K57556012:30CA (Jun)Leading Indicat %(m/m)0.813:00CABoC MonetaryPolicyAnnouncement %1.001.00
Less hawkish RBA minutes can weigh on AUDNZD
No tangible evidence of progress with US deficit/debtceiling negotiations
Gold now outpacing CHF, but in absence capital controls
RBA minutes
released in Asia were considered to be “lesshawkish”, with the RBA dropping their explicit view that policywould need to be tightened at some point, referring to a softer domestic economy and risks in Europe. However, the RBA didstate that it had more time to assess inflation and hence the focuswill invariably turn to the Q2 PPI/CPI releases next week.However, perhaps more important for the AUD besides the ratesview is the terms of trade boom driven by higher commodityprices, and hence we do like AUD on certain crosses like short
for instance. However, those wanting to play a lesshawkish RBA would be well advised to do soewithin thecommodity block; consider looking to get
short AUDNZD
followinglast week’s stronger GDP print given that RBNZ rate movesappear under priced given the recent strength visible in the NewZealand economy.There has so far 
not been any tangible evidence of progresswith US deficit/debt ceiling negotiations.
We did haveplatitudes about a ‘big dealbut no sign of how it would beachieved and with the clock now ticking down more loudly giventhat Friday may be the last effective day for a deal to allow time for the necessary legislation to raise the debt ceiling by August 2
.We can fully expect this situation to persist until we hear news of an agreement on US deficit reduction (and of a magnitude thatsignificantly reduces the threat to the US AAA rating) and the rightform of words – if not yet hard actions – out of the planned EUSummit on Thursday that assuages some of the current concernsnot just about the security of a second Greek bail out, but alsohelps bring GIPS spreads in general back down. See today’sMarket Focus for more on the latter. On the former, it may bemere co-incidence, but we note that Monday’s May TICS datashowed the lowest net long term capital inflow since January2010, led by reduced appetite by private (not official) foreigninvestors for US securities. This was the first full month after S&Pput the US on notice that its AAA status was under threat fromfailure to raise the debt ceiling in a timely manner as well asputting the US fiscal position on a sustainable long term footing.Turning to safe havens, considering that gold has hit a newnominal record high above $1600 but
didnot sustain the push to new record lows, is arguably symptomaticof concern about capital controls in Switzerland that would drive awedge between the currency and the gold price; but we’re not yetconvinced that the Swiss authorities will go down this route (if theydid, most likely via the attempted re-imposition of taxes on non-resident CHF deposits) until and unless upward pressure on CHFbecomes even more intense (e.g. EURCHF below 1.10).Data/events focus Tuesday, outside of Euro-peripheral and USdeficit/debt ceiling headlines is on the German ZEW survey (whichexpected to drop sharply in July), the BoC’s rates announcementand US housing starts and building permits. The BoCannouncement should be a side show; note that our economistfeels that with core inflation subdued and growth likely to slow inH2, the BoC is expected to remain on hold until at leastDecember.
FX: Not much besides consolidation in Asia;
USDmixed versus G10- USD gains versus NOK (0.40%),EUR, CHF (both 0.20%). USD flat against JOY, SEK,AUD. USD down near 0.08% vs. CAD, GBP. Asian FX isvery quiet, but posting modest gains vs. USD led byTHB, KRW (0.10-0.15%). PBOC set the yuan centralparity rate at Cny6.4684 against the dollar today,compared with Cny6.4680 set for the previous tradingday.
Equity markets all trading around 0.50%in the red in Asia with SHCOM down 0.75%. US boursesovernight closed lower; SPX -0.81%, DHIA -0.76%,BOVESPA -1.08%.
It is a fairly sparse calendar for Europe again on Tuesdaywith data limited to the 0900GMT release of both
EMUconstruction output
data for May and also the closer-watched
German ZEW
data for July, which is expectedto show the expectations index decline to -12.0 and thecurrent conditions slip to 85.0.
US data
starts at1145GMT with the weekly ICSC-Goldman Store Salesdata, which is followed at 1230GMT by
Housing Starts
Building Permits
data. The pace of housing startsis expected to rise to a 575,000 annual rate in June,which would be a second straight gain. US data thencontinues with the 1255GMT release of the weeklyRedbook Average
NEWSAustralia/ New ZealandRBA minutes signal no immediate rate rise.
A reviewof financial markets in the wake of European debt worrieswas the main topic of discussion at the RBA July 5 Boardmeeting indicating this would be main determinant of monetary policy in the near term, the minutes of themeeting showed. Domestic inflation took a backseat withthe minutes making no mention of expectations of a pick-up in inflation, rather saying there was more time at handto assess the likely strength of inflationary pressures inAustralia. The upcoming July 27 CPI data release wouldhelp shape views about inflation, and therefore the futurepath of interest rates, the minutes said.
JapanFinance minister Noda
cited by wires saying he willwatch markets carefully. No comment if will intervene inFX market, recent forex moves one-sided, Commentscome as dollar-yen slides to Y79.03 morning low,matching last night's NY low, while euro-yen has jumpedto Y111.72 high from Y111.46 earlier.
BoJ Deputy Governor Yamaguchi
testifies at theHouse of Representatives Budget Committee. Mustwatch high yen's negative impact closely, watching firmsmoving operations overseas. To take appropriate policyaction for economy. High yen has benefit, loweringimport costs.
Summer bonuses climbed 4.21%
to an average of Y728,535 before taxes, rising for a second straight year,according to a survey of 645 firms by Nikkei Inc.
Europe:ECB Trichet:
Greek default or credit event "should beavoided". EUR continues to be "very solid currency".Euro area price stability underpins currency. Failure of US debt talks would create global problem. A stateexiting euro "not an assumption I envision"Earlier, new
French FinMin Baroin
spoke to the press inWashington. He said talks were going well ahead of Thursday's EU leaders’ summit and he was confident EUleaders would respond to the crisis, with investors beingreassured. He added that France would not back asolution leading to a "selective default".
Eurozone governments are considering a levy onbanks
a way to involve private creditors
in a bailoutof Greece, eKathimerini reports, citing a story inGermany's Die Welt newspaper.
Greek fin min
on the wires overnight says the
UScannot do much when it comes to buying Greekbonds.
Says Greece has not yet accepted a solution of selective default. Says if liquidity can't be secured by theECB it should be secured by the EFSF or the Eurosystem
Greek PM Papandreou
might make another attempt tofind some common ground with opposition leaders aheadof a euro zone summit in Brussels on Thursday, whichGreek government sources referred to as the mostimportant such meeting in the last 20 years, Kathimerini'sEnglish website reports. It is likely that the prime minister or Finance Minister Evangelos Venizelos will speak toopposition leaders, probably over the phone, before thesummit, the website says.
Germany's opposition Social Democrats (SPD)
haveoffered Chancellor Angela Merkel their support to get a"Marshall Plan" for Greece through parliament amidgrowing nervousness in her own conservative camp, theIrish Times says. Ahead of Thursday's emergencysummit, the offer to back substantial debt for Athens andother unpopular European decisions indicates that Berlinpoliticians are beginning to take to heart criticism of Germany's role in the euro zone crisis, the paper says.
As the first unpopular elements of SilvioBerlusconis austerity drive come into force this week,hitting the pockets of lower-paid Italians, pressure isbuilding to rein in the high cost of the country'spoliticians, who have amended the budget to protect their own interests, the FT says.
UKGeorge Osborne must reverse his VAT hike
to restoreconfidence and boost growth,
according to a leadingbusiness lobby group
, the Guardian reports. The rise to20% in January is battering hard-hit industries that have
Foreign Exchange Strategy Tuesday, 19 July 2011http://www.GlobalMarkets.bnpparibas.com
yet to recover from the recession, the Federation of Small Businesses said after its quarterly survey showeda dramatic decline in business confidence in the threemonths to the end of June, the paper says.The FT says there is disappointing news for the Labour leader in Tuesday's Guardian where an ICM poll showsthe Tories have actually increased their share of the votein the last few weeks - seen by many as the best of EdMiliband's leadership. It showed a three point drop for Labour on 36 and a four-point gain for the Lib Dems on16 points, leaving the Tories one point ahead on 37 per cent. A Populus poll for the Times shows similar results,with a fall in Tory headline vote, but no greatimprovement in the fortunes for Labour or its leader. Aplague on all your houses appears to be the public'sresponse.
The yield on the CNY5 billion in one-year paper sold bythe People's Bank of China remained unchanged atauction Tuesday for a third week at 3.4982%, traderssaid. The bank earlier drained CNY25 billion via 28-daybond repurchase agreements, they said.
China's money supply should be reduced whileproduction should be increased
in order to curbinflation, an advisor with the PBOC advisor Zhou Qirenrecommended in comments published today.
US/Canada:Foreigners net sellers of US assets in May – Treasury
for the first time in 11 months. Selling was heaviest inshort-term assets such as bills and deposits, contributingto an overall net outflow of $67.5 billion. That was thefirst net outflow since June 2010, and it reversed a $66.6billion inflow recorded in April 2011.Republican lawmakers moved ahead Monday on adoomed plan to amend the US Constitution to require abalanced federal budget, one day after President Obamamet with the top two House GOP leaders in hopes of reaching a debt-limit agreement that could win approvalfrom the hostile House, the Washington Post says.
White House spokesman Jay Carney said while Obamawould prefer the biggest possible package, he is leavingroom open for a safety valve to get an increase in thedebt ceiling by Aug. 2, when the federal government willrun out of money to pay its bills. "We must pursue afallback or last-ditch option," Carney said. "Conversationshave been going on about that." He also said there mustbe a mechanism in place to ensure the United Statesdoes not default on its debt obligations.Few Signs of Progress in U.S. Debt Talks 
With fewsigns of movement over the weekend onnegotiations to raise the federal borrowing limit,Senate leaders are planning this week to unveil abackup plan that would force more budget wranglingbefore the end of the year. Washington seemsrudderless just two weeks before an Aug. 2 deadlinefor Congress to increase the $14.29 trillion borrowingauthority or risk having some government bills gounpaidMoody's suggests US eliminate debt ceiling
ongovernment debt to reduce uncertainty among bondholders. The United States is one of the few countrieswhere Congress sets a ceiling on government debt,which creates "periodic uncertainty" over thegovernment's ability to meet its obligations, Moody's saidin a report. We would reduce our assessment of eventrisk if the government changed its framework fomanaging government debt to lessen or eliminate thatuncertainty," Moody's analyst Steven Hess wrote in thereport.
Foreign investors poured cash into Canadian debtmarkets in May,
boosting overall securities purchases totheir highest level in a year at C$15.44 billion ($16.08billion), compared with C$8.52 billion in April.
Foreign Exchange Strategy Tuesday, 19 July 2011http://www.GlobalMarkets.bnpparibas.com

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