Attention Still With US – Q4 GDP Due Today
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(Please note these rates were taken at 9:30am GMT, rates do fluctuate every 2 – 3 seconds)
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GBP/USD traded higher with risk sentiment yesterday but GBP underperformed compared to the other risky currencies (with the exception of SEK). GBP remains resilient against EUR and will likely hold below the key resistance around the 0.8390-0.8400 area in the absence of any positive news from the Greek PSI discussions. The negative print in Q4 GDP and expected announcement of further QE will likely weighing on sterling performance during risk positive moves, however GBP will hold up well should risk sentiment turn subdued today. The Treasury will on Friday publish plans for a radical overhaul of financial regulation that will hand the Chancellor new powers to take charge in a crisis, rein in the might of the Bank of England, and provide extra protection for consumers. The new Financial Services Bill will be put to Parliament on Friday morning alongside a memorandum of understanding between the Treasury and the Bank that will set down how the authorities should respond to another financial crisis. It will make clear that responsibility lies with the Chancellor whenever taxpayers’ money is put at risk to avoid a repeat of the Northern Rock fiasco when Alistair Darling found he could not order the Bank to act, The Telegraph says. David Cameron and Boris Johnson were caught up in a new round of cross-Channel tensions yesterday after the favourite to replace Nicolas Sarkozy as President of France threatened to scupper the EU’s economic rescue plan and undermine the City. François Hollande, the socialist tipped to win power in May, set out a manifesto that declared war on financial services and promised to rip up the EU’s fiscal treaty, due to be approved on Monday. The Prime Minister, the Mayor of London and British business chiefs were taken aback by Mr Hollande’s plans, claiming that they would damage financial centres. Mr Johnson accused him of “political vindictiveness”, The Times explains.
Meanwhile, talks in Greece are ongoing. The head of Institute of International Finance (IIF), Charles Dallara, is to meet with Greek Prime Minister Lucas Papademos in Athens again today to discuss a debt-swap deal. According to Greek newspaper Ethnos, the IIF is now willing to accept a coupon rate for new Greek bonds of 3.75%, despite earlier demands of a rate no less than 4%. Elsewhere in the Eurozone, in a move which some are describing as the most significant since the country was frozen out of international debt markets last year, the Irish National Treasury Management Agency (NTMA) yesterday offered to swap investors’ holdings in the country’s short-term debt. Some observers seem to believe that the move may benefit from the ECB’s long-term refinancing operations. EUR/USD continued higher yesterday morning, but struggled overnight as the risk positive momentum faded. Markets will likely turn their attention to Greece and Europe now. While good US numbers this afternoon could provide some support to risk sentiment, the market will likely need to see a positive outcome from negotiations on the Greek PSI before we see EUR/USD break higher. Lloyds TSB expect EUR/USD to struggle today after a week of gains and will likely hold below the 1.3200 level as the market waits for news from Greece.
The Fed, which had previously said it would maintain the federal funds rate between 0% and 0.25% until mid-2013, announced yesterday that it intends to leave them as they are until late 2014. According to the Federal Open Market Committee (FOMC), “economic conditions – including low rates of resource utilization and a subdued outlook for inflation over the medium run – are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.” While the move fuelled a strong showing by US stocks last night, some noted that the decision reflected the central bank’s concerns over economic growth: one economist from RBC Capital Markets (Tom Porcelli) was quoted as saying that “this drives home one important fact, the Fed is scared.” Today attention remains on the US with the release of the first estimate of Q4 GDP. There has been a noticeable improvement in US economic indicators in the final quarter of 2011. This has been broad-based, with activity, consumer and business sentiment and labour market data generally printing stronger than expectations. And notwithstanding this week’s softer house sales data, the housing market has also improved. Reflecting this, annualised Q4 GDP growth is predicted to be slightly above 3% in the final quarter of 2011, up from 1.8% in Q3 and the fastest since Q2 2010. However, a key upward contribution in Q4 will come from a rebound in inventories. This is unlikely to be repeated in H1 2012, indicating a slower pace of expansion ahead. Nevertheless, Lloyds TSB have raised their forecast for US 2012 GDP growth to 2.6%, from 2.2% previously. Lloyds TSB believe the main downside risk to the outlook comes from an intensification of tensions in the euro area which could damage returning consumer and business confidence. A stronger-than-expected rebound in business and residential investment is the chief upside risk, reflecting potentially strong pent up demand.
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The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The author(s) cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.
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GBP/USD Rally on ‘Dovish’ US FOMC Statement Prolonging First Interest Rate Hike
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(Please note these rates were taken at 11:00am GMT, rates do fluctuate every 2 – 3 seconds)
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The UK economy contracted at a 0.2% quarterly rate in the fourth quarter, according to the latest data out this morning from the Office for National Statistics. Consensus estimates were looking for a fall of 0.1%. “While these figures reveal significant weakness in the economy, we do not think they mark the start of an inexorable slide into a severe recession,” said Barclays Capital analyst Blerina Uruci. the decision taken by the members of the Bank of England’s (BoE) Monetary Policy Committee to maintain the current policy settings at the last meeting was a unanimous one, the central bank revealed today; while gross mortgage lending totalled £9bn in December, the strongest month of 2011 and 12% higher than the December 2010, according to the British Bankers’ Association (BBA), as mortgage approvals rose more than expected. Todays CBI distributive trade survey data ought to reflect the impact of constrained household spending on high street sales for the first month of this year. The survey is anticipated to show that the balance of retailers believe that sales volumes in January were lower than levels experienced over the same period last year.
In Eurozone news, the International Monetary Fund (IMF) is putting the pressure on the European Central Bank (ECB) to also take a haircut on its own €40bn worth of Greek bond holdings, according to the Financial Times. The ECB bought up these sovereign bonds below par value as part of the programme to save Greece from collapse back in 2010 and has also accepted them as collateral as a means of propping up the country’s banks. According to the paper, these bonds currently carry a yield in excess of 7% and the pressure is on the European monetary authority to forgo profits in order to ease Greece’s debt loads. The German Treasury defined its latest debt auction held this morning as “impressive” after yields fell to a record low for 30-year securities. The German Treasury sold €2.46bn in 30-year debt on bids for more than €5bn. The average yield offered from this security fell to 2.62%, down from 2.82% the previous auction. Meanwhile, Germany’s business climate indicator for January beat expectations to register a reading of 108.3 points compared to 107.3 in December, according to the German IFO Institute located in Munich. The Ifo expectations increased again and current condition was close to unchanged. It appears that the forward-looking Ifo index bottomed out in October. Danske expect Ifo expectations to increase moderately and to stay in line with very moderate positive growth in Q1. Danske’s Ifo expectations model also points to further increases. yesterday’s release added upside risk to the estimate of zero growth q/q in Q1 in Germany. Danske forecast German growth in 2012 of 0.8% and 1.9% in 2013.
USD weakened on the back of the dovish FOMC announcement, suffering both due to the correction lower in US rates and the overall pick-up in risk appetite. This led EUR/USD to break above 1.31 The Fed surprised the market by announcing that rates are expected to be exceptionally low at least through late 2014 – almost three years from now! This was one year later than Danske expected. However, exceptionally low does not necessarily mean unchanged rates, as 11 out of 18 members see the rate higher than the current rate in late 2014. This was a bit of a surprise. There is a wide dispersion between Fed members’ estimates of the first hike with three members wanting a rate hike already in 2012 while two members want to wait until 2016. The Fed also announced a new explicit longer-run goal on inflation at 2%. This is slightly higher than the previous longer-run projection of inflation at 1.75%-2% that was part of the economic projections, but not stated as explicit goal. Despite the recent improvement in the economy the Fed is still very cautious on the outlook in the statement. The Fed sees modest growth in the coming quarters and still significant downside risks to the outlook. The Fed also gave the inflation outlook a dovish twist by removing the sentence that it will pay close attention to inflation and inflation expectations. The more dovish statement may be due to a change in voting rights with three hawks no longer being voters and only replaced by one hawk, Jeffrey Lacker, who dissented. The projections reveal a more hawkish tilt among non-voters. Based on the new FOMC projections, Danske now look for the first rate hike in mid-2014 (instead of late 2013). Weaker than expected US pending home sales data for December released yesterday, which fell by 3.5% on the month, should not detract from an overall improvement in housing market volumes. Lloyds TSB forecast new home sales released this afternoon to rise by 10k to a saar of 325k from November’s levels. The US housing market has been a key laggard relative to the wider improving US economy. Growth in durable goods orders in the US for the month of December is likely to have moderated to 1.7% from 3.7% in November. November’s data was boosted by a series of Boeing aircraft orders placed during the month. Initial jobless claims for the week ending 21/1 are estimated to rise by 13k from the previous week. However, much of the market’s attention will be focused on tomorrow’s release of the first estimate of US Q4 GDP.
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The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The author(s) cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.
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UK GDP see -0.2% Economic Contraction
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(Please note these rates were taken at 12:20pm GMT, rates do fluctuate every 2 – 3 seconds)
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Today will also be important domestically. The first official estimate of Q4 GDP is published today. Preliminary data for manufacturing and services have pointed to significant contraction in the final quarter of last year. Lloyds TSB are somewhat sceptical of the scale of the reported slowdown and factor some upward revision to the preliminary numbers. Nevertheless, Lloyds TSB still estimate Q4 GDP to come in at -0.2%, slightly lower than the consensus -0.1% forecast. At the same time, the Bank of England publishes minutes from January’s MPC meeting. As Lloyds TSB have stated, January’s meeting will likely prove to have been a close call, with some members inclined to preannounce February’s expected £50bn extension to QE in January. As such, Lloyds TSB suspect a couple of members will have voted to raise the asset purchase target in January. This will provide an important signal, not so much for February when more QE is widely expected, but for the likelihood of additional stimulus beyond. GBP outperformed in G10 yesterday as risk sentiment softened. UK events today are unlikely going to provide much support for GBP. Q4 GDP is widely expected to show a contraction and today’s Minutes will likely show scope for additional asset purchases; Lloyds TSB economists expect to see a close call with some members inclined to preannounce February’s expected £50bn extension to QE in January. With news unlikely to be positive from the UK today, EUR/GBP will probably struggle to break lower as Lloyds TSB see good support around the 0.8280-0.8300 area.
Euro area PMIs surprised positively again in January. Composite PMI rose to 50.4 from 48.3. Hence, we are back above the boom-bust level. The improvement supports Danske’s view that the sharpest drop in production happened in Q4. Danske expect the euro area to be in a mild recession with negative growth in Q4 and Q1. The euro area economy faces strong headwinds from ongoing fiscal consolidation and the deleveraging in the bank sector. Eurozone finance ministers rejected what the Institute of International Finance (IIF) considers to be their “maximum offer that is consistent with the voluntary debt exchange”. The bone of contention lies in the fact that the IIF insists on an average 4% interest rate for the life of the new debt, while Greece refuses to pay above 3.5%. The Eurogroup members that met yesterday in Brussels decided to back Athens. Also weighing on sentiment were reports that ratings agency Standard & Poor’s is likely to downgrade the nation’s ratings to ‘selective default’ after its debt restructuring. “These seem to be pretty flimsy excuses for profit-taking though since it appears that negotiations may drag on into mid-February anyway,” said market analyst Colin Cieszynski from CMC Markets. “Overall, today appears to be a normal day of backing and filling as markets consolidate a strong start to the year,” he said. Meanwhile, Societe Generale, Credit Agricole and Group BPCE are the first major French banks to have their ratings cut after France lost its own triple-A rating. The ratings agency explained that the new ratings incorporate one level of government support rather than two levels that an AAA-rated sovereign would provide. Banks across Europe were out of favour today as risk appetite was scaled back with the stocks on the STOXX Europe 600 Banks index falling an average 1.1%. In other news, concerns over Portugal’s finances have also arisen. The country may need a second bailout if it does not raise the necessary financing on the open market next year. The Wall Street Journal (WSJ) has reported that there are concerns amongst some market participants that the IMF will impose new requirements on the Iberian nation if it becomes apparent that it is unable to return to the market next year.
Fed’s changed communication policy was outlined in the minutes to the previous meeting. In the Summary of Economic Projections (SEP) Fed will now add the range of members’ projections of the timing of the first hike and Q4 forecasts for the Fed funds rates in the following two years. It is not clear whether information about the first hike will be provided in the FOMC statement, but Danske believe it will replace the current wording about policy expected to be exceptionally low until at least mid-2013. Danske expect the projection to point to the first hike at the end of 2013. This is a bit earlier than the market prices at the moment, as Fed funds futures price the first hike in mid- 2014. Danske do not expect Fed to embark on QE3 as the economy is improving and we do not believe there will be consensus for further policy easing.
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The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The author(s) cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.
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Buffett Campaigns for America’s Rich To Pay More Taxes To Help Close US$1trn Debt
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(Please note these rates were taken at 1:00pm GMT, rates do fluctuate every 2 – 3 seconds)
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The impact of the slowdown in Europe and its effect on the domestic economy is yet to have a visible impact on the UK public finances. In December, Lloyds TSB forecast PSNB (public sector net borrowing) to total £14.4bn. The underlying deficit is thus likely to narrow by £1.5bn on the previous year, broadly in line with the average improvement seen this financial year. This suggests the finances may undershoot the revised official PSNB target of £127bn – no mean feat against a background of weakening economic activity. This reflects a marked slowing in central government spending growth, which has slowed to around 1% on the year. The deficit improvement will provide ongoing support to gilts ‘safe-haven’ status. However, a fresh recession is likely to result in disappointing receipts growth as we move into 2012-13. Ahead of tomorrow’s MPC minutes, Governor King will speak in Brighton this evening.
Discussions over tackling the euro area’s debt crisis are expected to remain firmly on the table when EU finance ministers meet in Brussels this morning. Today’s gathering comes hot on the heels of yesterday’s euro area finance ministers meeting and looks to provide some clarity over the Greek bailout package ahead of next week’s EU leaders summit. In terms of economic news, with expectations that euro area GDP contracted in Q4, market focus is now on economic activity in Q1 and the prospect of a euro area wide recession. Although, Lloyds TSB look for both the ‘flash’ manufacturing and services PMIs to have improved in January to 47.5 (prev 46.9) and 49.2 (prev 48.8) respectively – they are expected to remain below 50. The FT reports that Germany is ready to boost the firepower of the European rescue fund to EUR750bn if stricter budget rules are accepted by the eurozone countries. Apparently, Angela Merkel is ready to the let the existing European Financial Stability Fund (EFSF) with EUR250bn continue together with its successor the EUR500bn European Stability Mechanism (ESM). The softer stance from Germany came after a call from IMF’s Lagarde earlier in the day that the eurozone needs a bigger firewall to avoid larger countries like Italy and Spain being forced into a default. However, the FT story is not confirmed officially and according to Reuters Merkel’s spokesman Stefan Seibert has already denied that such a decision has been taken. Overnight the market also had to digest banking downgrades of French and Italian banks by S&P. However, the downgrades were expected after the sovereign downgrades a few weeks ago and came after a very strong rally in European banking stocks that pushed European shares to a five-month high. Hopes of a Greek debt deal and reports that France and Germany would loosen Basel III fuelled the rally. The rally in risky assets ran slightly out of steam in the US session and the major indices ended close to flat. The EUR/USD is also well supported just above the 1.30 mark.
The greenback was mostly lower against major currencies ahead of a two-day central bank meeting, starting on Tuesday. Investors will be watching out for fresh clues on when Fed officials expect interest rates will be raised. Initial estimates for US fourth-quarter GDP will also be issued at the end of this week. While the catalyst for USD weakness yesterday may have been growing optimism about the Greek PSI deal, the most notable FX development was USD weakness rather than EUR strength. Lloyds TSB suspect this is mainly a result of positioning and USD sensitivity to risk positive developments. The Eurozone developments are likely to remain the main focus today, but will continue to determine USD direction in the way they impinge on risk appetite. The USD could still have significant downside on risk positive news, but there seems little chance of major progress today. Late tonight Barack Obama will deliver the 91st State of the Union Address. Billionaire investor Warren Buffet has pledged to donate a chunk of his riches to pay down the US national debt – provided that a minority of its politicians do the same. The so-called Sage of Omaha said he would donate 15% of his income to the government, provided that 10% of Congress agreed to do so too. The comments from Mr Buffett, the 81-year-old chairman and chief executive officer of the Berkshire Hathaway conglomerate, mark the latest step in his campaign for America’s rich to pay more taxes to help close its trillion-dollar budget deficit. “If you can get a significant percentage of Congress to do that, I would do it,” he said. In an interview with Bloomberg Television, Mr Buffett said people who are making millions of dollars should be moved up to the “mid 30s” in terms of the percentage of their income they pay in tax, as most Americans do, The Telegraph writes.
The Economic and Financial Affairs Council (Ecofin) will meet to discuss Hungary’s insufficient measures to correct its excessive deficit, regulation for the over-the-counter derivatives market and economic governance. The need to increase bailout funds is likely to be debated following calls for more funds from IMF’s Christine Lagarde.
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The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The author(s) cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.
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FX Forecasts ZAR, HUF, TRY, MYR, THB, INR Out by Danske Bank
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(Please note these rates were taken at 5:15pm GMT, rates do fluctuate every 2 – 3 seconds)
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Looking at South Africa, the deterioration of the financial environment continues to impact the rand negatively and the increased political uncertainty has likely also had a negative impact. Looking ahead we are looking for further weakness. That said Danske expect the rand weakness to be curbed by overall relatively positive South African fundamentals and by relatively high South African interest rates. Recently political risk has increased in South Africa after significant infighting has broken out within the ANC party. At the centre of the conflict is the leader of ANC’s young wing, Julius Malema, who has been expelled from the ANC for disloyalty. The increased political risk potentially could increase market worries about the South African government’s reform agenda and hence negatively impact South African growth potential.
Most interest will undoubtedly be on the Hungarian rate decision after the recent spike in volatility in the Hungarian markets on the back of the Hungarian government’s decision to pass a new central bank law. The law has been heavily criticized by the European Commission as, according to the EU, it is in breach of EU rules and limits the independence of the central bank. This week, the Commission said it has initiated legal action against the Hungarian government regarding the central bank law. There will likely be more focus on these issues rather than on actual monetary issues at the press conference following next week’s rate decision. Danske expect Hungarian central bank governor Simor to continue to fight for and defend the independence of the Hungarian central bank (MNB). However, he will also be cautious about upsetting the markets. So far, the MNB has shown considerably more calm than the Hungarian government, in Danske’s view. The MNB has hiked its key policy by a total of 100bp over the last two Monetary Council meetings, despite the complete lack of growth momentum in the Hungarian economy. However, inflation also remains above the MNB’s 3%-inflation target and there is no doubt that the recent sharp sell-off in the forint is a key driver for the MNB’s hawkishness. With the MNB’s independence under attack, political uncertainty remains elevated. The consensus expectation expect a 50bp rate hike to 7.50%. Hungarian Prime Minister Viktor Orban has said that the government will scrap plans to merge the financial regulator PSZAF and the Hungarian central bank (MNB). This effectively means that the Hungarian government has caved into the demands of the IMF and the European Commission and now seems to be guaranteeing the independence of the central bank. This should open the door for a new IMF deal for Hungary.
Turkish central bank’s communication and policy actions have been somewhat erratic so every Turkish rate decision is drawing a lot of attention and uncertainty about the outcome of the decision is much higher than it needed to be. Turkish inflationary readings remain volatile and elevated, with the December headline reading hitting a 2011 high of 10.45% y/y, up from 9.48% y/y a month previously and averaging around 6.5% for 2011. Danske latest forecasts see CPI averaging 8.4% in 2012E, but the risks are skewed for higher readings despite the central bank’s determined, inflation hawkish stance. Since cutting policy rates at the interim rate setting meeting in August by 50bp to 5.75% to shore up against slowing growth and as a pre-emptive measure against the deteriorating external conditions, the TCMB has taken an almost 180 degree turn and adopted a rather hawkish stance in the face of accelerating inflation and the depreciation of the lira, which it regards as excessive. Following the last inflation report, the TCMB launched a lira supportive new policy approach that utilises a rate corridor of 5.75% to 12.5% on the o/n lending rates and effectively re-sets lending rates on a daily basis. However, in terms of the actual policy rates, Danske see no changes in either direction in the near term, as attention remains on the o/n lending rates and a host of other unorthodox measures. Consensus expects unchanged rates from TCMB at next week’s meeting.
With monetary policy remaining deflationary, the CNB could ease monetary policy to engineer a further weakening of the Czech koruna and it seems as though the market has to some extent been betting on this. However, it is also notable that some CNB board members have argued that further weakening of the Czech koruna could warrant rate hikes. This – overly in Danske’s view – hawkish stance of Czech monetary policy is likely to curb the sell-off in the Czech koruna. However, with the economy continuing to be in a “no growth” mode it is; in Danske’s opinion, only a matter of time before the CNB will be forced to allow for a further weakening of the CZK.
THB strengthened significantly in the wake of the surprisingly clear election result and hope that some political stability will now finally return to Thailand, but has in line with other Asian currencies weakened in the past month in the wake of the increasing risk aversion in the market. As Thailand has very strong external balances and foreign investors have avoided Thailand in recent years, Danske also believe that THB will continue to perform relatively well in a risk-averse market.
The MYR remains supported by strong external balances and in the medium term possibly by liberalisation of the economy, including easing access for foreign investments. The MYR, in line with most other Asian currencies, has weakened slightly in the wake of the recent turmoil in the global financial markets. While Danske believe the MYR will remain vulnerable in the short run, they expect it to strengthen on a 12M horizon on the back a gradual recovery in the global economy and some improvement in risk sentiment. The political environment appears to be stable, although the governing Barisan Nasional (BN) coalition is increasingly challenged by the opposition and failed to win a two-thirds majority in the last general election in March 2008. Although the next election is not scheduled until 2013, an election in 2012 looks increasingly likely, because of the government’s current favourable approval ratings. While Malaysia has a stable regulatory environment, it has been lagging other Asian countries on governance reforms and economic liberalisation. That said, Prime Minister Najib recently announced some liberalisation of foreign direct investment rules, easing requirements for co-Malay ownership.
INR has plunged by close to 20% against the USD since August and it remains vulnerable in the short run due to India’s current account deficit around 3% of GDP, weaker FDI inflows into India and portfolio inflows out of the India stock market. Frustration with the lack of progress of economic reforms have added to this development recently. RBI has intervened in the FX market recently to stem the depreciation of INR. In addition, it has put limits on net short INR positions for domestic FX traders and the amount of foreign currency expenditure corporations will be allowed to hedge. Although USD/INR has probably overshot, it will remain vulnerable in a volatile market. However, with the Indian current account deficit expected to improve next year and market sentiment also expected to improve, we should see some recovery in INR later next year.
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The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The author(s) cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.
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Interest in US Federal Reserve Interest Rates Forecast, When Will they Hike?
In the US GDP data for Q4 are up for release. Danske expect to see a growth rate of 3.0% in line with consensus, up from 1.8% in Q3. Stronger consumption growth, a boost from net exports and positive contribution from inventories will lift GDP growth. The Fed meeting on Wednesday will be the first meeting with Fed interest rate projections and it will be very interesting to find out when Fed expects the first interest rate hike and how much tightening is expected in the following years. Other releases next week will be durable goods orders and home sales and house prices.
Entering 2012 the US economy is on a much stronger footing than seen for most of 2011. Growth in Q4 11 is tracking slightly above 3% as private consumption has recovered and the inventory cycle has turned more supportive of economic activity. Net exports have also improved as export growth gained some steam towards the end of 2011 while import growth remained subdued. It seems the very weak USD is increasingly supporting net trade.
The headwinds that caused the downturn were fading and turning to tailwinds. Private consumption, in particular, was hurt in the first half of the year by the shocks that hit the economy. However, as the shocks have dissipated, private consumption growth has recovered. First, gasoline (petrol) prices reversed sharply during the year, falling from a peak of around USD4 per gallon in early May to USD3.37 per gallon currently. This has given a decent boost to real income growth as the consumer deflator has fallen from 3.9% in Q1 to an estimated 0.5% in Q4 – a direct lift to real income growth of about 3.5 percentage points. A second factor that supported private consumption in the second half of 2011 was a rise in car sales. This came after a significant decline in car sales in Q2 following the earthquake in Japan, which led to supply disruptions that hit the auto industry especially. Danske prefer to be a little on the cautious side though and forecast an increase in private consumption growth of 2.5% in 2012. This leaves some scope for a small increase in the savings ratio, which declined over the second half of 2011.
Another positive surprise in the US in recent months has come from the housing market. Both sales and building activity have been better than expected and inventories of homes are coming down fairly rapidly now. The housing market is supported by the rapid decline in bond yields as well as rising incomes. This has led to a further increase in affordability, which is running at very high levels. A barrier to a turn in the housing market has been the very low confidence among households. However, as unemployment has started to fall and more stories of improving housing activity hit the media, Danske expect sentiment to improve gradually and look for a further thawing of the housing market in terms of a gradual increase in house prices and a pickup in construction spending. Housing will thus increasingly move from a drag on to a boost to the overall economy and help strengthen the recovery. As construction is at very low levels (now only 2.5% of GDP), Danske believe the direct growth contribution will continue to be limited. Danske expect construction spending to move from a neutral factor for growth to a positive contribution to growth of 0.3 percentage points in both 2012 and 2013.
Another supportive factor for growth in 2012 will be exports. With emerging markets slowing down and the euro area entering recession, export sales slowed in 2011, although they remained fairly strong. In Q2 and Q3 exports grew by just over 4% annualised, following 8% export growth in the previous two quarters. In 2012, Danske expect exports to grow close to 8% again, as emerging markets gain pace and the euro recession tapers off. In general, the end to global inventory adjustment will lead to bounce back in world trade. Over the past couple of years, the US has actually outperformed many of its peers in terms of export performance US competitiveness has improved quite significantly over the past five years as high productivity growth has kept unit labour costs down and the historically weak dollar has made US companies much more competitive. This is not only benefiting exports but also leading to lower import growth as domestic companies are also more competitive on the home market than foreign competitors.
Danske believe headline inflation is likely to have reached a peak back in September and we expect it to continue the path lower over the coming quarters from the current level of 3.4%. Danske look for inflation to reach just below 2% in mid-2012 as the base effects of the decline in commodity prices kick in. Inflation has already slowed considerably on a q/q basis but it takes longer for it to kick into the y/y inflation rate. Core inflation currently stands at 2.2% but Danske also expect it to decline over the coming quarters. Core inflation has also been pushed higher by the pass-through from higher commodity prices, which rose sharply in the first half of 2011. Core inflation normally reacts with a lag to commodity prices and hence the peak is likely to come six to nine months after commodity prices have peaked. Underlying price pressure is very low in the US as wage growth is very subdued around 2% and pricing power is still poor due to the slow to moderate growth in consumption. Danske expect core inflation to decline to 1.5% by mid-2012. Danske still expect price pressure to remain subdued going into 2013 but a decline in the unemployment rate would start to put more upward pressure on wage growth and Danske expect pricing power to improve slowly. Hence, Danske expect core inflation to increase back close to 2% in 2013.
With the recovery ongoing and the job market gaining pace, Danske believe the Fed will stay on hold all this year. Hence, QE3 is no longer on the table. However, the Fed has announced it will start publishing forecasts for the Fed funds rate. Following the two-day meetings, these will be published together with the forecasts for GDP, unemployment and inflation. This forecast is likely to mean that the phrase about keeping rates exceptionally low until at least mid-2013 is likely be removed from the statement as the Fed funds forecast will instead be used to signal the Fed’s expectations of the first hike and subsequent pace of hiking rates. With this in hand, the Fed also has a new tool to steer long-term yields. If the Fed wishes to push down long yields and add stimulus this way, it can thus move its forecast of the first hike further into the future. This way it can stimulate without increasing its balance sheet through for example quantitative easing. Danske expect the first hike from the Fed in mid-2013 as unemployment has crept lower and inflation is close to 2%.
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Italian PM Monti Calls For Doubling ESM Bail-Out Fund, Berlin Not Keen
Speculation on whether the ECB will sell its holdings of Greek bonds at the purchase price has also increased. Different media reports suggest that this could reduce the Greek debt by around EUR15bn, but as is the case with the collective action clauses such a move is expected to come after the PSI agreement has been finalised. On the release front we will get both flash PMI and Ifo numbers in the coming week. Danske expect the gradual improvement to continue. The PMI new order-inventory balance that tends to lead the composite figures has turned. This is in line with this week’s very strong ZEW figures. Also euro area M3 figures are worth keeping an eye on.
Euro area finance ministers are scheduled to meet Monday to discuss the details of the proposed fiscal pact that will seek to limit structural deficits of member countries to 0.5% of GDP in the future. Pressure from the ECB to include an automatic correction mechanism should countries deviate from the target are likely to see a penalty clause included in any new draft legislation. However, any new agreement is likely to stop short of allowing enforcement through the European Court of Justice for those countries that fail to comply, instead opting for a system of fines. Ministers are also expected to come up with hard target dates for each country to comply with the new rules. While the new fiscal proposals seek to avoid potential problems, it cannot address the current financing needs of some of the euro area’s most fiscally vulnerable countries. The second financing package for Greece and fine tuning to the permanent rescue fund (ESM) are also on the agenda for today’s meeting and are likely to garner more market interest. Set to replace the temporary €440bn EFSF, the €500bn ESM, which ministers agreed to bring into place by July, will run parallel with the EFSF for a year, but borrowing from the combined facilities will be capped at €500bn. Standard & Poor’s downgraded the EFSF last week from AAA to AA+, raises concerns around the potential credit rating that will be associated with the new fund and the capacity to increase its size if needed.
Italian Prime Minister Mario Monti has called for the Eurozone to double the size of the region’s permanent bail-out fund to help stricken states. Doubling the European Stability Mechanism’s (ESM) firepower would reassure markets while driving down borrowing costs for the debt-wracked countries of the Eurozone, Mr Monti is said to have argued. Mr Monti had won backing for the proposal from European Central Bank President Mario Draghi, who proposed using unused money from the European Financial Stability Fund (EFSF) to boost the size of the new fund to about €750bn, according to reports in German weekly Der Spiegel, which cited unnamed sources. A spokesman for Chancellor Angela Merkel on Friday again ruled out Berlin boosting its contributions to the European bailout funds, The Sunday Telegraph reports.
The outlook for EUR/USD is more uncertain – at least in the short term. We still look for EUR/USD to end 2012 higher, but also acknowledge that eurozone event risks remain significant over the coming months. The question is whether investors will be willing to take on long euro positions as global macro data improve, but the European debt crisis remains unresolved. We doubt it and as a result do not expect the current euro rebound to take EUR/USD back to the mid 1.30s.
Greece’s government and IIF this weekend failed to reach an agreement on a voluntary debt restructuring of Greece’s private debt (PSI-negotiations). Hence, the Greek government will not be able to present an agreement at today’s Eurogroup Finance Minister meeting. However, the PSI negotiations continue and it now appears that the deadline is to have an agreement before the EU-summit on 31 January. The stumbling block in the negotiations continues to be the coupon on the new long-term-bonds to be swapped for existing ones. IMF supported by Germany appears to be insisting on a lower coupon and a larger haircut to secure a long-term sustainable debt level for Greece. Although it is expected that an agreement will be reached eventually, the failure to do so this weekend might increase fear of a disorderly default.
According to Financial Times Germany and France will today call for important elements of the Basel III rules to be watered down to mitigate negative effect on growth. The proposal is expected to be revealed in connection with the German Finance Minister Schäuble and French Finance Minister Baroin’s scheduled joint press conference today. There has been a slight reversal in risk sentiment on the back of disappointment that Greece and IIF have not been able to conclude the PSI negotiation.
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Focus on UK GDP on Wednesday, Speculation Sterling (GBP) Reached a Peak in Medium-Term
UK retail sales figures showed a strong rebound in December, as widely expected and saw limited impact on the sterling. But GBP/USD benefited from the mild risk on move on Friday more so that the euro and saw EUR/GBP trade lower towards the 0.83 level. There are key events for the UK this week with Q4 GDP and minutes to the January MPC meeting released on Wednesday. Forecasters are expecting negative growth for Q4, and with the minutes likely to show discussion of further QE, this could weigh on GBP performance early this week. But continued pressure on the euro today will likely see continued downside bias on EUR/GBP.
By far the most interesting data in the UK next week is the first release of Q4 GDP on Wednesday. After expanding 0.6% in Q3, the economy has undoubtedly slowed, but the big question is if it has also contracted. Economic data surprised on the upside in Q4, but maybe only because expectations were very low. PMIs have corrected higher and private spending seems to have been relatively strong. Industrial production is falling, but the worst should be over now. Danske believe output in Q4 was broadly flat compared to Q3. It could be a small decline or a small increase and as no breakdown of the data is provided until next month it will be difficult to say where the contributions to growth stem from. Contrary to most in the market, Danske see some chance of a positive surprise, which could be quite important for spending propensity and general consumer sentiment. The Eurozone crisis is dragging on the UK economy and making exports more difficult. The pound has, in Danske’s view, come to a point where it will not continue to perform against the euro and could in fact weaken as the market warms up for more quantitative easing from the Bank of England next month.
Amidst continued euro area turmoil, the outlook for the domestic economy has weakened further of late. Despite the 0.5% expansion in Q3 GDP, the continued deterioration in business surveys and the weak industrial production numbers for November suggest that GDP contracted in Q4. While the sharp drop in October services output adds weight to a large drop in output in the final quarter of 2011, the index is prone to heavy revisions and Lloyds TSB look for some of this weakness to be revised away. Nevertheless, the weakness in production surveys is expected to add to the downside risk. This raises the possibility of a larger contraction in Q4 GDP than the – 0.1% suggested by Lloyds TSB Business Barometer, and pencil in a fall of 0.2%, bolstering the MPC’s case for further QE.
The Bank of England left policy unchanged in January, including its QE target at £275bn. As a result gilt purchases will cease before the next MPC policy decision (9 Feb). With the Bank forecasting inflation to fall significantly this year; current inflation falling slightly faster still; and GDP likely to undershoot the Bank’s near-term projections, Lloyds TSB see a strong case for further QE. They expect the minutes to reveal a close debate in January, with two members expected to have voted for more QE immediately, with others pointing to next month’s Inflation Report projections as a reason to hold off. This would send an important signal to markets, not only that a further £50bn of QE is likely next month, but that additional stimulus is likely further down the line. As such, Lloyds TSB see these minutes supporting gilt yields around historic lows.
The impact of the slowdown in economic activity is yet to have a visible impact on the public finances. In December, Lloyds TSB forecast PSNBX to total £14.4bn (£11.6bn including financial interventions). The underlying deficit is thus likely to narrow by £1.5bn on the previous year, broadly in line with the average improvement seen this financial year. This suggests the finances may undershoot the revised official PSNB target of £127bn – no mean feat against a background of weakening economic activity. This reflects a marked slowing in central government spending growth, which has slowed to around 1% on the year. The deficit improvement will provide ongoing support to gilts ‘safe-haven’ status. However, a fresh recession is likely to result in disappointing receipts growth as we move into 2012-13.
The CBI’s quarterly industrial trends survey includes an estimate of business optimism that has proven a particularly good lead indicator for official output. January’s survey will be closely watched for confirmation of the recovery in the manufacturing PMI, which picked up sharply in December to 49.6 from 47.7 in the previous month. Lloyds TSB are suspicious of the scale of this rebound. As such, Lloyds TSB suspect that the coming week’s business optimism index, which fell to a 2½ year low of -30 in Q4, will post just a modest rebound in Q1. In turn, this suggests that official manufacturing output will struggle to expand in Q1 after what they see as a 1% drop in Q4. The deceleration in global – particularly Euro area – activity has put UK attempts to rebalance on hold. This has been felt chiefly in the manufacturing sector.
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Focus on US Existing Homes Sales Today
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(Please note these rates were taken at 10:40am GMT, rates do fluctuate every 2 – 3 seconds)
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If you need any other exchange rates then please don’t hesitate to contact me.
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The fundamental drivers of UK consumer spending remain less than helpful as evidenced by this week’s wage, unemployment and confidence data. Yet recent retail sales volumes have been supported by discounting by retailers. December’s figures look to have been further boosted by two other factors. First, a national strike day, in the public sector, allowed some people to head to shopping centres, while Christmas day falling on a Sunday provided an extra Saturday’s shopping the day before. The BRC survey recorded a sharp jump in total sales – although the true underlying rise was obscured by last December’s snow. As such, a lot of uncertainty surrounds this month’s release. We look for a punchy 0.9% rise in volumes, with the annual rate up to 2.7% – the second highest level since 2008. But this is likely to prove a short-term boost, with the longer-term outlook remaining troubled. Sterling looks a reasonable proxy for the EUR in the event of EUR strength if UK retail data is strong, as market concerns about UK QE in February may well diminish.
A deal on Greek PSI could quite possibly be reached today or this weekend so that it can be presented to the Eurogroup in Brussels on Monday. It seems that Greece is pushing for 100% participation – probably to be achieved by introducing Collective Action Clauses in Greek law. Today is also the deadline for European banks to submit their detailed plans to EBA on how to raise capital to achieve the 9% core tier 1 capital ratio on 30 June 2012. The auctions in France and Spain yesterday went reasonably well and the markets now await a resolution on the Greek PSI – a deal with a large enough haircut to bring the Greek debt on a sustainable path would in our view be positive for the markets, as it would remove a great deal of uncertainty.
A break through the 1.2970-1.30 area in EUR/USD looks necessary to start to trigger longer term stops on short EUR positions, but could struggle to do so today after a week of recovery. If we do start to advance through 1.30 triggering of stops could potentially create momentum for a strong move higher – maybe even as far as 1.32. However, we doubt the PSI agreement will engender enough optimism for this sort of stop run to develop.
Recent US economic data has generally pointed to an upswing in activity but yesterday saw weaker than expected December housing starts. Nevertheless there have been some encouraging signs in the US housing sector of late. For example, this week the NAHB housing market index rose for the fourth straight month in January to its highest level since June 2007. Existing home sales figures out today should show that this improvement in confidence is translating into a rise in market activity. As of November sales were up over 10% from their summer lows and we expect that another solid rise took place in December. Although of course this would still leave sales nearly 40% below their 2005 cyclical peak.
Hungary’s chief aid negotiator Fellegi will meet with EU Commissioner Olli Rehn to discuss financial assistance, but we do not expect a breakthrough today.
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The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The author(s) cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.
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Speculation GBP/CHF and GBP/JPY Will Outperform If Market & Traders are Risk Positive
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(Please note these rates were taken at 10:00am GMT, rates do fluctuate every 2 – 3 seconds)
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The UK unemployment rate hit 8.4% in the three months to the end of November, higher than the 8.3% analysts had been expecting. The unemployment rate has not been higher since 1995 and the number of unemployed people has not been higher since 1994, according to the Office for National Statistics. UK labour market data once again surprised on the positive side yesterday, with even the rise in the ILO unemployment rate due to a rise in the labour force, and employment actually rising. The disconnect between the growth numbers and the employment numbers continues, and suggests that the growth numbers may be being understated. Nevertheless, weak UK growth and declining inflation make an extension of QE very likely in February, and this will limit the enthusiasm for sterling in the anticipation, but typically not in the implementation. In a risk positive environment, GBP should nevertheless outperform CHF and JPY from current low levels. Nationwide’s consumer confidence index for the month of December slipped to 38 points, from 40 the month before. That is the second lowest level on record since the survey started in 2004. The main factor behind the retreat was a drop in households’ expectations for the first half of the year. The consumer expectations sub-index fell to the 50 point mark, from 55 in November.
The International Monetary Fund (IMF) is looking to increase the resources at its disposal to fight against the Eurozone crisis. “Based on staff’s estimate of global potential financing needs of about $1tn in the coming years, the Fund would aim to raise up to $500bn in additional lending resources,” the IMF said. According to IMF Managing Director Christine Lagarde, “The biggest challenge is to respond to the crisis in an adequate manner and many Executive Directors stressed the necessity and urgency of collective efforts to contain the debt crisis in the Euro Area and protect economies around the world from spillovers and excessive output/income contractions. A German debt auction saw strong demand in which the government issued €3.44bn in two-year notes at an average yield of 0.17%. Meanwhile, a close eye will be kept on Athens as Greek private creditors meet with the government to agree on debt write-downs. Elsewhere in the Eurozone, reports that Fitch could downgrade Italy by two notches continue to do the rounds, while the S&P has said that Germany’s triple-A rating will not be at risk of a downgrade this year, even if the economy enters a recession. EUR/USD traded higher helped by news of a proposed increase to IMF lending capacity and some talk of growing expectations of a Greek PSI deal. However, there is no official news on this, and the risk of a failure remains, though the news is still unlikely to be released until tomorrow, or possibly even Monday. Today’s French note auctions are unlikely to be problematic, but the Spanish auction will be a bigger test with Spain looking to fund in the 10-year as well as shorter maturities. However, if optimism on the Greek PSI deal is sustained, the bias towards a higher EUR should remain, there is significant resistance above 1.29 in EUR/USD.
The USD edged lower yesterday but the USD index moves were essentially due to EUR gains rather than USD moves, with the USD little changed against non-European currencies. The slightly better NAHB housing index was another signal of US recovery, but until there is some reason to believe this brings the first US rate hike forward such positive US data seems unlikely to have much positive impact against the non-European currencies, while EUR/USD and related crosses will continue to be dominated by euro area news. So today’s US CPI and housing starts data also look unlikely to have a major USD impact.
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The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The author(s) cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.
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