JPM – FX Weekly Update – Focus remains on Central Banks for the USD and EUR

NOK: strength of the Norwegian economy leads to NOK buying
Recent support for the NOK is primarily due to a combination of structural factors (positive credit and external fundamentals) overlaid with the improvement in domestic growth (4%oya)…….



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            Norway’s housing boom, +8%oya, increasingly limits the scope for the CB to cut rates to prevent NOK appreciation. As a petro currency, the recent 30% bounce in oil further benefits the currency. Conversely, the situation in the UK is very different.
            Whilst UK Q2 GDP growth has been revised higher from ‐0.7% to ‐0.5%, the economy is still performing poorly. In contrast to Norway, the UK housing market growth is the weakest in Europe.
            It remains a puzzle why the BoE’s aggressive QE is having such little net impact on GBP. The BoE is up to its seventh round of asset purchases and may potentially expand QE in 2013. The increasingly divergent outlook for Norwegian and UK monetary policy is likely to continue into the fourth quarter. We are recommending short GBP vs. NOK positions via cash and options.

            PLN: central bank rate cut expectations likely overdone

            The Polish economy appears to be stronger than originally expected; suggesting market expectations of rate cuts may be overdone. Industrial production in July exceeded market expectations increasing 5.2%yoy. Retail sales increased 1.3%mom, led by a 7.8% increase in household goods. The central bank monetary policy decision on 4th September will be closely watched by markets. With inflation at 4% ‐ above the target – JPMS LLC expects the central bank to remain on hold, despite the chance of a rate cut priced into the market. Meanwhile, flows remain supportive of long‐term PLN strength. In June, Poland received EUR3.2bn in inflows into local bonds and stocks ‐ the largest monthly net inflow ever. The trade deficit also continues to narrow due to a modest export recovery. EURPLN has temporarily pushed higher from 4.05 toward 4.10 on the back of equity dividend repatriation, but PLN should resume a strengthening trend once these seasonal outflows subside.

            MXN: growth data and inflows remain supportive of the peso

            Economic data released over the last week continues to signal moderating, but still strong, economic expansion in Mexico.
            Retail sales in June increased 5.6%yoy, showing some moderation relative to 1Q12, but still growing at a robust pace.
            Similarly, credit growth has moderated, but is still growing 18%yoy. Supportive credit flows and employment growth, an increase in workers’ remittances and moderate real wage gains are likely to support consumer spending in the near‐term.
            Current account data for Q2 highlighted the strength of the USD inflows coming into Mexico this year that support our forecast of USDMXN at 12.00 by mid‐2013. Exports increased to USD94.5bn in 2Q12, while inflows into the local fixed income market remain robust at USD19.6bn YTD. For now, USDMXN spot price action has been fairly range bound, with the pair trading within the 13.05‐13.25 level, but we remain confident in our mid 2013 price target of 12.00.

            MYR: resilient fundamentals

            Recent data from Malaysia suggests that the country’s fundamentals have shown resilience. Real GDP exceeded expectations and increased 5.4%yoy for 2Q2012. A significant increase in domestic demand more than offset the sluggish net exports number. On the other hand, inflation remains soft. July CPI printed lower than the previous month at 1.4%yoy, helped by easing food prices and lower transportation costs. With low inflation and robust domestic growth, we expect Bank Nagara of Malaysia to keep rates on hold for the rest of the year. This should provide support for the currency, MYR, which had lagged its regional peers’ performance earlier this year. In particular, we believe SGD/MYR continues its recent downtrend. The lower CPI print from Singapore suggests the MAS has less need to tighten monetary policy via currency appreciation and the upcoming large IPOs in Malaysia will likely to attract substantial foreign participation, increasing the demand for the Ringgit.

            Weekly Currency Thought: Focus remains on Central Banks for the USD and EUR

            Substantial and sustainable are the words from the latest FOMC minutes which caught market attention. To quote “…Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery…” The reaction was clear as U.S. Treasuries reversed their sell‐off and 10yr yields decreased 15bps to 1.60% from 1.80/1.85% highs. In currencies, the biggest victim was USDJPY, falling some 1.5% on the day. Additionally, the EURUSD rally ran out of steam ahead of the technical 100 day moving average of 1.2617. The market is now focusing on Bernanke’s speech at Jackson Hole next week as an indicator of market direction. Anticipation of this speech has been building for sometime and now expectations of future FOMC policy measures are in the balance. Many are of the opinion that the Fed will “do more” but the question is defining what “more” means. Unless we see a new $500‐600B QE3 program (the odds of this seem low), the market is more focused on what Mr. Draghi has to say. In the coming weeks, we see some key dates for the Eurozone crisis. In particular on the 6th September the market awaits the ECB meeting and on the 12th September the German constitutional court votes on the legality of the ESM/fiscal pact. In addition, investors will be watching for headlines on the updates of the Greek negotiations and continue to monitor Spanish and Italian yields (Spain to auction bills on Tuesday and Italy to auction bonds on Thursday). We continue to see limited Euro appreciation and recommend investors position for Euro downside via options.

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