JPM – FX Weekly Update – Weekly Currency Thought: Gone Fishing

AUD: Weaker Macro and Chinese data weigh on AUD
AUD has been trending weaker recently, sliding some 300 pips off its 1.06 July high and the market has begun to take notice……..



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            Width = 585px Height = 1540pxThe main catalyst has been growing fears of a China slowdown and potential hard landing especially with corporate profits, PMIs, IP and import data all very weak over the past 2 quarters.
            Consequently the Shanghai equity market is down 13% (lowest level since Feb09) and iron ore prices are down 30% over the last quarter. This is significant because China accounts for over 25% of Australian exports. Furthermore, with only moderate domestic inflation, the RBA has more scope to cut the benchmark policy rate to support the economy. Indeed, futures are pricing a 75% chance of a 50bp rate cut by December and lower rates will potentially reduce the appeal of ACGBs and the AUD to yield‐seeking investors. However, even with headwinds abound, the AUD’s lure as an AAA‐rated reserve currency with still attractive yields should provide good support for currency.

            SGD : Singapore slowing
            The pace of Singapore’s economic growth seems to be lagging behind other ASEAN countries, as seen by Q2 GDP unexpectedly contracting 0.7% QoQ, and the IP index falling sharply in July by 9.1% MoM. The poor data has led to growing expectations that the Monetary Authority of Singapore (MAS) will move to a more neutral stance of currency appreciation at its October meeting. As a result, SGD has weakened in the NEER basket band this month, trading from +150pips to +75pips. However, in his National Day speech (Aug 9), Singapore PM Lee Hsien Loong focused more on social and structural issues rather than short‐term economic risks, so the administration’s fiscal stance is unlikely to change for the year. In addition, the weak IP and moderation in inflation are still within MAS’s expectation of 1.5‐2.5% and 4‐4.5% respectively.
            Therefore unless the data continues to worsen, MAS might not need to ease aggressively. We expect USD/SGD to remain rangebound in the coming months, ahead of the October meeting.

            TRY: July trade data reinforces compelling macro trends
            July trade data released last week underscore the positive macro developments in Turkey over the last few months. Exports are up 8.5% yoy as Turkish companies continue to seek new markets outside Europe. While exports to the EU were down 10%yoy, exports to other countries jumped 42% yoy in June. Meanwhile, the CBRT’s tight monetary policy is succeeding, leading to renewed investor credibility. Weaker import demand has contributed to a much narrower current account deficit.
            Excluding energy imports, the 12‐month current account is nearly flat at 0.7% of GDP – the lowest level in 20 months.
            Inflation also appears to have peaked earlier this year and is expected to decline sharply to 6.2% by year end. Positive macro trends have set the stage for a likely sovereign ratings upgrade in the next few months. This would be a major boon for Turkey as a one notch upgrade would push it into investment grade territory. Long TRY positions have the potential to achieve double digit total returns by mid 2013.

            BRL: Low trading volumes as market waits for BCB
            Trading volumes in Brazil rates and futures markets have declined to the lowest level year to date as the market awaits more guidance from the central bank. BCB had sold USD futures to cap a move above 2.10 and had until August 31st to roll the USD4.1bn forward or let it expire (which would effectively mean the withdrawal of USD4.1bn from the market). The currency pair is now likely to resume its downward drift toward 2.00 as investors continue to unwind costly short BRL positions. This week also marked the likely end of BCB’s easing cycle with the bank lowering the benchmark SELIC rate to a new record low of 7.50%. Although this is historically low for Brazil, the country still offers some of  the highest real yields in the world which should ensure it remains an attractive investment destination. Markets are likely to turn increasingly positive on Brazil as central bank easing and the slew of government fiscal measures contribute to an economic recovery in Q4 2012. The authorities are more likely to accept a stronger BRL as economic data shows improvement

            Weekly Currency Thought: Gone Fishing
            In 1982 the then Fed Chairman, Paul Volcker, a keen fisherman started a gathering of central bankers at Jackson Hole due to its favourable fly‐fishing climate. Since then, the economic symposium has become a forum where Central Bankers provide an update on the effectiveness of their past policies, rather than discuss future actions. Bernanke’s comments did not seem to add a whole lot to what we knew already from the last FOMC minutes. The Fed maintained its dovish tone, standing ready to act but is not pre‐committing itself to doing so. Most of the speech was focused on the impact of the Fed’s measures since the crisis. With the recent improvement in US data (Q2 GDP +1.7%) and a preference not to be seen as politically biased ahead of the US general election, it is highly likely the Fed will
            wait and see before providing any additional stimulus. The Fed’s Beige Book supported the prospect of weak but steady growth as it found an improvement in retail activity but weaker manufacturing due to slowing demand from Asia. One notable absentee from Jackson Hole was Mr. Draghi due to heavy workload in Europe. Draghi denied that the euro member states would need to forge a “United States of Europe” to shore up the currency union amid concerns in Germany about the amount of sovereignty required to be ceded. Merkel also stated that a banking license for the euro area’s bailout fund; the ESM (European Stability Mechanism), is not compatible with EU treaties. This will make the German court ruling on Sept 12th on the legality of the use of ESM interesting.

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