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For the most part, currencies are treading water this morning. U.S. producer prices grew by 0.1 percent in June, which was the first increase in wholesale prices in 4 months. Economists anticipated another monthly decline in price pressures but with PPI ticking upwards, the case for a third round of Quantitative Easing weakens. Excluding food and energy costs, PPI rose 0.2 percent, which was right in line with expectations. While inflation is still very low, the Fed will latch onto any reasons that would allow them to delay QE3.
The stability in currencies today is the best scenario we could have hoped for given the downgrade of Italy by Moody’s and last night’s report of slower Chinese growth. One of the most significant event risks this week was China’s Q2 GDP report and even though the latest numbers showed growth slowing to its lowest level since the first quarter of 2009, investors were unfazed because this along with the retail sales and industrial production reports were in line with expectations. The reaction in the foreign exchange market could have been much worse if investors wanted to focus on the 8% number but with expectations set so low going into the releases, the fact that GDP only missed by 0.1% turned out to be good news.
While Italian and other European policymakers have been screaming about the untimeliness of Italy’s downgrade, investors were unfazed and shrugged off the decision by Moody’s to cut Italy’s sovereign debt rating by 2 notches to Baa2 because that still left Italy with a rating one notch higher than S&P. The EUR/USD was also helped by a strong Italian bond auction that showed investors still willing to fund the country at reasonable yields after the downgrade.
It may be Friday the 13th which for our non-western readers is a day that is generally unconsidered unlucky, but with only the University of Michigan consumer sentiment report due at 10am ET, it should be quiet. The only risks would come from big moves in equities but there is little indication that this would happen.
via : http://www.bkassetmanagement.com/us-outlook/fx-a-semblance-of-good-news/
By now we can only hope (pun intended) that everyone has seen the David Einhorn chart showing the circularity of the European “summit-based” decisionmaking process – somewhat relevant since we have had 21 summits since 2008 and Europe has never been in a condition quite as bad as last week when a historic move by the ECB to lower the deposit rate to zero and the refi rate below the critical threshold of 1.00%… and nothing happened (that’s not quite true: JPM, Goldman and Blackrock all made it quite clear European money markets are now officially dead).
Of course, the chart above can be applied not only to Europe in its current predicament, but to any Keynesian-based “resoution” which attempts to solve debt with more debt: initial improvement, only for the euphoria to fade once the realization that total leverage in the system has increased, actual cash flow has remained flat at best, or likely declined as none was used to generate incremental revenue, while the amount of eligible collateral for future use has decreased, until one day the debt-creation machinery grinds to a halt.
However, as the following empirical analysis from Credit Suisse shows, the “Einhorn” chart is not just a conversation piece at cocktail parties: there is an actual trade pattern which has made traders lots of money, and which makes Eurocrats the best friends of not only Belgian caterers, but short-sellers everywhere: go long into a summit when the clueless algos read headlines and send risk soaring, only to short the inevitable fizzles days if not hours later.
Once the chart above is updated for the most recent failed June 28-29 summit, we will make sure it is reflected empirically (primarily as a convenience for all those who think they can time the bottom in Spanish bonds just right… just like all those who said that Greek bonds yielding 100% was the absolute bottom, until they hit 1000% 3 months later of course).
So… all those hoping to make a quick buck shorting circular European stupidity have just one question: when is the next summit?
From Goldman Sachs
The past week was dominated by the Eurogroup statement over the weekend that Spain will seek financial support for its banks. According to the statement, Spain intends to make a formal request soon, with financial assistance expected to be around EUR100 bn and to come from the EFSF or ESM. Aid will be channeled through the FROB, and will increase the debt burden of the Spanish sovereign. There will be no macro or fiscal conditionality as in the bailouts of Greece, Ireland and Portugal, but only on bank sector restructuring. That said, there will be monitoring of the deficit and structural reforms as part of this bailout, though no conditionality, and the IMF is also invited to monitor progress under the program. Separately, the week also saw lots of commentary out of the Fed, including from Chairman Bernanke and Vice Chair Yellen. At this point, we see any easing as a close call between a modest extension of the “twist” and a broader purchase program involving mortgage-backed securities and long-term Treasuries, financed via balance sheet expansion. Our base-case forecast remains the latter. Finally, also over the weekend China data for May showed inflation coming down and a weaker activity picture, as had been signaled by last week’s policy rate cuts. That said, China’s trade balance surprised positive (Figure 1), with stronger-than-expected import growth, even if some of that came from holiday effects. Markets rallied broadly last week, presumably as they sensed a more activist stance from policy makers on both sides of the Atlantic. In FX, cyclical currencies that have been hard hit in recent weeks rallied back strongly (Figure 2), including RUB, HUF and MXN. Against this backdrop, we shifted our tactical recommendations in FX back to neutral, closing our short $/JPY recommendation that we had held since March 22.
Against the backdrop of policy progress in Europe and an FOMC that looks set to ease at least incrementally, what is notable is that USD positioning is max long, as we have flagged recently in our weekly IMM emails. To put this in perspective, we compare IMM positioning now with just prior to the announcement of the “twist” on September 21. Back then — with Euro zone tensions also running high — our proprietary positioning score for overall USD positioning was +8, just shy of the current reading of +10. Looking at positioning on individual currencies, what is notable is that positioning currently has much bigger shorts on NZD and AUD, while the EUR short is roughly comparable (Figure 3).
Looking to the week ahead, the key question for us is where to harvest excessive risk premia, bearing in mind that the Greek elections are around the corner. On the fundamentals, we like CNY, SGD and MYR the most, as we think balance of payments support offers some insurance against the Greek elections. In Latam, the risk premium in MXN looks excessive to us, but this currency will be vulnerable to any adverse Greek developments. In terms of policy talk and data, for the former Fed chatter ends on Tuesday when the blackout period begins ahead of the FOMC on June 19/20. For the latter, US retail sales and industrial production will be important to watch as we head into the FOMC next week.
Tuesday June 12th
- India industrial production (Apr) We forecast IP growth to remain weak at 1.3% yoy (consensus 1.7% yoy), from -3.5% yoy in March. There is general weakness in industrial activity, indicated by the April core sector data and our Current Activity Indicator (CAI), with the latter having shown a declining trend since the start of 2012. Apart from this, April IP is expected to be dragged down by negative seasonality factors, which generally keep the sequential activity momentum weak.
- Indonesia central bank meeting We expect Bank Indonesia to keep rates on hold at 5.75%, in line with consensus. Previously, the central bank has stepped up monetary operations to contain inflation risks. We continue to keep our baseline view for unchanged policy at 5.75% for the rest of the year unless fuel price hikes materialize further down the road.
Wednesday June 13th
- Thailand central bank meeting We expect Bank of Thailand to keep the policy rate on hold at 3.00%, in line with consensus. The post-flood recovery is progressing at a faster-than-expected pace so far—the central bank highlighted in its last statement that manufacturing production disrupted by the floods was projected to return to normal levels by end-2Q2012 (vs. the previous guidance of 3Q2012). We believe rate normalization against the backdrop of post-flood-reconstruction spending and the associated build-up in inflationary pressures will take place in 4Q2012.
- US retail sales (May) We forecast that retail sales growth cooled significantly in May, at -0.5% mom compared to consensus of -0.1% mom. Weaker vehicle sales and the decline in gasoline prices point to a likely decline in headline retail sales. However, we also expect that growth in “core” retail sales (ex-autos, gasoline and buildings) also stalled after steady growth earlier in the year, based on chain-store results for the month. We are looking for a flat reading here, compared to consensus of 0.4% mom.
Thursday June 14th
- India WPI (May) We expect May WPI inflation to come in at 6.9% yoy (consensus 7.5% yoy). We expect the divergence in headline and core WPI to continue, while weakness in activity, base effects and tight liquidity will keep manufacturing and core inflation low, at close to 4.5% yoy. We expect primary inflation to remain high on a yoy basis, held up by the food sub-component. On a sequential basis, however, we expect primary articles WPI inflation to moderate slightly, due to favorable seasonality trends generally seen in the month of May.
- Philippines central bank meeting We expect the central bank to keep rates on hold in its upcoming policy meeting, in line with consensus. The central bank has cut rates by a total of 50 bp since January 2012.
- New Zealand central bank meeting Consensus expects the OCR to remain unchanged at 2.5%.
- Switzerland central bank meeting We expect no change from the SNB at this meeting, in line with consensus. We recently changed our call for no re-peg in EUR/CHF higher.
- Euro zone CPI (May) Consensus expects a reading of 2.4% yoy, unchanged from the last one.
- US CPI (May) The CPI likely declined in May on a drop in energy prices, where we are looking for a reading of -0.31% mom, below consensus of -0.2% mom. However, we forecast another firm increase in the core, with growth of +0.20% month-over-month, in line with consensus.
Friday June 15th
- Japan central bank meeting
- US industrial production (May) Modest growth in manufacturing employment and a contraction in hours suggest industrial production expanded only moderately. We forecast a gain of 0.2% mom after a 1.1% increase in April (consensus 0.1% mom). Sluggish growth would also be consistent with the downshift in business surveys during the month.
- US Net long-term TIC data (Apr)
- US University of Michigan consumer confidence (Jun) Consensus expects a reading of 77.5 after 79.3 in the last report.