Week In FX: October 2-7

Another week not for the faint hearted. Bernanke was to blame for instigating ‘Turnaround Tuesday’. In his congressional testimony he was prudently efficient and forthright and not overtly cheerful about the state of the US economy. His dour understanding of the fundamentals led the market to understand that some large scale stimulus, or so called quantitative easing, was still in the Fed’s arsenal.

Fitch downgrading Italy and Spain had Friday ‘flat lining’, only hours after the market embraced risk because of a better than expected NFP print. Without any firm European recapitalization announcement, dealers are trading on speculation.

The ECB announced new liquidity measures this week but disappointed hopes for outright policy easing. In contrast, the BoE defied consensus expectations and delivered a significant new installment of quantitative easing. Before departing, Trichet reminded us that “we are in a global crisis”. In a few weeks a new man will be held responsible, Mario Draghi, the new president of the ECB.

Below are some of the highlights of the week:

EUROPE

• FR: BoF Governor Noyer argued that ECB purchases of peripheral sovereign debt should remain limited and that they should not monetize debt. He has ruled out increasing the size of the EFSF, but endorsed leveraging the fund to increase its ability to intervene.
• EU: Manufacturing PMI was revised a touch higher to 48.5 with upward revisions in both France and Germany. The declines have been modest with the exceptions of Ireland and Spain. Italian PMI surprised strongly on the upside, rising to 48.3 from 46.5 in August. Headline print consistent with sluggish growth in core economies and contraction in the periphery. This makes fiscal adjustments a constant challenge.
• GBP: Manufacturing PMI rose to 51.1 in September from 49 in August, above expectations for a decline to 48.5. New orders pushed above 50 from 48, although export orders were very weak at 45 from 47.9, reflecting weaker demand from the euro area.
• CHF: Swiss PMI fell to 48.2 this month, below the 50-points threshold for the first time in two-years (weakness was broad based) and in line with the KOF barometer and ZEW indicator. Analysts expect GDP growth rates to be at or close to zero in Q3 and Q4.
• EU: Juncker stated that the Eurogroup meeting next week would be cancelled, indicating that the Troika report will not be ready.
• GR: Greece’s finance minister has been guiding market expectations towards a November disbursement, noting that Greece has no coupons to pay and has sufficient cash to make it into November.
• SPN: Spanish ‘unemployment’ rose +96K in September, or +79K on a seasonally adjusted basis (highest monthly increase in two-years).
• TRY: Turkey cuts the 1-year FX reserve requirement ratio from 9.5% to 9.0%.
• PLN: Poland central bank keeps rate unchanged at +4.50% as expected.
• ITL: Moody’s downgraded Italy’s sovereign ratings by three notches to A2
• UK: UK construction PMI fell to 50.1 in September from 52.6 in August, well below consensus of 51.6. This adds to signs of weak growth momentum in the UK.
• UK: FT reported that EU finance ministers are planning a coordinated recapitalization of European financial institutions.
• USD: WSJ took a different view and reported that European policymakers may be pushing for a larger restructuring of Greek debt to bring it back in line with S&P’s rating.
• EU: IMF director Borges suggested that they could create an SPV (Special Purpose Vehicle) to buy Italian and Spanish debt alongside the EFSF, and that the PSI (Private Sector Involvement) provisions need to be changed to account for larger private sector losses.
• SPN, ITL: Spanish and Italian services PMI fell further into contraction in September, at 44.8 and 45.8 respectively and consistent with further contraction in growth in Q3.
• Core-EU: German and French services PMI were revised lower to 49.7 and 51.5 respectively. The overall Euro area composite PMI fell to 49.1 in September from 50.7 in August, the fifth consecutive monthly decline.
• UK: Services PMI rose to 50.2 from 48.8 in August and the new business subindex increased to 54.1 from 53.4. Combined with the stronger manufacturing survey brought the composite PMI +1.2 index point higher to 52.9 this month.
• UK: GDP revisions showed that the economy expanded only +0.1%, q/q in Q2, down from +0.2%, with sharp downward revisions to private consumption and exports.
• FT: Reported that the EBA (European Banking Authority) will reexamine its stress tests to include haircuts to sovereign debt.
• GER: German Chancellor Merkel acknowledged the need for recapitalization and the urgency for action. She seems to favor a program that would give banks more time to try to raise capital from the markets, before turning to their own governments for capital. Market can expect to wait until the Eurogroup meeting on 17/18 October for clarity.
• IMF: Europe director has had to retract a statement proposing IMF involvement in an SPV to buy euro area debt. IMF is currently only allowed to lend to countries directly.
• GER: August factory orders fell -1.4%, m/m. Domestic orders fell -3.2% and were the main driver behind the weakness.
• CHF: Inflation surprised on the upside due to a statistical effect (change in assessment timing). CPI rose +0.3%, m/m this month, pushing headline inflation to +0.5%, y/y from +0.2%.
• CHF: SNB reported FX reserves rose to CHF282b in September up from CHF253b, due to intervention, valuation of assets and net flows related to FX forwards/swaps contracts used to inject CHF liquidity.
• BoE and ECB: Both kept rates on hold at +0.5% and +1.5% respectively, increased liquidity and expanded QE. BoE hiked APP (Asset Purchase program) to GBP+275b and ECB to buy covered bonds and conduct two longer term refi-operations.
• GER: Industrial production fell-1%, m/m, in August after a +3.9% rise in July. This bodes well for 3rdQ GDP, but the deterioration in leading indicators suggests growth momentum is likely to slow further in the months ahead.
• UK: Moody’s plans to downgrade 14 UK banks and building societies by up to three levels.
• GER: Chancellor Merkel meets Sarkozy in Berlin on Sunday.

AMERICAS

• USD: US Manufacturing unexpectedly accelerated (51.6) in September as production picked up, easing some of the concerns that the world’s largest economy is stalling.
• USD: US Factory Orders fell -0.2%, and this after rising a downwardly revised -2.1% in July. A sharp decline in auto orders was to blame for the negative prints.
• USD: ADP report recorded a +91k private job gain. Last month’s release was revised down by-2k to +89k.
• USD: Business conditions in the US non-manufacturing sector were little changed month-over-month (53 vs. 53.3). In the sub-components, employment fell (48.7) and price pressures eased (51.9).
• CAD: Building Permits down -10.4% vs. +0.4%
• USD: Weekly claims adjusted to +401k and continuing claims to +3.7m
• CAD: Canada hires +60.9k full-time. The unemployment rate fell -2 ticks to +7.1%. A misleading headline, heavily weighted towards education +38k and self-employed.
• USD: NFP beats market consensus +103k, UE rate static at +9.1% and prior months revision up +57k.

ASIA

• CNY: China’s manufacturing PMI rose to 51.2 this month from 50.9 in August (second consecutive gain, export orders up and prices down). The print was below the pre-crisis seasonal (+2bps) due to smoothing of the historical seasonal.
• Asia: BI (Indonesia), Bank Negara Malaysia, MAS and BoK continue to intervene to curb domestic currency devaluation, afraid of importing inflation. Market anticipates BI is to announce new regulations requiring repatriation of FX from exporters.
• INR: PMI fell in September to 50.4 (lowest in two-years), down from 52.6 in August.
• KRW: Exports grew +19.6%, y/y, in September, slower than the +25.9% growth in August, but still stronger than the consensus forecast for 16.6%.
• AUD: RBA kept rates on hold at +4.75%. Current policy stance remains appropriate, but opened the door to rate cuts, stating “an improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary.”
• AUD: FI market increased the pricing for rates cuts at the November 1 meeting by +18bps to +44bps.
• AUD: Aussie building approvals surprised higher and rose +11.4%, m/m in August. The trade surplus widened to AUD$3.1b in August from AUD$1.8b in July.
• KRW: Korea CPI inflation fell to +4.3%, y/y, in September from +5.3% in August. Core-inflation also dropped to +3.9%, y/y, from +4.0% giving the BoK room to keep the won weak and exports competitive.
• CNY: Reuters reported that Chinese policy makers may ask Hong Kong, CB to set up CNH swap lines (HK’s “delivered” CNY), to maintain adequate liquidity.
• KRW: BoK, FX reserves fell $8.8b in September. This suggests that a bulk of their intervention was done using forwards.
• PHP: CPI inflation rose moderately to +4.8%, y/y this month from +4.7%, but below the consensus forecast of +4.9%. Inflation pressures are showing signs of easing and this would allow the BSP to keep the volatility of the PHP low.
• THB: BoT Governor said that the central bank may switch its inflation target to headline inflation from core-inflation. The proposed target is +3% with a +/- 1.5% tolerance band. The current headline inflation is 4.0%.
• SGD: MAS has announced that its semiannual policy statement will be released on 14 October.

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