Morning Adviser Asia
5/5/2010 12:59:00 AM
Euro Angst Expands
By Brian Kim
We turn our attention in the G10 to Norges Bank's policy decision after the RBA's latest hike. As of the time of writing, 9 of 16 economists surveyed in Bloomberg are looking for a 25bp hike in Norges Bank's policy rate. Although arguments against a policy rate hike have recently increased, we are nevertheless looking for a 25bp hike (we are not included in the Bloomberg survey). (for more details see UBS Nordic Economic comment,3 May 2010). Proponents of an unchanged policy rate this week likely believe Norges Bank could prefer to wait to normalize rates until growth activity picks up and long-term inflation expectations actually begin to shift from the current 2.5% area. Officials may prefer to err on the side of caution and wait to see a more solid base in the recovery before hiking the policy rate and they could also point to recent NOK strength as an argument against further monetary tightening. On the other side of the coin, recent Norges Bank guidance seems to indicate a hike, as their recent communications state, "The Executive Board's strategy is that the key policy rate should be in the interval 1 ? - 2 ? percent in the period to the publication of the next Monetary Policy Report on 23 June unless the Norwegian economy is exposed to new major shocks." We take this as a sign that officials prefer to steer rates into the middle of this range ahead of the June meeting and we also think the bank will be more likely to normalize policy rates before it is forced to do so when inflation expectations pick-up down the road. NOK spot performance versus the other G10 currencies has been more mixed thus far than in 2009, when the NOK appreciated versus all except the Australian and New Zealand dollars. On a trade weighted basis, the NOK has been appreciating but our flow data shows inflows have been less prevalent thus far as NOK has suffered from risk liquidation and NOK is behind CAD and CHF in our 12 month aggregate positioning data. That said, recent position liquidations could allow a Norges Bank hike to provide more support to NOK than may be expected.
G10 FX
USD: Risk pull-back buoys dollar
The dollar largely strengthened on the back of continued pull-back in risk-seeking. AUDUSD traded down to 0.9089 and USDCHF were 1.1029 and 1.0244 at the time of writing as US equities closed down over 2%. Oil and gold are $82.17 and $1171.60 at the time of writing. EURUSD traded 1.2977-1.3214 and USDJPY 94.32-94.99. The pending home sales index rose roughly in-line with consensus expectations: up 5.3% m/m in March after a revised 8.3% m/m surge in February. The expiration of homebuyer tax credits boosted sales, as it will again in April. Factory orders were above expectations in March, up 1.3% m/m. Within the details, durable goods orders were revised up to -0.6% m/m in March, while nondurable goods advanced 2.9% m/m. Looking ahead, the nonmanufacturing ISM index probably rose slightly further in April.Leading up to the ISM data, three other (second-tier) economic reports will be released, including the ADP estimate of private payrolls. We will look to the employment component of the nonmanufacturing ISM for any guidance on nonfarm payrolls.
EUR: EURUSD breaks 1.30
EURUSD fell below 1.30 for the first time since April 2009 as sovereign fixed income spreads widened. Officials from other peripheral Eurozone countries, including Spain, spent much of the session defending their fiscal positions and quelling market talk about further aid for other nations. Greek spreads continued to widen and further protests against austerity measures emerged, raising concern about whether Athens will be able to see the changes through. Even once the aid package is ratified by individual member nations, more will be needed to restore investor confidence in the euro and the Eurozone. ECB Governing Council Member Liikanen said he does not see a collapse of the euro system and if Greece does not follow the terms of the package, the ECB still has tools to use. Volker Kauder, parliamentary head of the German party CDU, said that in the future an orderly insolvency of European states must be possible, and that the EU must be able to better examine the finances of EU member states in order to prevent the kind of burgeoning budget deficit witnessed in Greece. Our 3m forecasts for EURUSD remains at 1.30.
NOK: Norges Bank decision ahead
We expect a 25bp hike to bring the policy rate to 2.00%. NOK performance has lagged this year compared to last year as investors appear to have reduced their positions. While this decision could be a close call should Norges Bank prefer to exercise more caution in the current environment, we still see longer-term upside in the Norwegian krone.
FX Technicals
EURUSD sub-1.30
EURUSD BEARISH Violation of the 1.30 psychological round number leaves the bear with little support till the 1.2892 (1.3818 minus 1.5144-1.4218) to 1.2886 (April 22, 2009 reaction low) cluster. USDJPY BULLISH Initial support at 93.84 (April 30 reaction low) to 93.65 (0.618 of 91.60-94.99). should keep focus on 95.10 (0.618 of 101.44-84.83). GBPUSD BEARISH The selloff from 1.5498 (April 26 high) takes aim at 1.5067 (0.618 of 1.4784-1.5524). Short-term resistance is at 1.5283 (May 3 reaction high). USDCHF BULLISH The recovery from 1.0435 (April 1 low) tests 1.1023 reaction with 1.1184 (0.618 of 1.1967-0.9918) next. Short-term support is around 1.0732 (May 3 reaction low). AUDUSD NEUTRAL A break of 0.9080 (0.382 of 0.8579-0.9389) would expose next support at 0.9002 (Mark 26 low). USDCAD NEUTRAL The move through 1.0216 (April 19 reaction high) exposes 1.0304 (March 26 reaction high). Support is at 1.0101. EURCHF BEARISH As long as 1.4558 (February 5 breakout low) holds, view the recovery as corrective. A sustained break of 1.4268 (0.618 of 1.4145-1.4466) would sour the short-term tone. EURGBP BEARISH The break of 0.8603 January 28 low exposes 0.8456 (August 6 low), then 0.8401 (June 22 low). EURJPY NEUTRAL A sustainable break of support from 122.52 (0.618 of 119.66-127.92) to 122.37 (April 28 low) would expose 121.06 (March 22 low). *NOTE: The trend for each currency pair as defined in the table is determined by our proprietary model and is independent of our discretionary interpretation of price action
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