Global Markets Research
Macro
Global
4 November 2010 Market Update
FX Strategy Weekly
Research Team
London G10: The Fed’s intention to buy Treasuries until 2011Q2 could result in the longest Fed easing phase in modern history. This will likely keep the pressure on dollar. Until Spain comes under fire, we think the euro will continue to rally. Our 1.45-1.50 target remains in play. We remain EUR/GBP bulls as our sterling bearishness is not predicated on QE happening. We’re modestly bullish NOK. Asia: KRW is now our favourite currency to hold over a 3m horizon, as we think domestic appetite to allow a stronger won is growing. We continue to favour a basket of SGD, MYR and PHP, though we think gains would be gradual and tempered by their respective central banks. We remain bullish INR, even though the RBI has signalled a pause. A key change to our views is that we no longer recommend using TWD as a funding currency as the central bank’s FX policy seems to have changed. Finally, we expect market speculation on a HKD revaluation to intensify in coming months, though we think Hong Kong will ride it out with its current policy. LatAm: We summarize our LAFX views from the November Emerging Markets Monthly
Caroline Grady Henrik Gullberg Bilal Hafeez Caio Natividade George Saravelos Lamine Bougueroua
New York Alan Ruskin Drausio Giacomelli Daniel Brehon Mauro Roca Guiherme Marone
Singapore Mirza Baig Dennis Tan
Sydney John Horner
Head of FX Strategy Bilal Hafeez
USD Weak During Long Fed Easing Phases 115
2001-03
110 105 2007-
100 95 90
19891992
85 80
1984-86
75 -1
4
9
14
19
24
29
34
39
months after start of easing cycle
Foreign Exchange
Global Markets Research; Bloomberg Finance LP.
Deutsche Bank AG/Hong Kong All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 007/05/2010
4 November 2010
FX Strategy Weekly
G10 FX Outlook !
The Fed’s intention to buy Treasuries until 2011Q2 could result in the longest Fed easing phase in modern history. This will likely keep the pressure on dollar.
!
Until Spain comes under fire, we think the euro will continue to rally. Our 1.45-1.50 target remains in play.
!
We remain EUR/GBP bulls as our sterling bearishness is not predicated on QE happening. We’re modestly bullish NOK.
Longest Easing Phase Ever –Negative for Dollar The Fed’s intention to buy an additional $600bn of Treasuries by the end of 2011 Q2 effectively extends the easing phase of the Fed that first began in September 2007. If the Fed follows through, the current easing phase would become the longest in modern history overtaking the 1989-1992 phase. Such a backdrop would likely keep the dollar under pressure. Indeed, during each of the longer phases of Fed easings in recent decades the tradeweighted dollar has trended down (see first chart). The most recent Fed action also stands in stark contrast to the actions of other central banks around the world. Notably, the ECB continues to sound hawkish, focusing more on withdrawing liquidity and even the typically dovish BoE appears to backing from re-engaging in further quantitative easing. Our 1.45-1.50 target for the euro, therefore, appears on track.
USD Weak During Long Fed Easing Phases 115
2001-03
110 105
2007-
100 95 90
19891992
85 80
1984-86
75 -1
4
9
14
19
24
29
34
39
months after start of easing cycle Source: Deutsche Bank.
Spain Not Following Ireland to New Wides 500
300
10y spreads over Bunds
450 400
Ire
350
Por
300
250 200
Spa
250
150
200 150
100
100
Watch Spain for Sovereign Risk to Return as Theme The main risk to our bullish euro view would be a renewed Euro-area sovereign crisis. However, the critical element for the crisis to hurt the euro would be for the woes in the smaller sovereigns to spill over into the larger ones, such as Spain. So far, despite the new wides being seen in Irish spreads, Spanish spreads have not followed suit (see second chart)... Earlier this year, contagion was high and new wides were seen simultaneously across markets. We therefore focus on the larger sovereigns as a trigger for a more cautious stance on the euro. For now, the signs are more benign.
50
50
Jan-10 Mar-10 May-10
Jul-10
Sep-10 Nov-10
Source: Deutsche Bank
Europe FX and AUD Top Performers Against USD HUF PLN AUD
Top 5
SEK CZK
G10 and E. Europe FX Gaining Most versus Dollar Perhaps the most interesting development in recent months has been the distribution for currency gains against the dollar. The top performing currencies have been the European currencies (HUF, PLN, SEK, CZK) and AUD. So although there has been much focus on Asian currencies and other EM currencies, the stronger theme has been the recovery in the euro and the European currency markets. The fact that policymakers in central Europe are more constrained in their ability to curb currency strength (EU law prohibits capital controls) may have something to do with this. So with G20 coming up,
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CAD IDR HKD
Bottom 5
USD RUB -5
0 5 10 FX Performance (vs USD) Over Past 3m
15
Source: Deutsche Bank
Deutsche Bank AG/Hong Kong
4 November 2010
FX Strategy Weekly
the safer way of investing using dollar weakness may continue to be through G10 and EMEA FX.
Tentative Pick-Up in M&A Could Be a GBP Positive 110
Whippy EUR/GBP But Trend Intact In our last update on EUR/GBP we highlighted the worrisome rise in short sterling positions pointing to the risk of a squeeze in the case of a positive sterling surprise. The recent stronger than expected Q3 GDP number proved to be the instigator of this squeeze, causing a sharp sell-off in the cross. Yesterday’s more limited move lower following a no-change from the Bank of England provides tentative indications that the positioning picture is a bit cleaner, also reflected in a reduction in shorts in our positioning indicators (chart 1), though we remain concerned that there may be a few additional stale shorts that could be at risk of a flushout. But what about the medium-term EUR/GBP outlook? A relatively healthy data trend clearly places headwinds to a sharp sterling sell-off. The November inflation report released next Wednesday will provide additional information on the prospects of further quantitative easing and may be an additional disappointment to those looking for the BoE to follow the Fed. Despite this, we remain bullish EUR/GBP. Our sterling view has never been predicated on additional quantitative easing taking place. It has instead been based on the dismal performance of sterling when put on a head-to-head comparison with the rest of the G10: low level of yields, a current account deficit and ongoing downside risks to the economy because of fiscal tightening all place sterling at the bottom of any beauty contest. The one potential light at the end of the tunnel is the UK’s open-border investment regime, which could see sterling benefit if cross-border equity and foreign direct investment flows pick up on the back of a rise in global risk appetite. Our M&A monitor, which tracks all publicly announced M&A deals on a real-time basis is tentatively pointing in this direction, and we will be carefully monitoring this trend going forward . In the meantime, we note that Eur-UK rate differentials continue widening in favor of the EUR, and we remain EUR/GBP bulls until further notice. Bearish EUR/NOK Bias As expected, the Norges Bank revised its repo rate path lower at the October 27th policy meeting, projecting the next 25bp rate hike in Q3 next year. With this event risk out of the way, we believe the near-term direction in the NOK is now likely to be primarily determined by general appetite for risk and swings in the oil price. The downward revision to the rate path was the result of a run of disappointing activity data over the past couple of months, as well as subdued price pressures at the consumer level. While real economy data has perked up Deutsche Bank AG/Hong Kong
80 60 40 20 0 -20 -40 -60 -80 -100 -120 -140 -160 -180
102 94 86 UK TWI (lhs) 78 3m inflows (net, $ bn rhs) 70 Jan-01
Jan-03
Jan-05
Jan-07
Jan-09
Source: Deutsche Bank
For Now Cyclical Picture Still Sterling Negative 1
EUR/GBP (lhs) Eur-UK rate diff (2-yr rates, rhs)
0.95
0.75
0.25
0.9 0.85
-0.25
0.8 -0.75
0.75 0.7 Jan-08 Jul-08
-1.25 Jan-09 Jul-09
Jan-10 Jul-10
Source: Deutsche Bank
somewhat of late, inflation is likely to stay subdued, leaving little probability of a repricing of the Norges Bank outlook over the next couple of months. In this environment the NOK will struggle to find independent direction unless we see continued break on the topside in Brent crude. The correlation has been weak recently but typically picks up when oil is on a favourable trend. On a break of $90/barrell position for a move down to around 7.90 in EUR/NOK. Over the slightly longer-term we are still looking for a move down towards 7.50 in EUR/NOK by the end of Q1, as a lack of spare capacity and pent up consumer demand will lead to a gradual re-assessment of the pace of the tightening campaign in Norway. Bilal Hafeez
[email protected] London, +44 (0)20 7547 0354
George Saravelos
[email protected] London, +44 (0)20 7547 9118
Henrik Gullberg
[email protected] London, +44 (0)20 75459847
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