Daily Currency Briefing: Agreement But No Happy End

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Daily Currency Briefing

August 1, 2011

Agreement but no happy end

G10 Currencies
USD: No surprise there then: at the last minute the party leaders in Congress agreed on a compromise to raise the debt ceiling. This was the only way for the party leaders to convince their followers that they had done everything possible to defend their own positions. The price for the political tussle is high. What is at stake is not the question whether the US Treasury will have to delay the settlement of bills by one or two days. And the question as to whether one of the rating agencies will downgrade the USAs AAA rating is irrelevant in the end. The toing and froing in Washington has shattered confidence in the political system in the US: will the US Congress in its current position be able to draw up an economically sensible yet sustainable fiscal policy? Electorate and investors are wondering. The disastrous GDP data published on Friday illustrates: there is only a very fine line between two unpleasant alternatives: proliferation of the deficit which would unavoidably lead to fiscal disaster and throttling the economy due to fiscal savings at a time when the US economy would need new momentum. It seems increasingly unlikely that the US Congress will walk this fine line in its current position. The conclusion is obvious: there are few reasons for a significant recovery of the dollar. Short term the other issue is that not all risks have been overcome. Disagreeing minorities (particularly among the Republicans) might still derail the compromise. News along these lines could keep the FX markets on their toes from this afternoon (European time). On the data side the PMI for the manufacturing sector is due for publication today. The remaining dollar optimists might have been able to dismiss Fridays GDP data claiming that they constituted a glance in the rear-view mirror while the worst was now over on the economic side. Without doubt the ISM constitutes a forward glance. Once the question of the debt ceiling is off the agenda the FX markets are likely to remember the US monetary policy. In particular against the background of disappointing economic data that is another argument against a rapid dollar recovery. GBP: Fridays money supply data for June was disappointing and the slight gain in monthly mortgage approvals was hardly convincing as well in particular, as both indicators remain on extremely low levels. All in all, the recovery in broad UK economic activity seems to be a sluggish one. Later this morning we will receive PMI manufacturing data for July where expectations fit into the picture with a barely expansionary 51 print. Levels to watch in EUR-GBP are the 200 day moving average at 0.8665 and the confluence of the 21 and 55 day moving average around 0.8840. In cable, the next level to the downside is the 21 day moving average around 1.6210. CAD: GDP for May in Canada was a complete disappointment as it fell by 0.3% mom and only recorded a 2.2% rise yoy. As a result not even lower-than-expected US Q2 GDP and the notable downward correction of the previous quarter was able to support CAD, therefore the loonie recorded heavy losses against the USD. This week the USD will continue to be the driving force in USD-CAD. Only the Canadian labour market report for July due on Friday might refocus attention on local economic data. Otherwise USD-CAD will be at the mercy of the USD development. To the downside the 0.9400-20 area in USD-CAD seems to be cast in stone anyway.
Antje Praefcke +49 69 136 43834 antje.praefcke@commerzbank.com Peter Kinsella +44 20 7475 3959 peter.kinsella@commerzbank.com Ulrich Leuchtmann +49 69 136 43834 ulrich.leuchtmann@commerzbank.com

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Daily Currency Briefing

SEK: The Swedish economy remains the golden boy. At 1.0% qoq and 5.3% yoy Q2 GDP clearly exceeded market expectations. Even though SEK can always appreciate quickly following the publication of good economic data as was the case on Friday general market sentiment maintains the upper hand in EUR-SEK. That is likely to remain the case so that the Swedish PMI for July will only cause a brief blip in the SEK this morning. CHF: More historic highs in the franc on Friday and medium-term still no change in sight, although market sentiment got a lift overnight thanks to the agreement on the US debt ceiling, triggering sharp short-term losses in the CHF. To make matters worse US Q2 GDP data disappointed notably on the downside while Q1 data was revised massively downwards so that fears about a recession and concerns about QE3 are now making the rounds again and should continue for the time being. As the only safe haven the Swiss franc is getting all the flak without any chance of a relief in the near future, apart from some short-term blips like the move seen overnight. In our view EUR-CHF might be aiming for the 1.10 mark and the 0.75 mark in USDCHF should market uncertainty remain high. AUD: Tomorrow morning the RBA will decide on key rates. The inflation rate in Australia rose more notably than expected in Q2 to an impressive 3.6%. The core rate came in at 2.7% thus reaching the upper end of the central banks target corridor. It therefore remains quite likely that the RBA will resume the rate rise cycle before the end of the year. After all RBA Governor Glenn Stevens as well as the minutes of the last rate meeting had underlined that Q2 inflation data would be decisive for the future path of interest rates. This time it is however still too early for a rate rise. The statement is likely to refer to inflationary pressure and the strong AUD. Depending on the degree of hawkishness the AUD will be able to rise to a bigger or lesser extent. In any case, possible setbacks in the AUD will be used as buying opportunities, since the AUD will remain an attractive currency for the time being.

Antje Praefcke +49 69 136 43834 antje.praefcke@commerzbank.com

Antje Praefcke +49 69 136 43834 antje.praefcke@commerzbank.com

Antje Praefcke +49 69 136 43834 antje.praefcke@commerzbank.com

Emerging Market Currencies


EMEA: Today is PMI day in five EMEA countries. Even if local factors are taking a back seat on the FX markets in the current environment it will be of interest whether the economic weakness in Q2 has affected sentiment amongst purchase managers in Russia, Poland, Hungary, the Czech Republic and Turkey in July. Hungary and Turkey recorded an uptrend recently while the index for Russia stagnated over the past two months. In Poland and the Czech Republic the PMI fell over the same period but nonetheless remains the highest in the region. TRY: The glowing image which the Turkish central bank (CBRT) painted on Thursday at the presentation of its new inflation report evaporated on Friday. With a large minus of USD 10.2bn the Turkish trade balance recorded a record low. That means that there is renewed trouble brewing regarding the development of the Turkish trade balance one of the main factors why the lira is in a downward trend. The continued high credit growth suggests that it is excessive lending behind the economy overheating and thus behind the strong rise in import demand. We therefore consider the central banks rate cut rhetoric to be premature. On the contrary: consumer prices for July on Wednesday might illustrate that a tightening of monetary policy might be required before year end to control price pressure. HUF: On Friday the CHF-HUF exchange rate reached a new all-time high at 238.94 and therefore remains a major concern for Hungarian debtors with foreign-currency denominated loans. The fact that the annualised 1-month volatilities in CHF-HUF have more than doubled compared with the low in March illustrates how explosive the mix of safe haven Swiss franc and high risk currency forint is. An agreement on the US debt ceiling could cause a trend reversal though.
Carolin Hecht +49 69 136 41505 carolin.hecht@commerzbank.com

Carolin Hecht +49 69 136 41505 carolin.hecht@commerzbank.com

Carolin Hecht +49 69 136 41505 carolin.hecht@commerzbank.com

1 August 2011

Daily Currency Briefing

Todays Events
Time 07:30 08:00 08:55 09:00 09:30 10:00 15:00 Region Indicator SEK NOK GER EUR GBP ZAR USA Swedbank PMI Survey Puchasing Manager Index PMI (Markit) PMI (Markit) PMI (Markit) Investec PMI ISM manufacturing prices paid Period Jul Jul Aug Aug Jul Jul Jul Jul Actual 50,1 Our Forecast Survey 52,0 55,5 52,1 50,4 51,0 51,9 54,5 64,0 Last 52,9 56,1 52,1 50,4 51,3 53,9 55,3 68,0 Direction Cross

50,4 51,0 55,5

Important Market Data


FX Current Change (%) Last trading day's high Last trading day's low FX Current Change (%) Last trading day's high Last trading day's low FX Current Change (%) Last trading day's high Last trading day's low FX Current Change (%) Last trading day's high Last trading day's low Forwards / Options EUR-USD 3M Money Market Rate (%) Bonds / Bond Futures Yield (%), Price Equity Indices Closing Change Change (%) Oil / Prec.Metals $ per unit EUR-USD 1,4398 +0,63 1,4413 1,4230 EUR-SEK 9,0176 -0,44 9,1157 9,0414 EUR-AUD 1,3030 +0,28 1,3132 1,2987 EUR-RUB 39,7220 +0,64 39,7830 39,4271 Fwd 3M -34,7300 EURIBOR 1,61 10Y Bund 2,54 EuroStoxx50 2670,37 -22,39 -0,83 Oil, Brent 117,76 EUR-JPY 111,69 +0,29 111,56 110,40 EUR-NOK 7,7331 -0,11 7,7782 7,7316 EUR-NZD 1,6316 -0,63 1,6587 1,6389 EUR-RON 4,2540 +0,24 4,2541 4,2332 Fwd 6M -68,7900 $ LIBOR 0,26 10Y T-Note 2,84 DAX 7158,77 -31,29 -0,44 Oil, Nymex 96,88 EUR-GBP 0,8754 -0,07 0,8785 0,8734 EUR-DKK 7,4504 +0,02 7,4512 7,4472 EUR-BRL 2,2303 -0,39 2,2494 2,2276 EUR-CNY 9,2634 +0,49 9,2746 9,1597 Fwd 12M -131,2300 LIBOR 0,20 10Y JGB 1,08 Dow Jones 12143,24 -96,87 -0,79 Gold 1614,05 EUR-CHF 1,1422 -0,64 1,1497 1,1299 EUR-HUF 268,26 -0,19 270,48 268,35 EUR-MXN 16,7948 +0,39 16,9250 16,7299 EUR-SGD 1,7288 +0,49 1,7342 1,7154 Vol 1M 13,14 LIBOR 0,83 EUR-CAD 1,3708 +0,95 1,3773 1,3527 EUR-CZK 24,204 +0,10 24,243 24,147 EUR-TRY 2,4193 +0,91 2,4465 2,3947 EUR-KRW 1510,6384 +0,40 1519,1602 1500,1073 Vol 3M 12,90 $ index 73,84 -0,51 74,51 73,72 EUR-PLN 3,9938 -0,39 4,0187 3,9951 EUR-ZAR 9,5960 -0,03 9,6910 9,5886 EUR-THB 42,8197 +0,72 42,9140 42,3750 Vol 12M 13,30

CHF LIBOR CAD LIBOR 0,18 1,18 10Y T-Note 10Y Gilt Bund Future Future 2,86 130,36 125,42 Nikkei 225 10017,75 +184,72 +1,88 Palladium 839,50 Zinc 2470,0 FTSE 100 5815,19 -58,02 -0,99 Platinum 1795,75 Tin 28150,0 1292,28 -8,39 -0,65 Silver 39,52

S&P 500

Industrial Metals Aluminium Lead Copper Nickel $ per ton 2582,0 2613,5 9731,0 24500,0 Sources: Bloomberg L.P., European Banking Federation, British Bankers Association, Dow Jones, Xetra, S&P, TSE, LSE, LME.

1 August 2011

Daily Currency Briefing


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