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USD
Days are numbered for USD rally
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The USD
remained on a firm footing throughout
last week, on the back of the
continuing rebound in interest
rate expectations and a selective
interpretation of US data. Initial
expectations for a post-Katrina
pause in Fed monetary tightening
have been further pared back,
keeping the USD supported along
the way. However, as of last Friday
the December Fed funds contract
was already pricing in a rate
of 3.965%, which is not far from
our year-end forecast of 4.00%,
and any final traces of uncertainty
look set to disappear once the
Fed delivers another 25bps hike
this Tuesday. Together with the
much weakerthan- expected Philly
Fed and University of Michigan
Confidence Survey readings shedding
light on Katrinas damage
on domestic sentiment, further
significant USD gains stemming
from cyclical positives look unlikely
near term. On the other side of
the equation, indeed the influence
of structural negatives had been
muted by last weeks lower-than-expected
July trade deficit and a corresponding
jump in net foreign security purchases.
However, with oil prices likely
to stay firm for the rest of the
year (causing further current
account deficit widening), USD
60bn in aid for states affected
by the hurricane already voted
through by the US Congress (fueling
budget deficit concerns), and
a seasonal moderation in net capital
account inflows to the US in Q4,
we expect the USD not only to
have limited room for further
upside appreciation in Q3, but
also to significantly weaken as
we enter into Q4. |
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EUR
Emerging from political uncertainty
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The
EUR continued to price off the
broad USD trend as market attention
remained on US data. If anything,
uncertainties over whether Germany
would come under the governance
of a grand coalition
after last Sundays Germany
election had also added additional
weight on the EUR, as that could
well spell political deadlock
as well as slower pace of tax
and labour market reform going
forward. Indeed that seems to
be the outcome for now with no
clear winner emerging. EUR/USD
fell through key support 1.2200
as a result, and pressure on the
downside looks set to stay in
the near-term. However, leaving
politics aside, the Eurozones
fundamentals remain reasonably
positive Dow Jones Stoxx
600 Index climbed to a 3-year
high on the back of strong energy
and mining sector earning performances,
while last weeks Aug CPI
also came in stronger than expected,
prompting the market to price
in a higher chance that the next
move by the ECB will be a hike. |
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JPY
Improving fundamentals
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The follow-through
support from Koizumis election
victory proved to be short-lived
as market quickly turned their
focus to the USD trend last week.
USD/JPY ended the week higher,
although there are still evidence
supporting our bullish JPY view
in the coming months the
Nikkei continued to break higher
grounds on the back of oil price
retracement, and such upbeat business
optimism should continue to translate
into firm investment expenditures,
both in terms of labour and capital.
This in turn is fuelling private
consumption and improving services
activity also. We have therefore
revised our 2005 GDP projections
higher to 2.6% and 2006 to 1.8%
(from 1.7% and 1.3% at the beginning
of the year). |
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GBP
Reminder of growth concerns
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The GBP
continued to come under pressure
last week amid UKs looming
economic growth concerns. August
retail sales remained flat compared
to July, falling short of the
+0.3% m/m market consensus. Claimant
count measure of unemployment
rose in the UK for the seventh
month in a row in August, and
we believe that the UK labour
market is clearly taking a turn
for the worse as private sector
looks set to shed more jobs going
forward, while hiring in the public
sector is also bound to lose steam.
The resulting lower wage pressure
reinforces our call for the BoE
to cut rates in 2006. But for
now, looming inflationary pressure
should keep the BoE from jumping
the gun August CPI came
in at a strong 2.4% y/y, the most
in at least 8 years and materially
higher than the central banks
2% target. |
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AUD
May under-perform going forward
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The AUD
failed to stage a convincing follow-through
last week after briefly breaching
resistance 0.7755. Apart from
the broad USD rally, one key reason
for the fall was the continued
correction in copper prices
which has a 0.83 correlation with
the AUD in the past 3 years
from all time peaks. While we
expect the broad USD weakness
in Q4 to offer the AUD some support,
the risk of further correction
in base metal prices as well as
moderating domestic demand may
eventually drag the AUD/USD lower
in 2006. |
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CAD
Showing remarkable resilience
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Despite
the recent retracement in oil
prices, the CAD still managed
to hold on to its previous gains
against the USD last week amid
expectations that the Bank of
Canada will hike rates further.
The market is currently pricing
in a 65-70% chance of a 25bps
hike on Oct 18, and this weeks
wholesale and retail sales numbers
for July should help validate
this view. Together with our view
that oil prices should average
at USD 70pb in Q4, USD/CAD remains
on track to test key support level
1.1718. |
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SGD
All eyes on inflation data
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With
the SGD NEER still trading very
close to the weaker end of our
estimated trade weighted band,
risk remains for the USD/SGD to
go lower in line with our bullish
JPY call. Indeed, last weeks
data were mixed July retail
sales made an impressive jump
to 10.1% y/y, but external trade
figures for August turned out
to be a disappointment. All eyes
will be on this Fridays
August CPI numbers, whereby any
upside surprise could fuel speculations
that MAS may allow the SGD to
strengthen at a quicker pace. |
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IDR
Near-term downside pressure remains
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The IDR
started last week with a stronger
note, on the back of increasing
hopes that fuel prices could be
hiked as early as October. Such
optimism was reinforced by the
President Bambang Yudhoyonos
signing of Presidential Decree
12/05, authorising cash payments
of IDR 4.6trn (USD 460mn) to 15.5mn
poor households for the October-December
period. Given the political risk
of hiking fuel prices without
a social safety net in place,
we believe fuel prices are likely
to be hiked by 30% in November.
But nearterm risk remains for
USD/IDR the stock markets
recent relief rally could be losing
steam, as overseas investors sold
a net USD 11mn worth of Indonesian
stocks on Sept 15, largest since
August 18. |
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INR
Pulled on both ends
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The INR
traded in a tight range last week
under the influence of two opposite
forces. On one hand we continued
to see strong portfolio inflows
amid impressive equity performance,
and stronger than expected inflation
data fueling rate hike expectations.
On the other hand we had August
merchandise trade balance adding
to the financial year-to-date
deficit number on the back of
rising oil import bill. The latter
has been one of the key reasons
for our call for a weaker INR
this year. |
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ZAR
Divergence with gold spells caution
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The ZAR
fell marginally last week in tandem
with the fall in EUR/USD. This
also came despite gold prices
advancing to a 17-year high. While
the downside risk for ZAR looks
set to be limited by a potential
EUR/USD rally in Q4, we continue
to see substantial downside risk
for the ZAR in 2006 as global
demand for commodities eases,
global risk appetite moderates,
and the drag of trade deficit
grows. |
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Key Levels
| Currency |
Support |
Resistance |
| EUR/USD |
1.1970*** |
1.1870**** |
1.2325** |
1.2590*** |
| USD/JPY |
108.75*** |
106.50**** |
112.60*** |
113.70**** |
| GBP/USD |
1.7820**** |
1.7650*** |
1.8300*** |
1.8500*** |
| AUD/USD |
0.7475*** |
0.7370*** |
0.7810** |
0.7990**** |
| USD/CAD |
1.1720**** |
1.1620*** |
1.2030*** |
1.2220** |
| USD/SGD |
1.6700*** |
1.6435*** |
1.6905** |
1.7040**** |
| USD/IDR |
10000**** |
9900** |
10525*** |
10725** |
| USD/INR |
43.66*** |
43.40*** |
44.15**** |
44.50*** |
| USD/ZAR |
6.1150**** |
5.9200*** |
6.4370** |
6.5750*** |
Key: (*)-Minor; (*****)-Major
Key Events
| |
Day |
Implication |
| US NAHB Housing Market Index |
Monday |
US, UK lead indicators
point to improving housing markets |
| UK RICS House Price Balance |
Monday |
| Germany ZEW Investor Confidence Survey |
Tuesday |
Higher EUR, worries over likely grand
coalition government may undermine investor
sentiment |
| Eurozone Trade Balance |
Tuesday |
|
| Canada Leading Indicators |
Tuesday |
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| US Housing Starts |
Tuesday |
Low U.S. long term rates
still support the housing market |
| US FOMC Rate Decision |
Tuesday |
Expect Fed to deliver
another 25bp and communicate post-Katrina
strategy |
| UK Bank of England Minutes |
Wednesday |
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| France Consumer Spending |
Wednesday |
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| Eurozone Labour Costs |
Wednesday |
Eurozone workers accepting reality
of weak economy |
| Canada Retail Sales |
Wednesday |
|
| Japan Adjusted Merchandise
Trade Balance |
Wednesday |
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| Eurozone Budget Deficit
% GDP |
Thursday |
Eurozone close to breaking
SGP budget rule |
| Eurozone Government Debt
% GDP |
Thursday |
but who cares? The
SGP is dead in all but name |
| Canada Consumer Price
Index |
Thursday |
|
| Canada CPI excluding Core
8 |
Thursday |
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| US Initial Jobless Claims |
Thursday |
Ongoing impact of Katrina
being felt on claims |
| Singapore CPI |
Friday |
May further fuel the central
banks inflation concern |
| Belgium Business Confidence |
Friday |
Bellwether business confidence
survey pointing to gradual improvement
ahead |
Recent FX Performance (%, +ve = USD decline)
| Currency |
Past 1 Week |
1 Month |
3 Months |
1 Year |
| EUR/USD |
-1.13 |
0.59 |
0.66 |
-0.36 |
| USD/JPY |
-0.26 |
-0.34 |
-1.71 |
-0.34 |
| GBP/USD |
-1.19 |
0.85 |
-0.80 |
0.52 |
| AUD/USD |
-0.36 |
1.98 |
-0.93 |
7.96 |
| USD/CAD |
-0.28 |
2.80 |
4.44 |
8.08 |
| USD/SGD |
-0.07 |
-0.55 |
-0.44 |
0.76 |
| USD/IDR |
0.64 |
-1.63 |
-5.22 |
-10.21 |
| USD/INR |
-0.07 |
-0.66 |
-0.72 |
4.64 |
| USD/ZAR |
-0.65 |
2.54 |
5.21 |
1.06 |
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