Personal Finance - Standard Chartered Bank Market Matters

Foreign Exchange Market Report
FX Snapshot 19 Sept 2005

 
Personal Finance - Standard Chartered Bank USD
Days are numbered for USD rally
  • 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 Katrina’s 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 week’s 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.
    Personal Finance - Standard Chartered Bank EUR
    Emerging from political uncertainty
  • 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 Sunday’s 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 Eurozone’s 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 week’s 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.
    Personal Finance - Standard Chartered Bank JPY
    Improving fundamentals
  • The follow-through support from Koizumi’s 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).
    Personal Finance - Standard Chartered Bank GBP
    Reminder of growth concerns
  • The GBP continued to come under pressure last week amid UK’s 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 bank’s 2% target.
    Personal Finance - Standard Chartered Bank AUD
    May under-perform going forward
  • 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.
    Personal Finance - Standard Chartered Bank CAD
    Showing remarkable resilience
  • 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 week’s 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.
    Personal Finance - Standard Chartered Bank SGD
    All eyes on inflation data
  • 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 week’s 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 Friday’s August CPI numbers, whereby any upside surprise could fuel speculations that MAS may allow the SGD to strengthen at a quicker pace.
    Personal Finance - Standard Chartered Bank IDR
    Near-term downside pressure remains
  • 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 Yudhoyono’s 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 market’s 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.
    Personal Finance - Standard Chartered Bank INR
    Pulled on both ends
  • 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.
    Personal Finance - Standard Chartered Bank ZAR
    Divergence with gold spells caution
  • 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.

    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  
    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  
    France Consumer Spending Wednesday  
    Eurozone Labour Costs Wednesday Eurozone workers accepting reality of weak economy
    Canada Retail Sales Wednesday  
    Japan Adjusted Merchandise Trade Balance Wednesday  
    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  
    US Initial Jobless Claims Thursday Ongoing impact of Katrina being felt on claims
    Singapore CPI Friday May further fuel the central bank’s 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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