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13 Mar 2013
Fundamental Morning Wrap: GBP extends run as fundamental outlier
Sterling is the flavour of the moment once again, with this mornings institutional research keeping a primary focus on the woes of the UK economy and GBP´s. Elsewhere, Italian and Cypriot developments are ongoing, as is budget negotiations in the US.
GBP
Danske Bank analysts note that GBP has recovered slightly after it was initially hammered yesterday following terrible industrial production data. Jim Reid of Deutsche Bank feels that following yesterday's dismal numbers, a triple dip may be on the cards for the UK. He notes that the 10-year bond breakevens also edged higher to 3.347%, a level not seen since September 2008, hinting that there is some risk that inflation expectations are being un-anchored. He finishes by writing, “We've said many times that the UK is a fascinating market to watch as it is ahead of the cycle in many areas in this post Great Recession world. It seems us poor citizens are lab rats!!” ING analysts comments that yesterday´s dismal industrial production numbers suggest the UK will return to technical recession, heaping pressure on the Chancellor to offer support for the economy at next week’s budget. However, they feel that he is unlikely to acquiesce.
Goldman Sachs analysts note that the UK is benefiting from sharp fall in real rates and sterling. They feel that the sharp fall in real rates and decline in sterling in recent weeks has put the UK in focus. These factors combined with a decline in credit spreads has lead to a marked easing in UK financial conditions. Their economists argue that the combination of sluggish growth, significant spare capacity and weak inflationary pressures will be sufficient to justify further easing.
EUR
Danske Bank analysts feel that EUR/USD may have a “textbook” reaction to US Retail Sales today, with strong numbers expected to support risk appetite which would normally push the pair higher. However, an inverse reaction may occur at the prospect of pricing in a Fed “exit”. Jim Reid of Deutsche Bank notes that the Bundesbank’s Jens Weidmann was on the tape yesterday saying that the Eurozone sovereign crisis is not over and still represents the most significant risk for the German economy - despite recent improvements in financial markets. Further, he adds that there was continued uncertainty emanated from Italy and Cyprus, as well as France where reform looks to have “floundered”.
USD
Jim Reid of Deutsche Bank notes that House Budget Committee Paul Ryan yesterday released a budget plan which aims to balance the budget in ten years. The plan also includes a partial privatisation of medicare and a repeal of Obama’s health-care law. Reid adds, “The deal was quickly criticised by the President and in the meantime Democrat Senate Budget Committee Chairman Patty Murray is working on a competing plan (to be released today) that would raise taxes by nearly $1 trillion over the next 10 years and spend nearly $100 billion on a new jobs package – both of which are ideas that have been firmly rejected by Republicans.”
EM
Khoon Goh of ANZ notes that Asian currencies have been resiliant in the face of recent USD strength and in part he feels that this reflects continued positive investor interest in the region and a stronger CNY. He adds that given Emerging Asia growth prospects, strong fundamentals and ample liquidity, he see´s little reason for foreign investors to exit. Therefore, he is retaining his constructive view on Asian currencies, and is currently long KRW, CNY, CNH, PHP, INR and short IDR and GDP.
Ilan Solot of BBH notes that China is rebalancing its policy framework towards a slightly greater focus on inflation while Brazil is gearing up to tighten very soon. He adds that Mexico has had cuts, but currently MXN is on fire. He feels that Turkey is looking less favourable from a fundamental and policy perspective and Korean assets, and especially KRW, are facing renewed headwinds.
GBP
Danske Bank analysts note that GBP has recovered slightly after it was initially hammered yesterday following terrible industrial production data. Jim Reid of Deutsche Bank feels that following yesterday's dismal numbers, a triple dip may be on the cards for the UK. He notes that the 10-year bond breakevens also edged higher to 3.347%, a level not seen since September 2008, hinting that there is some risk that inflation expectations are being un-anchored. He finishes by writing, “We've said many times that the UK is a fascinating market to watch as it is ahead of the cycle in many areas in this post Great Recession world. It seems us poor citizens are lab rats!!” ING analysts comments that yesterday´s dismal industrial production numbers suggest the UK will return to technical recession, heaping pressure on the Chancellor to offer support for the economy at next week’s budget. However, they feel that he is unlikely to acquiesce.
Goldman Sachs analysts note that the UK is benefiting from sharp fall in real rates and sterling. They feel that the sharp fall in real rates and decline in sterling in recent weeks has put the UK in focus. These factors combined with a decline in credit spreads has lead to a marked easing in UK financial conditions. Their economists argue that the combination of sluggish growth, significant spare capacity and weak inflationary pressures will be sufficient to justify further easing.
EUR
Danske Bank analysts feel that EUR/USD may have a “textbook” reaction to US Retail Sales today, with strong numbers expected to support risk appetite which would normally push the pair higher. However, an inverse reaction may occur at the prospect of pricing in a Fed “exit”. Jim Reid of Deutsche Bank notes that the Bundesbank’s Jens Weidmann was on the tape yesterday saying that the Eurozone sovereign crisis is not over and still represents the most significant risk for the German economy - despite recent improvements in financial markets. Further, he adds that there was continued uncertainty emanated from Italy and Cyprus, as well as France where reform looks to have “floundered”.
USD
Jim Reid of Deutsche Bank notes that House Budget Committee Paul Ryan yesterday released a budget plan which aims to balance the budget in ten years. The plan also includes a partial privatisation of medicare and a repeal of Obama’s health-care law. Reid adds, “The deal was quickly criticised by the President and in the meantime Democrat Senate Budget Committee Chairman Patty Murray is working on a competing plan (to be released today) that would raise taxes by nearly $1 trillion over the next 10 years and spend nearly $100 billion on a new jobs package – both of which are ideas that have been firmly rejected by Republicans.”
EM
Khoon Goh of ANZ notes that Asian currencies have been resiliant in the face of recent USD strength and in part he feels that this reflects continued positive investor interest in the region and a stronger CNY. He adds that given Emerging Asia growth prospects, strong fundamentals and ample liquidity, he see´s little reason for foreign investors to exit. Therefore, he is retaining his constructive view on Asian currencies, and is currently long KRW, CNY, CNH, PHP, INR and short IDR and GDP.
Ilan Solot of BBH notes that China is rebalancing its policy framework towards a slightly greater focus on inflation while Brazil is gearing up to tighten very soon. He adds that Mexico has had cuts, but currently MXN is on fire. He feels that Turkey is looking less favourable from a fundamental and policy perspective and Korean assets, and especially KRW, are facing renewed headwinds.