Via Goldman Sachs
Week in Review
Japan intervenes Prime minister Naoto Kan successfully survived a party leadership challenge this week, which was greeted by the markets with additional Yen strength. In response, the government intervened to weaken the Yen, the first time the government has done so since 2004. $/JPY moved sharply from close to 83.00 before the intervention to above 85.00 for much of the rest of the week. As Thomas Stolper wrote in this week’s FX Views, in the event this “big-splash” intervention was successful because positioning was stretched and because the Yen is significantly overvalued against USD. That said, over the next 6 months the impact of QE2 in the US, persistent Japanese trade surpluses, and markets wanting to test the authorities’ resolve could result in marginal new lows below 79. In this case, more intervention is likely. The political environment is not supportive of Japan continuously intervening to defend specific levels as in the past.
Central bank meetings In India, the RBI hiked policy rates, and subsequent commentary from the central bank’s deputy later in the week signaled continued concern over inflation. The central bank of Chile also hiked as expected, while the Reserve Bank of New Zealand stayed on hold, also as expected, citing disruptions to economic activity from the earthquake earlier this month. The Swiss National Bank also kept policy on hold, but issued a very dovish statement that revised the inflation forecast down sharply, warning of possible negative inflation in early 2011, and pointed to slowing growth in 2011 as a result of the CHF appreciation.
EUR/$ up In the markets, EUR/$ rose about 3% last week. This rise came amid renewed focus on the Euro zone periphery, with Irish CDS making new highs and the ECB reportedly buying small amounts of Irish debt. Rumors that Ireland will soon seek an IMF program and EFSF support were denied by the IMF, which does not envision Ireland needing financial assistance. More important in our view, the outlook for Spain continues to improve slowly, as Erik Nielsen has noted, with growth in Q3 not pointing to substantial weakness and banks scaling back slightly their dependence on ECB liquidity. The SPX strengthened about 1.5% for the week, while the VIX was flat.
FOMC While we think the FOMC is likely to commence QE2 – another round of asset purchases – at some point later this year or early next, a resumption this Tuesday would be surprising given that the stream of data disappointments has abated and that the committee’s focus was still on the exit strategy only two meetings ago. Chairman Bernanke’s speech later in the week could shed additional light on the mindset of the FOMC.
Decoupling The Euro zone flash PMI for September will be closely watched, as a weaker-than-expected reading could reignite fears over growth prospects outside of the US and cast doubt over the de-coupling of the rest of the world from a weak US. Last month’s reading had come in lower than expected already after marking record highs during the summer. We expect only a very modest decline in the manufacturing PMI, from 55.1 to 54.9. An Irish debt auction on Tuesday also bears watching, given last week’s jitters over the Irish government’s market access.
Canada wholesale sales (Jul) Consensus expects a rise of 0.1% mom, following on from a fall of -0.3% mom in June.
Australia RBA minutes We look for evidence to support our revised rate forecast, which sees the RBA hike by 25 bps at its October meeting. We expect another 75 bps in hikes next year, which would bring the policy rate to 5.5%.
Canada CPI (Aug) Consensus expects a flat reading mom, following the large rise of 0.5% mom in July on the introduction of the harmonized sales tax.
United States housing starts (Aug) Consensus expects a rise of 0.7% mom, following on from a rise of 1.7% mom in July. We expect a better-than-consensus reading at 3.0% mom.
United States FOMC While we think the FOMC is likely to commence QE2 – another round of asset purchases – at some point later this year or early next, a resumption this Tuesday would be surprising given that the stream of data disappointments has abated and that the committee’s focus was still on the exit strategy only two meetings ago.
Switzerland trade balance (Aug) In the context of the SNB’s dovish forecast revisions last week, in part due to CHF strength, it will be interesting to see whether (abstracting from monthly volatility) Swiss exports continue to trend higher in August.
Norway central bank meeting We see no change in policy stance from the Norges Bank, which is in line with consensus. We expect one more hike to 2.25% by the end of this year, and a further 125bps of tightening to 3.5% by the end of 2011.
UK Bank of England minutes
Canada retail sales (Aug) Consensus expects a rise of 0.6% mom, following the a rise of 0.1% mom in July.
Euroland flash PMI (Sep) We expect a reading for the manufacturing PMI of 54.9, down slightly from a reading of 55.1 in August. Consensus expects a marginally bigger drop to 54.5.
Czech central bank meeting We expect the CNB to remain on hold at 0.75%, in line with consensus.
United States initial claims (Sep 18) Consensus expects 450k, unchanged from 450k in last week’s reading.
United States existing home sales (Aug) Consensus expects a rise of 7.1% mom, up from a large drop of -27.2% mom in July. We expect a slightly weaker rebound at 5.0% mom.
United States durable goods orders (Aug) Consensus expects a fall of -1.0% mom, following a reading of 0.4% mom in July. We are in line with consensus. Consensus for durable goods orders x/ transportation is for a rise of 1.0% mom, following a contraction of -3.7% mom in July.
United States new home sales (Aug) Consensus expects a rise of 6.9% mom, up from a large drop of -12.4% mom in July. We expect a slightly weaker rebound at 5.0% mom.
Bernanke speech Fed Chairman Bernanke speaks at Princeton University, possibly shedding additional light on the mindset of the FOMC following the meeting earlier in the week.
Mexico central bank meeting Consensus expects Banxico to remain on hold at 4.5%.
Colombia central bank meeting Consensus expects the central bank to remain on hold at 3.0%, as do we.