Full preview of the key events in the coming 168 hours via Goldman.
A key theme in asset markets last week was the substantial move in interest rate markets as US fixed income sold off abruptly following the FOMC statement, which did not hint at further easing. 10-year yields jumped by 27bps over the course of the week, a move reflected in most other rates markets. Still, solid US data and a perception that the likelihood of QE3 is fading (an outcome we still expect) have led to a shift in sentiment towards Dollar strength. However at this point, the Dollar on a TWI basis has risen by less than 1% since Bernanke's Humphrey Hawkins testimony, thus the shift in sentiment isn't obviously clear in broad Dollar direction. The Dollar has appreciated against the likes of the Yen, BRL, TRY, but has weakened against MXN and is basically unchanged against much of Asia.
While the focus is on the move in yields, when it comes to the rates market and FX, perhaps the more subtle focus should be on central bank commentary and whether further FX strength is likely to be tolerated. This was demonstrated most starkly last week when Norges Bank surprised the market and cut rates in response to NOK strength. Elsewhere, the SNB left the door open to lifting the floor of EUR/CHF, Brazil strengthened measures to discourage fixed income inflows, Thailand is examining ways of allowing local investors to buy more foreign assets and Taiwan complained about too much hot money inflows. And that was only last week. Previously the RBA, RBNZ, the Korean authorities and presumably the recent developments from the BoJ are all signs that further currency strength would over tighten financial conditions and at minimum offset any need for a hike in monetary policy rates – or even warrant a cut. One clear exception is the RBI, which has been noting that INR weakness is a threat to the inflation outlook and Bank Indonesia also does not tolerate much currency weakness either.
This week brings policy decisions in Taiwan and Thailand. The CBC decision will be very interesting to watch. The December statement at the time was surprisingly hawkish, only to be followed by a large upside surprise in inflation, and the TWD was subsequently allowed to appreciate. Given that the bank continues to view inflation as a major problem, according to quotes from Reuters, it will be very interesting to see how the bank weighs up concerns about hot money inflows vs the need to contain inflation risks. In particular, in the face of imported inflation pressures via higher commodity prices, many central banks may shift towards accepting the need for more currency strength. The week also brings some important central bank commentary. The RBA governor has an opportunity to opine on the recent slew of weak Australian data, as well as developments in the A$. There is quite a bit of commentary from Fed officials on the docket, including from Bernanke, which we will dissect for information on the further direction of policy. More dovish commentary than that of the FOMC last week, would arguably be a surprise and potentially dampen, if not reverse some of the moves of last week.
With the main focus being on the link between the rates markets and FX last week, the latest colour on the US external balance was largely overlooked. The January TIC data showed a large pickup in foreign buying of US assets, however this was overwhelmingly dominated by foreign buying of US fixed income. Surprisingly, despite 5 months of improving US data by that point, foreign buying of US equity was tiny at US$2.4bn. To put this into perspective, foreign buying of Asian equity amounted to over US$15bn in the same month, US$5bn of which went into Japan. On the assumption that foreign private buying of USTs is largely FX-hedged, the TIC data continue to highlight the weak external balance underpinning the USD against strong external balances in many other places. Unless the recent strength of US activity starts to translate into decent foreign appetite for US equities in particular and M&A inflows, we do not think that Dollar strength can persist on a broad basis and particularly against economies which are growing robustly. This week brings the Euroland BoP for January, and it will be interesting to compare the flow dynamics in the single currency area with those for the US the same month. Given the performance of peripheral bonds that month, it would be unsurprising to see strong foreign buying of Euro zone fixed income. With the gradual dissipation of Euro zone tensions since late December, it will also be interesting to see if foreign buying of Euroland equity picks up.
Finally, in terms of activity data, we need to highlight the Euro zone advanced PMIs, as well as the flash PMI in China. With quite some month-on-month volatility in activity data from both regions, in particular in the first two months of the year, we will await the March numbers with eagerness.
Monday 19 March
Euroland BoP (Jan): We will examine the data for a gauge of foreign appetite for Euro zone assets as tensions in the region started to lift.
Also of interest: RBA Governor speaks.
Tuesday 20 March
RBA Minutes: We expect the easing bias to remain in place, and do not anticipate any major deviations from the last Minutes following the February meeting. However, it is important to bear in mind that the Minutes pre-date the recent batch of weaker data.
Taiwan Export Orders (Feb): Consensus expects a rise of 13%yoy, up from a decline of 8.6%yoy the previous month.
UK CPI (Feb): We expect a rise of 3.1%yoy down from 3.6%yoy previously. Consensus expects a print of 3.3%yoy.
Italy Labour Market Reforms: The final round of labour market reform negotiations will start led by PM Monti. The aim is to pass legislation before the end of the month.
Also of interest: RBA Governor speaks, US Housing Starts.
Wednesday 21 March
Thailand Monetary Policy Meeting: We expect the Bank of Thailand to keep the benchmark rate on hold at 3.00%.
Malaysia CPI (Feb): We expect February CPI inflation to come in at 2.4% yoy, compared with Bloomberg consensus expectations at 2.3% yoy. Previously, CPI inflation came in at 2.7% yoy.
UK BoE Minutes and 2012 Budget
Also of interest: NZ Q4 current account balance, Bernanke Lecture on Monetary Policy at George Washington Uni, US existing home sales.
Thursday 22 March
Japan Trade balance (Feb): The trade deficit is likely to narrow sharply in February. The import and export trends in the data for the first twenty days of February suggest that the trade deficit narrowed sharply in February, to ¥130bn (from ¥1,476.9bn in January). Consensus expects a print of ¥120bn.
NZ GDP Q4: Consensus expects a print of 0.6%qoq after 0.8% previously. We expect a much lower print of 0.3%qoq.
Taiwan Monetary Policy Meeting: Rates are expected to remain unchanged at 1.875% by both GS and consensus. It will be interesting to see if CBC remains as concerned about inflation as at the last meeting. Recent commentary suggests that this is likely to be the case.
China flash PMI (Mar): The previous reading was 49.7.
Switzerland Trade Balance (Feb): Exports will be key to watch with regards to the prospects of the re-peg of EUR/CHF at a higher level, which we think remains an option after the latest commentary from the SNB after last week's meeting.
Euroland flash PMI (Mar): Consensus expects a rise to 49.5 from 49.0 for the manufacturing PMI and a rise to 49.2 from 48.8 on the service sector equivalent.
UK retail sales (Feb): Consensus expects a rise of 2.4%yoy on the headline reading after 2.0% the previous month.
Canada retail sales (Jan): Consensus expects a rise of 1.8%mom after -0.2% previously.
Also of interest: Euroland industrial orders, US claims.
Friday 23 March
Taiwan IP (Feb): Consensus expects a print of 8.52% year on year after a decline of 16.5% the previous month.
Singapore CPI (Feb): We expect February CPI inflation to come in at 5.2%yoy, same as Bloomberg consensus expectations. Previously, CPI inflation came in at 4.8%yoy.
Canada CPI (Feb): Consensus expects a rise of 0.4%mom on the headline reading, the same as the previous month.
Also of interest: Bernanke provides opening remarks at a Fed conference on central banking.