[achiever]

United States

Event risk: The FOMC meeting (Wed) and July retail sales (Thu) lead the week ahead. The FOMC will probably express a bit more confidence in the recovery but not enough to shift the balance of risks, giving the Fed the leeway to repeat once again that accommodative policy can be maintained for an exceptional period. That should be risk appetite supportive. Retail sales though will challenge improving growth sentiment with chain store sales suggesting core retailing remains weak in July. The impression is that the risk rally increasingly has legs. A wide array of leading indicators (the OECD LEIs, the ECRI US LEI, the ratio of new orders to inventories in the US business surveys) all point to a sharper near term recovery profile than what is already discounted by asset markets. If anything these indicators suggest the near term activity profile could be as sharp on the way up as it was on the way down. (To be sure, this though says nothing about the sustainability of the upswing and whether what may look like a “V” morphs into a “W”). Payrolls risks are skewed on the less weak side and a potentially sharp sell off in US bonds could see a heavily short USD market squeezed, prompting a solid USD bounce. But against that, the FOMC next week is unlikely to rock the boat too much and will likely emphasize policy accommodation for an extended period, a factor that should keep risk appetite supported, weighing on the USD. The best risk reward is thus to sit out the price action here and sell the DXY into strength into the key 78.3 level that broke earlier this week.

Canada

Event risk: Next week’s calendar offers little inspiration. June housing starts (Tue) will probably build on the recent bottoming out trend and the June trade balance (Wed) might slip back into modest surplus thanks to firmer energy prices. In both cases however that would hardly be a startling outcome. Fin Min Flaherty and BoC Governor Carney’s visit to China next week potentially offers more event risk with the risk being that both choose to jawbone the CAD lower again. Local policymakers look intent on slowing recent CAD gains judging by Fin Min Flaherty’s recent comments that, “steps could be taken to dampen” the currency. And, with the local cash rate at 0.25% CAD is a funding currency in the same camp as the USD, CHF and JPY. Recommend to buy USD/CAD into 1.05 and sell it above 1.10.

Europe

Event risk: This week the data due for release in Europe centre around the UK and the Eurozone. Following the BoE policy announcement, the next key data in the UK are a variety of house price indicators (anticipated to continue to show stabilisation) and labour market (softness). In the Eurozone we will see French industrial production and Bank of France business sentiment (already showing slower contraction of GDP). By contrast, German data recently has underperformed. German industrial production and CPI are on the agenda this week. The Scandies are relatively quiet – with CPI and Norwegian retail sales, while the unemployment rate is due for release in Switzerland. The one thing we’ve learnt in the past few weeks is that just when you think the market has changed direction it moves back again. In general, trades of the ‘short risk’ fashion have been reduced significantly and while two weeks ago we believed this would see a move higher in risk currencies, the market continues to gyrate in a ‘higher risk’ channel. Some interest rate spreads are wildly out of the money relative to their respective currencies but with rates effectively bounded at the lower band in the UK, US and Europe and quantitative easing (with its various forms) taking the fore, currencies are responding more to sentiment and leading indicators.

Australia

AUD, the ‘good times’ currency AUD/USD is up about 2.5 cents over the week, which sums up the resilience of risk appetite. AUD is an obvious choice for those bullish on the global economy, given its potential to benefit from higher commodity prices and volumes, reduced risk premiums on Aussie bonds and AUD/USD’s place as the fourth most heavily traded currency pair (triennial BIS survey Apr 2007). Moreover, unlike other growth- and risk-sensitive currencies such as KRW, there is little intervention threat. Of course, this makes short AUD/USD one of the more enticing options for those anticipating a rise in risk aversion, most likely stemming from disappointing data in key economies rather than say banking write downs or other financial sector setbacks, as markets seem quite convinced that the worst is past for the banks. On the global economy, the past week has not provided a smoking gun for either camp. In Australia, July employment was strikingly strong on the headline but ongoing contraction in full time jobs was less encouraging. Similarly, Q2 retail sales easily beat expectations and set up for a decent size positive on GDP but the steep drop-off from May to June (-1.4%) was a concern given that the government’s second round of stimulus payments should have finished up in May. Little wonder the RBA took a downbeat view on consumption even as it switched to neutral.

Event risk: The data calendar is still quite full over the course of next week. Next Monday housing finance data is released and the expectation is for another solid rise, as the housing recovery continues. On Tues the NAB business survey is out and then on Wed we get both the Westpac-MI consumer sentiment number and Q2 wages. It’s difficult to see anything in next week’s calendar that will see the A$ sell off in a material way. The data pulse in Australia remains reasonably strong and leading indicators offshore, particularly for the US, continue to suggest stronger data over the coming month. In turn this is keeping commodity markets well supported (the CRB index is now trading at fresh highs for the year) and risk appetite buoyant. This creates the likelihood of further strength in the A$ and indeed we see risks of a move through the 0.86¢ level over the next month or so. It’s unlikely this move higher will be a smooth process though. Any correction though is likely to be well supported, with dips back to the high 0.8200¢ region a good area to re-establish longs.

New Zealand

Event risk: Data wise, the week ahead to Thursday has a distinctly second-tier look about it. Of some interest will be the July housing data (QV house prices and REINZ house sales, released some time during the week), where we look for confirmation the pickup in volumes is rubbing off on prices. A mild housing rebound is one of the core themes supporting a higher NZD over the medium-long term. Consumer activity will also be on show in the July electronic transactions report (Tue). Business PMI (Thu) and Food prices (Thu) usually fail to attract market attention. It was the break above the key 0.66 level in NZD/USD which technically signaled the readiness of NZD to now move higher, having ranged sideways for over two months. Fundamental support comes domestically from higher migration (fuelling demand for housing and consumables), improved business confidence, and a stabilisation in international soft commodity prices. Of course, sentiment towards the USD remains the dominant driver of risk currencies.

Japan

Event risk: This week is pretty heavy on in terms of data. We get the current account data plus machinery orders and eco watchers data Monday. Tuesday is the BoJ plus consumer confidence. Wednesday we get final IP plus the BoJ monthly. We should also get the Cabinet Monthly through the week too. The data this week should continue to paint a picture of improvement in survey data. However, it is hard to see this changing the overall view of selling strength in yen crosses. We will watch price action very crosses like EUR/JPY and AUD/JPY. They provide a natural hedge for long risk trades.

North Asia

Event risk: The Bank of Korea should take little time to decide to keep the base rate at 2.0%, with inflation of 1.6% y/y well below the 3.0% target and the won rally helping keep a lid on inflation risks. But the news conference will be worth watching as ever. On the data front, we will see Taiwan exports (Fri) then the influential wave of China’s monthly data, kicking off with Jul CPI and PPI (Mon) then the trade balance (Tue but watch for leaks), retail sales and IP (Wed) and money supply data any time from Tue to Fri. The ongoing lack of movement in spot USD/CNY seems likely to anchor 12mth CNY NDFs for the time being though we do see the “next big thing” in Yuan NDFs being a move to greater USD decline, as the dollars inconveniently pile up at the PBOC. USD/TWD should keep trending gently lower but probably no further than 32.50 on the week. The BOK should fight hard to make sure specs don’t load up on short USD/KRW on a break of 1200, so 1210-35 could be the range. Analysts believe a lower Pyongyang risk premium is warranted on KRW following the Bill Clinton-Kim Jong Il meeting which strongly suggests Kim wants to talk - if only to the US.

South Asia

Event risk: The data calendar features Malaysia Jun IP (Mon), Indonesia Q2 GDP (Mon), revised Singapore Q2 GDP (Tue), Philippines Jun exports (Tue) and India Jun IP (Wed). A slew of July FX reserves readings will also be worth a look. SE and S Asian central banks are taking various attitudes to FX intervention though all will be watching the price action with great interest. Analysts expect USD sentiment will remain poor and risk appetite resilient, capping any USD/Asia rallies. MAS intervention may rise as a threat on any SGD outperformance, especially with CNY unhelpfully anchored to the falling USD. However, it should not be imminent, with SGD NEER +1.3% over band midpoint, still a good amount of breathing space.