Daily Currency Briefing

July 14, 2011

No solution for Europe, dollar under pressure

G10 Currencies
EUR: According to EU Commissioner Olli Rehn the European debt crisis is now systemic, i.e. it has spread to the entire zone. Even if we do not share this view entirely (the yields for French or German bonds for example have not risen), this choice of words illustrates that the pressure on the European politicians has risen notably. Does that mean that the euro might benefit from an imminent solution? We consider that to be unlikely as so far no solution seems in sight. The most prominent part of the debate centres on the issue of Eurobonds (which the Italian Minister of Finance Tremonti mentioned again yesterday) as well as Athens buying back bonds with the help of EFSF funds. Both ideas have major weaknesses. In view of treaties and laws it is simply impossible to introduce a Eurobond, a solution that is also highly contentious. A repurchase of bonds on the other hand is not going to reduce the debt levels as far as many expect. The fact that the summit of the heads of government and state which had been planned for tomorrow has now been postponed to next week, illustrates the fact that the negotiations have not yet progressed far enough for a solution to be reached. At EUR-USD prices above 1.42 the single currency seems to have recovered further this morning (one might almost overlook Fitchs downgrade of Greece). This might however turn out to be the quiet before the storm should Italian yields suddenly rise again. The FX markets will also focus on the auction of long-dated Italian bonds. Yesterdays recovery of EUR-USD is not due to the fact that the difficulties in the Eurozone have become smaller. It is therefore hardly surprising that the EURUSD risk reversals have recovered hardly at all. USD: In the end the recovery in EUR-USD is nothing else but a renewed USD weakness. This was caused by Fed president Ben Bernankes official hearing on the monetary policy situation in front of the US Congress yesterday. Bernanke stressed that the Fed would also consider QE3 (i.e. further stimulation) should the situation of the US economy deteriorate further. Even if he did not announce such a step by any means it became clear that the Fed would extend the high-risk monetary policy strategy. All markets punished the dollar and it eased against all G10 currencies. The unsolved conflict about increasing the debt threshold in the US also contributed to this problem. Bernanke made it clear that capital market yields might rise even if the US government failed to meet its obligations towards its own citizens without defaulting on bonds. Then Moodys entered the debate and lowered the outlook for the US AAA rating to negative. The reason the agency gave was concerns that the debt threshold might not be raised in time. Neither the CDS nor the Treasury market showed a notable reaction to the news. One thing seems to be clear to all parties involved: should Democrats and Republicans be unable to reach an agreement until early August (which we explicitly do not expect) a rating downgrade of the US would be a fait accompli. Moody's has now translated this general view into its rating system. The fact that the FX market did not react to this news should therefore not be interpreted as dollar positive sentiment. Instead we assume that the greenback might come under renewed selling pressure should the retail sales for June due for publication this afternoon disappoint as expected by our economists. From a chart technical point of view EUR-USD is moving in no-mans land at prices around 1.42. While the next major support is only located at 1.3909/00 the next resistance is also some way off at 1.4379 (55 day ma). CHF: The franc has still no competition among the so-called safe havens. The selling-wave in the dollar, which had been initiated by Fed Chairman Ben Bernanke who kept the door open for more quantitative easing, and eventually the warning of Moodys on the AAA-rating of the USA, triggered new all-time lows in USD-CHF at 0.8080. EUR-CHF temporarily fell below the level of 1.15 as there is still no solution regarding the euro zone debt crisis. The following is clear: as
You-Na Park +49 69 136 42155 you-na.park@commerzbank.com Lutz Karpowitz +49 69 136 42152 lutz.karpowitz@commerzbank.com

Lutz Karpowitz +49 69 136 42152 lutz.karpowitz@commerzbank.com

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Daily Currency Briefing

long as uncertainty regarding the debt crisis on both sides of the Atlantic prevails the Swiss franc will remain bid. SNB president Philipp Hildebrand at the weekend ruled out interventions, but the SNB remains very concerned about the strength of the Swiss franc as Vice president Thomas Jordan made again clear yesterday. New all-time lows in USD-CHF and EUR-CHF cannot be ruled out. The next important psychological level in USD-CHF is at 0.80. NZD: Overnight, the NZD temporarily turned the turbo on: Q1 GDP data surprised strongly to the upside with +0.8% qoq (expected was +0.3%), catapulting NZD-USD above 0.85. Moreover, AUD-NZD finally broke the 1.28-handle to the downside after three prior failures, setting a negative signal for the cross. If NZ Q2 CPI data surprises to the upside next week as well, the market is likely to quickly adjust its rate expectations for the RBNZ. We have always stuck to our view that the RBNZ will raise rates again before the end of the year and feel confirmed in our view.
Antje Praefcke +49 69 136 43834 antje.praefcke@commerzbank.com

Emerging Market Currencies

PLN: Consumer price inflation in Poland followed the regional trend and weakened considerably in June. The yoy rate fell from 5.0% in May to 4.2% and so recorded a stronger than expected fall as had been the case in Hungary and the Czech Republic. The best known dove among the MPC members, Elzbieta Chojna-Duch, felt confirmed in her view that further rate hikes would no longer be necessary and would adversely affect economic growth. It can therefore be assumed that Chojna-Duch will also vote against key rate hikes in the coming rate meetings. There is nothing new about that though. The comments of the other MPC members are more important. Anna Zielinska-Glebocka seems to remain part of the hawk camp for now and warned that the fall in inflation might be a one-off. The majority of the MPC members is likely to await the inflation data for July before deciding which side to take. So far further monetary policy tightening is not off the agenda just yet. Against the background of the Eurozone debt crisis the zloty is however unable to benefit from these developments. As soon as risk aversion eases off again notably the zloty will have some ground to regain against the euro though. HUF: The good news delivered by central bank economist Lorant Varga yesterday was that it may be possible to achieve a budget surplus of 2.8% this year. Reaching the governments budget target for 2012 is also within reach. The bad news remains that the Hungarian national finances have been rehabilitated by nationalising the private pension funds. According to the central bank the deficit would amount to a considerable 7% without these measures. Hungarian fiscal policy remains an underlying risk factor for the forint and might put pressure on the currency particularly in times of increased risk aversion. At present EUR-HUF has been able to defend its levels in a more benign market environment, but times for a notable forint recovery are still a long way off. CLP: The Chilean central bank is likely to leave key rates unchanged at 5.25% tonight. This would be the first break after five rate hikes. Since June 2010 the central bank has raised rates by a total of 475bp. As a pause is likely to be priced in it is mainly the central banks statement that will be of interest. Markets expect that the central bank will not take a long break and will hike rates two more times this year. A more dovish statement would therefore constitute a disappointment and would be likely to put pressure on the peso.
Thu Lan Nguyen +49 69 136 82878 thulan.nguyen@commerzbank.com

Carolin Hecht +49 69 136 41505 carolin.hecht@commerzbank.com

You-Na Park +49 69 136 42155 you-na.park@commerzbank.com

14 July 2011

Daily Currency Briefing

Todays Events
Time 08:00 10:00 Region Indicator HUF EUR Industrial production Consumer prices core rate FX and gold reserves Initial jobless claims Producer price index core rate 13:30 USA Retail sales less vehicles Period Jun Jun Jun Jun Jun Jul Jul Jun Jun Jun Jun Jun Jun mom yoy mom yoy yoy USD bn K mom yoy mom yoy mom mom Actual Our Forecast Survey Last -0,8 +2,6 +0,0 +2,7 +1,5 526,7 418 +0,2 +7,3 +0,2 +2,1 -0,2 +0,3 Direction Cross

+2,7 +1,5 415 -0,3 +0,2 -0,3 -0,1

+0,0 +2,7 +1,5 415 -0,2 +7,4 +0,2 +2,2 -0,1 +0,0

13:30 13:30

RUB USA USA

Important Market Data

FX Current Change (%) Last trading day's high Last trading day's low FX Current Change (%) Last trading day's high Last trading day's low FX Current Change (%) Last trading day's high Last trading day's low FX Current Change (%) Last trading day's high Last trading day's low Forwards / Options EUR-USD 3M Money Market Rate (%) Bonds / Bond Futures Yield (%), Price Equity Indices Closing Change Change (%) Oil / Prec.Metals $ per unit EUR-USD 1,4212 +1,45 1,4192 1,3952 EUR-SEK 9,1767 +0,01 9,2434 9,1583 EUR-AUD 1,3244 +0,38 1,3212 1,3106 EUR-RUB 39,7683 +0,35 39,7920 39,5392 Fwd 3M -38,5700 EURIBOR 1,61 10Y Bund 2,75 EuroStoxx50 2715,05 +21,52 +0,80 Oil, Brent 117,77 EUR-JPY 111,77 +0,29 112,07 109,87 EUR-NOK 7,8265 +0,20 7,8479 7,7922 EUR-NZD 1,6873 -1,30 1,7122 1,6890 EUR-RON 4,2808 -0,03 4,2985 4,2739 Fwd 6M -73,2000 $ LIBOR 0,25 10Y T-Note 2,88 DAX 7267,87 +93,73 +1,31 Oil, Nymex 97,78 EUR-GBP 0,8809 +0,19 0,8847 0,8760 EUR-DKK 7,4573 -0,00 7,4604 7,4552 EUR-BRL 2,2392 +1,34 2,2338 2,2020 EUR-CNY 9,1787 +1,31 9,2155 9,0177 Fwd 12M -137,4000 LIBOR 0,20 10Y JGB 1,09 Dow Jones 12491,61 +44,73 +0,36 Gold 1586,00 EUR-CHF 1,1533 -1,24 1,1722 1,1583 EUR-HUF 268,03 -0,39 270,30 267,05 EUR-MXN 16,6358 +0,82 16,6322 16,4456 EUR-SGD 1,7310 +0,87 1,7281 1,7108 Vol 1M 12,96 LIBOR 0,83 EUR-CAD 1,3635 +0,79 1,3607 1,3469 EUR-CZK 24,386 +0,75 24,454 24,157 EUR-TRY 2,3392 +1,12 2,3334 2,3038 EUR-KRW 1504,6705 +0,55 1505,0892 1480,3153 Vol 3M 12,90 $ index 74,90 -1,21 76,09 74,78 EUR-PLN 4,0210 -0,21 4,0584 4,0091 EUR-ZAR 9,6697 +0,38 9,7274 9,5439 EUR-THB 42,7512 +0,58 42,7973 42,3135 Vol 12M 13,18

CHF LIBOR CAD LIBOR 0,18 1,17 10Y T-Note Future 10Y Gilt Bund Future 3,12 128,35 124,84 Nikkei 225 9930,36 -32,78 -0,33 Palladium 782,25 Zinc 2345,5 FTSE 100 5906,43 +37,47 +0,64 Platinum 1765,50 Tin 26605,0 1317,72 +4,08 +0,31 Silver 38,41

S&P 500

Industrial Metals Aluminium Lead Copper Nickel $ per ton 2450,5 2745,0 9658,5 23710,0 Sources: Bloomberg L.P., European Banking Federation, British Bankers Association, Dow Jones, Xetra, S&P, TSE, LSE, LME.

14 July 2011

Daily Currency Briefing

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