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Morning Adviser Asia 8/1/2010 11:22:00 PM

US Q2 GDP Disappoints

By Gareth Berry

Dollar performance was mixed again on Friday as marginal gains against the euro and the franc were more than offset by significant losses against the other G10 currencies. Q2 GDP came in fractionally weaker than expected at +2.4% annual rate (cons. +2.6%). However, the Q1 reading was significantly revised up to +3.7% annualised rate from +2.7%. Our US economics team notes that the personal savings rate for the past few years was significantly revised up, suggesting that consumers are in better shape financially than previously thought. Finally, the annual benchmark revisions revealed that the recession had been even deeper than previously reported. The University of Michigan consumer sentiment index for July increased to 67.8 (cons. 67.0, prev. 66.5). The Chicago PMI was much stronger than expected, rising to 62.3 (cons. 56.0, prev. 59.1). On Friday, EURUSD traded 1.2981-1.3098 and USDJPY traded 85.95-86.99.

This week, private payrolls due on Friday will likely be the focus, and our US economists forecast a +100k (cons. +90k, prev. +83k) increase since June. However, layoffs of temporary Census workers and ongoing weakness in other government employment probably resulted in a decline in total payrolls of -55k (cons. -60k, prev. -125k). Fed Chairman Bernanke is due to deliver a speech later today entitled "Challenges for the Economy and State Governments".

EUR

Targets: EURUSD 1m 1.2000, 3m 1.1500 At 1.7% (cons. 1.7%, prev. 1.4%) inflation in July rose in line with market expectations. The unemployment rate remained unchanged in June at 10.0%. The highlight this week is likely to be the ECB's monthly press conference due to take place on Thursday. Our European economics team are in line with the consensus and do not expect any change to the refi rate. The recent spate of surprisingly firm economic data, together with further spread tightening in the sovereign bond space, could give ECB President Trichet grounds for some cautious optimism. Questions are likely to centre on ECB opinion over the results of the stress tests and how the capital shortfall of ?3.5bn identified by the tests can be reconciled with ECB calculations that up to ?200 bn in additional bank asset writedowns are needed by end-2011. Trichet is also likely to face questioning over the future of the ECB's Securities Markets Program, given that sovereign bond purchases have now slowed to a trickle. We maintain our bearish euro view, given that fiscal consolidation is likely to hold back already weak growth rates while the Eurozone strives to deal with the problem of high public and private debts. We keep our 6m EURUSD 1.10/1.00 put spread trade recommendation.

JPY

Targets: USDJPY 1m 90, 3m 95 Finance Minister Noda broke his silence on the question of the strengthening yen to say that he's watching the FX market closely. Vice-Finance Minister Ikeda later followed up to say: "I will not comment on levels but generally speaking, I'm worried about the impact it may have on Japanese exporters, which have been a driving force (for the economy)". USDJPY did not react to these remarks. Headline CPI in June was -0.7% y/y as expected (cons. -0.7%, prev. -0.9%). Consumer prices by this measure have now been falling for 17 consecutive months, but the pace of CPI continues to decline, potentially weakening the case for more easing. Although it is due to be a quiet week for Japanese economic data, Japan is likely to remain in focus given that USDJPY temporarily dipped below 86 on Friday, setting a fresh 2010 low. We do not see a major risk of intervention around current levels, as the MoF is unlikely to take action without support from other G7 members.

GBP

Targets: GBPUSD 1m 1.4100, 3m 1.3500 The BoE is due to announce its latest policy decision on Thursday. Our UK economist is looking for no change to the Bank rate, and for the quantitative easing program to remain paused at ?200 bn. As such, attention will likely focus instead on the minutes due two weeks later. Any sign that the MPC is leaning further in the direction of more QE is likely to hurt the pound. Also, of particular interest will be how the votes were cast, and especially whether other MPC members saw fit to join MPC member Sentence in calling for a rate hike.

AUD, NZD

Targets: AUDUSD 1m 0.8500, 3m 0.8500 On Tuesday the RBA is due to announce its latest policy decision. Our Australia economics team are in line with the consensus expecting the cash rate to remain at 4.5% . Last week's weaker than expected Q2 CPI, Q2 PPI and June lending data support this view. In New Zealand, the Q2 unemployment report due on Thursday is expected to show an increase to 6.2% (prev. 6.0%). We remain cautious on the aussie and the kiwi as the pace of economic growth in major export markets across Asian begins to show signs of cooling. China's PMI came in fractionally weaker than expected at 51.2 (cons. 51.1, prev. 52.1).

CHF

Targets: EURCHF 1m 1.3700, 3m 1.3500 At 2.23 (cons. 2.30, prev. 2.25) the Kof leading indicator for July was released below market expectations. Prior month's reading was revised down to 2.23 from an initially reported 2.25. Although the KoF leading indicator was unchanged on a monthly basis, it continues to indicate an expanding economy over the next six months. EURCHF has been trading heavily in recent days as market expectations rise that the SNB could hike in September. July CPI due out on Tuesday, and expected to show a -0.5% m/m decline, is likely to have a very significant bearing on the policy decision. Our Swiss economist maintains his call of a +25bp hike in September to be followed by another +25bp of tightening in December. Consequently, we remain of the view that EURCHF will trend lower again in the short to medium term.

SEK, NOK

Targets: EURSEK 1m 9.6500, 3m 9.5000, EURNOK 1m 7.8000, 3m 7.6000 Norges Bank announced that it will purchase foreign exchange in August for the Government Pension Fund Global, selling NOK135 mn per day, and marking the first month in which such FX purchases will be conducted since August 2009. Nevertheless, we look for further EURNOK downside as both fundamentals and yield differentials shift further in Norway's favor. In Sweden, at +1.2% q/q (cons. 1.0%, prev. 1.4%) and +3.7% y/y (cons. 3.3%, prev. 1.4%) Q2 GDP showed that the economy grew at the fastest pace in more than three years. The improvement was driven by stronger consumption and trade.

FX Technicals

USDJPY next support at 84.83 EURUSD BULLISH Upside move through 1.3094 exposes 1.3416 with scope for 1.3692 next. Near-term support holds at 1.2737 ahead of 1.2480 USDJPY BEARISH Bearish momentum remains intact with the break of 86.27, which exposes 84.83 reaction low. Near-term resistance comes in at 88.12 ahead of 89.16 GBPUSD BULLISH Violation of 1.5816 would open up the way for further gains towards 1.6069. Near-term support comes in at 1.5125 ahead of 1.4857 USDCHF BEARISH Decline through 1.0395 has exposed 1.0131 ahead of 0.9918. Near-term resistance is defined at 1.0676 ahead of 1.0789 AUDUSD BULLISH Next big resistance above 0.9077 lies at 0.9389. On the downside, initial support lies at 0.8738 ahead of 0.8316 USDCAD NEUTRAL Break below 1.0139 would put odds in favor of a bearish tone. Initial resistance is defined at 1.0587 ahead of 1.0853 reaction high. EURCHF BEARISH Pullback from 1.3819 brings our focus back on the downside. Initial support lies at 1.3342 ahead of 1.3074. EURGBP NEUTRAL Currently holds above 0.8252 support level ahead of 0.8068. Initial resistance lies at 0.8532 with next resistance lying at 0.8633 Fibonacci level. EURJPY BULLISH Upside potential holds below 115.49 ahead of 117.50. Near-term support is defined at 110.02 ahead of 107.32 key low. *NOTE: The trend for each currency pair as defined in the table is determined by our proprietary model and is independent of our discretionary interpretation of price action.