EUR: ECB on the wire
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USD: awaiting QE plans from Fed and ECB
In the U.S., the macro trends of decelerating global growth yet healthy corporate earnings remain unchanged and as such, price action in USD has been dictated by expectations of monetary policy in the U.S. and Europe. Market participants are divided on what they expect from the FOMC meeting on 1st August. Consensus has slowly converged toward the FOMC announcing some sort of QE3, but the form of such action has the potential to weigh on the USD. Additionally, the Fed will most likely extend the low rate guidance from late-2014 to mid-2015. In Europe, Draghi’s comments led to a short covering rally in EURUSD from below 1.2150 to above 1.23. We remain skeptical about the follow through of European authorities and would take advantage of any rallies in EURUSD to establish new EUR shorts against the USD as well as our preferred Emerging Market longs (i.e. short EURMXN). The next key date is 2nd August where we have Spanish auctions and the ECB meeting (12:45 BST for the press release/13:30 BST for Draghi’s press conference).
BRL: watching month-end currency futures for next trend
Flows in USDBRL toward month-end are telling as market liquidity tends to be concentrated on the front month contract. The Central Bank of Brazil (BCB) has a short USD 4.7bn futures position maturing this week. The market has been awaiting the BCB’s action to gauge their thoughts about the FX rate. If the BCB were to roll the full amount (i.e. sell USD at a future date, the market would interpret this as BRL positive). If BCB lets this position expire then it would indicate that the authorities have a near term floor for USDBRL. Our view remains that improving economic data should make the authorities more comfortable with USDBRL breaking below 2.00 and investors appear to be slowly converging to this view. Anecdotally, it appears hedge funds are letting their long USD positions expire and real money investors remain bullish BRL. Watch for upcoming economic data for signs of the incipient 2H economic recovery (IP and PMI on 1st August).
CNY: expecting growth to accelerate in H2
The People’s Bank of China fixed the onshore USDCNY mid rate higher for 4 consecutive days, surging to a YTD high midweek. The fix did ease off into the weekend and against this backdrop we do not foresee CNY weakening significantly in the near term. We expect the Chinese economy to bottom out and growth to accelerate in the second half of the year, as the Flash PMI edged higher to 49.5 from 48.2 in June. The effects of a number of recent government policies to boost the economy seem to be filtering through. China has cut the RRR three times since the end of last year and also cut the benchmark lending and deposit rates twice since June. It has also increased loan growth, relaxed housing prices control, and embarked on new infrastructure projects across the country. The impending leadership transition also means that the top decision-making body in China is likely to focus on smoothing the handover with steady economic growth. Additional growth data this week includes PMI numbers.
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