Daily Currency Briefing

July 19, 2011

Quiet before the storm?

G10 Currencies
EUR-USD: The trade in EUR-USD was very calm yesterday. The pair moved in a narrow range between 1.4015 and 1.4120, while trading around 1.4140 during the night. There was little news on the debt crisis issue in the euro zone or the debt ceiling in the US. The calm is deceptive though as markets are nervous ahead of the EU summit planned for Thursday. The yields for peripheral bonds, which continued to rise yesterday, illustrate this very clearly, indicating that markets still doubt whether it will be possible to reach a solution that will suit all parties (government, ECB, rating agencies). Moreover it remains unclear what this solution would look like as regards hair cut or an involvement of private investors. The FX market clearly does not want to take position yet as the decision about raising the US debt ceiling is still outstanding as well. However, over the next few days we could see higher volatility in EUR-USD as there is a risk that every side will want to make their point ahead of the EU summit. Should it then turn out that an agreement will be difficult to reach, the euro is likely to come under pressure. Even if the US is also struggling with some sort of debt crisis the difficulties seem easier to solve compared with the complicated situation in the euro zone. On the data front the German ZEW index is due for publication today. We expect a notable fall of the index. Even though market attention is unlikely to focus on economic data releases this week, EUR-USD might come under temporary pressure nonetheless should the index disappoint very notably as we expect. The last thing the euro zone needs at present are increasing concerns about the German economy. GBP: The pound continues to be caught between a rock and a hard place. The ongoing tensions with the euro zone debt crisis and the continuing uncertainty regarding the US debt ceiling negotiations mean that the pound is trading as a function of risk appetite rather than fundamental data. At the moment there are few reasons to buy the pound apart from medium term valuation concerns and the many reasons to sell the pound still exist: low yield, the full effects of austerity yet to be felt and non existent consumer activity. Yet in the last 2 weeks EUR-GBP has fallen from 0.9080 to 0.8740 as investors and market participants exited long euro positions given the problems in the euro area. On Wednesday we will receive the minutes from the July MPC meeting. The market will focus in particular around the proposal of further quantitative easing. We have long argued that further QE will not be effective as consumers continue to deleverage and that the costs of the policy (perceived currency debasement and inflation) far outweigh the benefits. If the minutes clearly indicate an unwillingness to engage in further QE, EUR-GBP could fall towards the 200-day moving average around 0.8660. SEK: As we had expected the Riksbank remained hawkish in its minutes. Svante berg still assumes that the central bank will continue to raise rates at the remaining three rate meetings this year, in particular if the Eurozone debt crisis can be solved without any further negative effects on the financial markets. Interestingly enough the two doves Karolina Ekholm and Lars Svensson admit that they now both accept the rate hike which was done back in April, although they voted against it in April, and that they now accept larger rate increase today than was indicated by the repo-rate path they voted on in April. The minutes did not support SEK, it remains at the mercy of market sentiment. Markets will only be able to concentrate on fundamental factors once a solution for the Eurozone is presented. Until then the upper end in EUR-SEK remains the weak side. CAD: The Bank of Canada will leave key rates unchanged today. The BoC already seemed st slightly more hawkish at the last meeting on 31 May by suggesting that some of the considerPeter Kinsella +44 20 7475 3959 peter.kinsella@commerzbank.com You-Na Park Carolin Hecht +49 69 136 41505 42155 you-na.park@commerzbank.com carolin.hecht@commerzbank.com

Antje Praefcke +49 69 136 43834 antje.praefcke@commerzbank.com

Antje Praefcke +49 69 136 43834 antje.praefcke@commerzbank.com

For important disclosure information please refer to the back pages

Daily Currency Briefing

able monetary policy stimulus currently in place will be eventually withdrawn. As a result the possibility of the statement providing a surprise is limited and the event is likely to provide little support for the CAD unless the Bank of Canada back-paddles, sounding more cautious than in May, which seems unlikely to us. The central bank did not put its head above the parapet with the changes to the May statement as it did not provide any timeframe for possible future rate rises. As a result the new Monetary Policy Report due for publication tomorrow is therefore likely to provide more potential for strong moves in CAD if the BoC raises its inflation and growth outlook. But in our view not even that is certain, after all the US economy has not developed quite as positively over the past few months as widely expected so that the BoC is likely to be cautious regarding any adjustments to its outlook. The Canadian inflation data and retail sales are due for publication on Friday. This data is likely to have the most notable effect on CAD in our view. Until then USD-CAD will continue to be driven by the news flow surrounding the debt issues in the US and the Eurozone. Good support is located at 0.9520 with resistance located around 0.9680. AUD: The RBA minutes of the July meeting were rather on the cautious side. The sentence that further monetary tightening of monetary policy would be necessary at some point had been omitted compared with the June minutes, but had already been missing from the statement th published on 5 July as well. According to the RBA, considering strong growth in Asia the medium term outlook for the Australian economy was solid but GDP growth for 2011 was unlikely to be as strong as earlier forecast. Moreover the downside risks in connection with the Eurozone debt crisis have increased. The RBA is taking more time to evaluate the development of inflation in this context the CPI data next week will be decisive. So altogether nothing new as th the RBA had already sounded more cautious regarding growth and inflation on 5 July. AUDNZD sellers immediately seized the opportunity though.
Antje Praefcke +49 69 136 43834 antje.praefcke@commerzbank.com

Emerging Market Currencies

TRY: The lira suffered notably as a result of yesterdays flight into currency safe havens and temporarily breached the 1.67 mark in USD-TRY. Local factors are not going to provide any support at present. At the central bank meeting on Thursday the MPC is likely to leave key rates unchanged once again as central banks aim is likely to remain unchanged too: slowing a widening of the current account deficit with the help of historically low rates and a weak currency. A monetary policy turnaround is only likely once inflationary pressures rise. Until then the lira is fully exposed to global risk perception. Should the debt situation on both sides of the Atlantic deteriorate further a further test of 1.67 is probably on the agenda. HUF: Hardly a day passes without new all-time highs in CHF-HUF being recorded. Yesterday the currency pair breached the 238.455 mark. The explosive mix of risk sensitive forint and safe haven franc is causing the cross to appreciate at unprecedented speed in the current environment. There is unlikely to be any support on the data or on the rate front this week. While there is unlikely to be any stopping CHF-HUF, we expect that EUR-HUF will also be aiming at the important resistance levels at 273.72 and 274.87. CZK: New political disputes seem to be on the horizon in the Czech Republic. Just as the most fundamental differences in opinion amongst the members of the governing coalition seemed to have been overcome Prime Minister Petr Necas announced that VAT might be raised to 19%. Just after the recent decision to raise VAT to 17.5% by 2013 was only taken after much political bargaining within the coalition. In an environment such as this the koruna is unable to act as a safe haven amongst the CE3 countries and is therefore likely to trend mainly sideways this week.
Thu Lan Nguyen +49 69 136 82878 thulan.nguyen@commerzbank.com

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

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

19 July 2011

Daily Currency Briefing

Todays Events
Time 08:00 10:00 10:00 13:00 13:00 13:30 14:00 Region Indicator HUF EUR GER PLN PLN USA CAD Gross wages ZEW business expectations ZEW business expectations Producer price index Sold Industrial Output Housing Starts Housing Permits Interest rate decision Period May Jul Jul Jun Jun Jun Jun Jun Jun Jul yoy
-25,0

Actual

Our Forecast

Survey +4,2 -12,5 +0,1 +5,5 +4,8 +5,7 575 595 1,00

Last +5,9 -5,9 -9,0 -0,2 +6,5 +2,6 +7,7 560 609 1,00

Direction

Cross

mom yoy mom yoy K K %

575 580 1,00

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 1,4110 -0,27 1,4168 1,4015 EUR-SEK 9,2302 +0,39 9,2782 9,1685 EUR-AUD 1,3274 -0,08 1,3300 1,3219 EUR-RUB 39,7148 -0,07 39,7257 39,5350 Fwd 3M -37,3300 EURIBOR 1,61 10Y Bund 2,65 EuroStoxx50 2622,36 -53,02 -1,98 Oil, Brent 116,36 EUR-JPY 111,58 -0,19 111,98 110,66 EUR-NOK 7,8760 +0,09 7,8888 7,8270 EUR-NZD 1,6676 -0,43 1,6780 1,6602 EUR-RON 4,2662 +0,00 4,2777 4,2533 Fwd 6M -70,1500 $ LIBOR 0,25 10Y T-Note 2,92 DAX 7107,92 -112,20 -1,55 Oil, Nymex 96,20 EUR-GBP 0,8782 +0,22 0,8778 0,8706 EUR-DKK 7,4572 +0,01 7,4596 7,4545 EUR-BRL 2,2217 -0,22 2,2287 2,2071 EUR-CNY 9,1252 -0,20 9,1342 9,0668 Fwd 12M -126,1700 LIBOR 0,20 10Y JGB 1,07 Dow Jones 12385,16 -94,57 -0,76 Gold 1603,65 EUR-CHF 1,1542 +0,01 1,1540 1,1379 EUR-HUF 272,58 +0,78 273,39 268,60 EUR-MXN 16,5529 -0,13 16,6601 16,5093 EUR-SGD 1,7159 -0,37 1,7267 1,7074 Vol 1M 13,79 LIBOR 0,83 EUR-CAD 1,3528 +0,20 1,3525 1,3449 EUR-CZK 24,478 +0,04 24,524 24,351 EUR-TRY 2,3390 +0,24 2,3511 2,3261 EUR-KRW 1494,4437 -0,21 1497,9841 1487,0751 Vol 3M 13,66 $ index 75,32 +0,26 75,75 75,18 EUR-PLN 4,0399 +0,54 4,0469 4,0126 EUR-ZAR 9,8319 +0,69 9,8451 9,7070 EUR-THB 42,2372 -0,77 42,7485 42,0962 Vol 12M 13,79

CHF LIBOR CAD LIBOR 0,18 1,17 10Y T-Note 10Y Gilt Bund Future Future 3,03 129,44 124,83 Nikkei 225 9922,49 -51,98 -0,52 Palladium 798,25 Zinc 2398,5 FTSE 100 5752,81 -90,85 -1,55 Platinum 1777,50 Tin 27000,0 1305,44 -10,70 -0,81 Silver 40,42

S&P 500

Industrial Metals Aluminium Lead Copper Nickel $ per ton 2444,5 2730,0 9690,0 23770,0 Sources: Bloomberg L.P., European Banking Federation, British Bankers Association, Dow Jones, Xetra, S&P, TSE, LSE, LME.

19 July 2011

Daily Currency Briefing

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