22 September 2010

Global Strategy

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Global Views
The View Ahead: Post-Fed thoughts
The FOMC has moved a very large step closer to committing to further QE. As I
have argued in this editorial for a few weeks, stealing the thought from our US
economist Michelle Girard, the key to understanding the FOMC is to understand
that the status quo in terms of their implicit employment and inflation mandates is
not good enough, i.e. the data stabilisation we have seen in recent weeks isn't
enough to prevent QE. The FOMC have now confirmed that. I thought it was
interesting that they focused much more on the inflation mandate they are
missing, rather than the employment one (where the miss is arguably bigger). I
think this is an attempt to prevent a 'spooking' of equity markets though as
today's price action shows, this has not been entirely successful. One thing that
has been shown this morning (if it still even needed to be) is that equities are at
best a coincident indicator of the state of the world, not a leading indicator.

What now for markets? Bonds have grabbed back a lot of the losses of recent
weeks, and you can be increasingly confident that this was a correction in a bull
market, not the start of a bear market. I remain a committed bond bull, preferring
the UK and US to Europe and preferring the 10y part of the curve as the sweet
spot for the next round of rolling flattening. For equities, obviously the market has
managed to push hard through my 1120 sell target and if we break 1150
convincingly then 1200 awaits, but I remain a committed short for now. I note
with interest that the recent rally has been built on very modest volumes which
suggest certain degree of fragility. We will see over the next few weeks how we
trade, but stay short with a stop on two consecutive closes above 1150.

Lastly FX. The rolling series of competitive devaluations continues apace. First
off it was the UK, then it was the US, Europe had it's go starting about a year ago
and now the US looks to be on the path again and of course Japan is trying it's
rather more obvious attempts. Who will be next? Well one, I think the call of our
FX team for months now to be short G3 against other countries such as AUD and
CAD is still a great one as it shields you from this competitive devaluation based
volatility. However, if you had to pick the next G3/4 country to start to weaken I
would look at the UK. UK growth is slowing very clearly, and the MPC is one of
the more dovish Central Banks. There may have been no votes for QE in today's
Minutes but you can feel them coming, and when the MPC engages in QE that
will be the trigger for GBP to get hit. Start preparing now. Andy Chaytor

Ahead today
Norges Bank rate decision (8:00 EDT): policy rate will be left unchanged at
2.00%, and expect no reason for them to abandon their cautious stance. There is
a slight risk for rate path to be tuned down.

Research Team
Canada retail sales, Jul (8:30 EDT): continued growth in consumer demand
Global Strategy
(expected +0.6% mom) will highlight the strong domestic recovery in Canada.

www.rbsm.com/strategy
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New Zealand GDP, Q2 (18:45 EDT): annualized expansion of 2.5% from last
quarter’s 1.9% growth is expected. The qoq rate is forecast to edge up to 0.7%
from 0.6.

Global Strategy | 22 September 2010

Central banks: 12:30 EDT BoE’s Dale speaks; 13:00 EDT Treasury’s Geithner
testifies

G10 data calendar

EM data calendar

Overnight news

BoE Minutes: Committee members voted 8-1 to keeps rates steady at 0.5% and
asset purchase unchanged at GBP 200bn. The minutes had a dovish slant to it,
as "some" members see more probability of increasing stimulus as downside risk
to growth has increased.

Moody’s on French banks: outlook changed to stable from negative

Norway unemployment rate, Jul: unemployment continued to ease to 3.3%

against 3.5% expected

Today’s views

FX: The strong hint from the FOMC statement will further underpin Asian and
higher-yielding currencies. It has tended to weaken the USD broadly; however,
the other major currencies also face similar deflation risks and none should be
bought. In fact, we see the data trend deteriorating in the Eurozone and
industrial new orders on Wednesday and advance PMIs on Thursday may reveal
further slowing in activity. This should tend to cap EUR near August peak of
1.333. The JPY may firm near term, given it is still well above the 82.80 level
where it traded before intervention a week ago. As gold continues to set record
highs this isn’t a case of simply buying risk indiscriminately. Rather,
fundamentally stronger economies which are pushing for higher policy rates will
continue to outperform. The AUD may look a bit overbought compared to other
commodity currencies, with potential for catch up in NZD, BRL and CAD.

Emerging markets CEEMEA: From current levels, we remain constructive in

Poland, where we recommended a long PLNCZK relative value trade, and also
an option strategy (seagull). We also like ILS, but may look for better levels to
express this view.

Emerging markets Latam: The FOMC's easing bias reinforces the view that in
spite of limited room for appreciation in LatAm FX on the back of stretched
valuations, intervention risks and maturing phases of policy normalisation in
some key markets (Brazil, Chile), LatAm FX will continue to outperform the dollar
and overall developed markets. The weak dollar environment and growth
differential will continue to support strong flows into EMFX and the region. Brazil,
Chile, Peru and even Colombia stand to gain where domestic demand is robust
or recovering in still a relatively low inflation environment.

Emerging markets NJA: Post the FOMC decision, key support levels have been
re-written, with the USD/MYR breaking below 3.10 and the USD/SGD trading
below 1.33. Barring aggressive central bank intervention, Asian currencies are
likely to benefit as major countries like US and Japan engage in competitive
devaluation. A senior EU diplomat said European leaders are prepared to give
up votes in the IMF if China shows responsibility on its currency. This
underscores the concessions that major countries are willing to make to push for
2
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further CNY appreciation, and is undoubtedly another positive for Asian

currencies. MYR rates reversed the earlier bull-flattening to steepen by nearly
1bp on the 2s5s. The swap curve is still a tad too flat compared to the current

Global Strategy | 22 September 2010

policy rate, and is likely to steepen especially with many investors holding
flatteners. Singapore will reopen its 5Y SGS, with the tender cut-off next Tuesday.
While the issuance size of SGD1.6bn met expectations, we do not foresee strong
demand given the relative richness of the belly. Indonesia’s auction on Tuesday
was met with overwhelming demand, attracting nearly IDR15trn in bids against
its target of IDR3trn. Demand was especially strong for the long bonds, spurring
a bull-flattening of the curve. The head of Indonesia's statistics bureau said that
September inflation could come in at 0.5%, lower than August's 0.8%. This
should ease inflation fears and support IDR bonds. Expectations of further QE in
the US and positive supply factors could provide an additional leg to the rally.
That said, we continue to see upside risks to inflation, and thus prefer to stay on
the 10Y segment of the curve where there is less duration risk.

Media

Cable to take swipe at City greed - FT

Gold, Silver Prices Hit New Highs - WSJ

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