Daily Currency Briefing

August 25, 2011

Legally questionable

G10 Currencies
EUR: The German President Christian Wulff took a clear stance on the ECBs bond purchasing scheme: I regard the huge buy-up of government bonds of individual states by the European Central Bank as legally questionable he stated at a conference for Laureates of the Nobel 1 Prize for Economics in Lindau, Germany. There are legal risks for the Eurozone bailout th scheme on other fronts as well. On 7 September the German Constitutional Court in Karlsruhe is going to take its decision on the issue of aid for Greece / Euro bailout mechanism. There is a potential threat that the court might end Germanys involvement in the Greece rescue package and EFSF. As a result there is a danger of legal issues becoming a subject on the FX markets constituting an event risk for EUR-USD in the near future. Despite the fact that EUR-USD risk reversals remain at record levels (chart) a correction is unlikely under these circumstances. Risk reversals point towards fears of a EUR-USD collapse 3M 25 risk reversals, EUR-USD; percentage points annualised volatility
0.00
Ulrich Leuchtmann +49 69 136 23393 ulrich.leuchtmann@commerzbank.com

-1.00

-2.00

-3.00

-4.00 Jan 10
Source: Bloomberg

Apr 10

Jul 10

Oct 10

Jan 11

Apr 11

Jul 11

It seems all the more remarkable that the spot market is unimpressed by the new risks emerging. EUR-GBP and EUR-CHF were able to rise notably while EUR-USD almost reached Tuesdays peaks. And all that despite a disappointing Ifo index. The motto at present seems to be risk on (i.e. renewed risk appetite). This trend can however only continue while these risks do not materialise. The risk/reward profile of EUR-USD longs therefore seems pretty unattractive to us. JPY: Japans DPJ is preparing the transition towards a new Prime Minister. The representatives of the candidates among them Finance Minister Yoshihiko Noda are already negotiating the modalities. Is the fact that Japan has moved from a state of extreme political stability to a phase of rapid government changes a bad signal for the yen? Obviously political instability put pressure on the currency. However: changes of government in Japan only mean very gradUlrich Leuchtmann +49 69 136 23393 ulrich.leuchtmann@commerzbank.com

1 We do not offer a legal view but suggested on 11.05.2010 one day after the announcement of the ECB purchases that the ECB interventions aim at reducing the financing costs for countries that are unable to control their budget situation

For important disclosure information please refer to the back pages

Daily Currency Briefing

ual changes in politics. Following decades of ultra-Keynesian politics the room for manoeuvre in monetary and fiscal policy has become so limited that any large changes in strategy are not possible anyway. What will be of interest for the FX market will be the question as to whether the new Prime Minister and possibly the new Finance Minister pursue a different intervention tactic than Noda and Prime Minister Naoto Kan do at present. In this respect Nodas nomination would constitute the smallest uncertainty. SEK: As recently as early July the Riksbank had announced a rate rise at each of its rate meetings this year (Sep, Oct, Dec). Since then the picture has changed though: risk aversion on the financial markets has risen notably with EUR-SEK temporarily climbing as far as 9.35 while Swedish economic indicators have deteriorated notably. The July PMI fell to 50.1 with a further st deterioration of sentiment in August likely (publication on 1 September). The sentiment indicators on consumer and business confidence due for publication today will likely paint a similar picture. So far the Riksbank was very parsimonious with comments on the current situation on the financial markets and the local economy. Therefore markets expect todays speech by the Riksbanks First Deputy Governor Svante berg to provide first indications on how the Riksbank judges the situation and whether it will change its hawkish stance. berg is rather on the neutral side, neither an explicit hawk nor a dove. As a result he is likely to signal a weaker growth and inflation outlook compared with the latest Monetary Policy Report in July stressing the higher risks, in particular because of the tension on the financial markets caused by the debt crisis in the Eurozone. He is probably only going to reflect and confirm market concerns. In view of the turbulence on the financial markets the markets have already priced out further rate hikes by the Riksbank. Hence, the negative effect on the krona should be limited. We consider the 9.16 area to provide good resistance in EUR-SEK. A hawkish speech suggesting a still strict monetary policy course would come as a surprise and support the SEK. We do not expect to see that though, in particular as the government is intending to present its new growth forecasts tomorrow, which are likely to be revised downwards. For it to reach the area of 9.0550 SEK therefore has to get support from better market sentiment. NOK: Svante bergs Norwegian colleague, Jan Qvigstad, will also speak today at 3:00 pm CEST today. Norges Banks view is however better known than that of the Riksbank, following its rate decision in August at which it left key rates unchanged referring to the lower risk scenario in Junes Monetary Policy Report. Qvigstad too is likely to underline the increased risks for the economic outlook. As this is nothing new for the market the speech is unlikely to have much effect on EUR-NOK. EUR-NOK too remains at the mercy of market sentiment, so that only a more positive market sentiment would be able to drive EUR-NOK towards 7.80 ahead of the weekend.
Antje Praefcke +49 69 136 43834 antje.praefcke@commerzbank.com Antje Praefcke +49 69 136 43834 antje.praefcke@commerzbank.com

Emerging Market Currencies

CZK: Those who have lost faith in the good of the business cycle in the whirl of credit downgrades, negative outlooks and debt concerns were taught to think again yesterday. The Czech Republic is the silver lining on the horizon and its credit rating was upgraded by two notches from A to AA-. Even if the rating change is mainly due to a change in the evaluation measures it underlines once again the role of the Czech Republic as an island in the Eastern European universe. While the safe haven amongst the G10 universe now has to be searched for very carefully, the Czech Republic no longer has to hide amongst the EMEA currencies thanks to its solid fundamentals. As a result the koruna is now even better prepared for a renewed rise in risk aversion. PLN: Todays minutes of the last rate meeting are unlikely to affect the zloty much. The central banks rate hike cycle is likely to be over this year, as the economy, as well as inflation, have come to a standstill. Retail sales grew far less in July than expected suggesting that local consumption is beginning to run out of steam. In case of a reversal to the risk on mode these weak prospects are likely to limit the zlotys appreciation potential.
Carolin Hecht +49 69 136 41505 carolin.hecht@commerzbank.com

Thu Lan Nguyen +49 69 136 82878 thulan.nguyen@commerzbank.com

25 August 2011

Daily Currency Briefing

Todays Events
Time 00:01 07:00 08:30 10:00 10:30 Region Indicator GBP GER SEK CHF ZAR RUB USA Period Actual
49,0

Our Forecast

Survey 45,0 +5,1 7,1 +1,7 +7,7

Last
51,0

Direction

Cross

13:30

Nationwide Consumer confidence Aug GfK Consumer Confidence Sep Unemployment rate Jul ZEW business expectations Aug Producer price index Jul Jul FX and gold reserves Aug Initial jobless claims Aug

+5,2

mom yoy USD bn K

405

405

+5,4 8,8 -58,9 +4,4 +7,4 540,2 408

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 1,4403 -0,28 1,4481 1,4379 EUR-SEK 9,1219 -0,16 9,1620 9,0987 EUR-AUD 1,3798 +0,43 1,3795 1,3703 EUR-RUB 41,6640 -0,26 41,8475 41,6247 Fwd 3M -16,1300 EURIBOR 1,54 10Y Bund 2,21 EuroStoxx50 2238,70 +38,72 +1,76 Oil, Brent 110,76 EUR-JPY 110,86 +0,29 110,88 110,16 EUR-NOK 7,8341 -0,06 7,8498 7,8208 EUR-NZD 1,7387 +0,57 1,7466 1,7249 EUR-RON 4,2535 -0,03 4,2610 4,2461 Fwd 6M -30,6900 $ LIBOR 0,31 10Y T-Note 2,27 DAX 5681,08 +148,70 +2,69 Oil, Nymex 85,07 EUR-GBP 0,8797 +0,65 0,8805 0,8728 EUR-DKK 7,4504 +0,01 7,4516 7,4474 EUR-BRL 2,3243 +0,64 2,3208 2,2972 EUR-CNY 9,2059 -0,23 9,2498 9,1924 Fwd 12M -58,0100 LIBOR 0,19 10Y JGB 1,04 Dow Jones 11320,71 +143,95 +1,29 Gold 1732,30 EUR-CHF 1,1458 +0,09 1,1475 1,1372 EUR-HUF 272,75 +0,38 273,06 271,06 EUR-MXN 17,9861 +1,17 17,9505 17,7578 EUR-SGD 1,7438 +0,43 1,7442 1,7345 Vol 1M 13,04 LIBOR 0,88 EUR-CAD 1,4231 -0,24 1,4300 1,4216 EUR-CZK 24,316 -0,52 24,509 24,293 EUR-TRY 2,5701 +0,43 2,5764 2,5497 EUR-KRW 1568,1577 +0,98 1566,6555 1551,4781 Vol 3M 13,46 $ index 74,07 +0,23 74,09 73,67 EUR-PLN 4,1634 +0,23 4,1702 4,1394 EUR-ZAR 10,4590 +1,04 10,4548 10,3392 EUR-THB 43,1544 +0,19 43,3490 42,9533 Vol 12M 12,89

CHF LIBOR CAD LIBOR 0,01 1,13 10Y T-Note Future 10Y Gilt Bund Future 2,48 134,54 129,55 Nikkei 225 8802,69 +163,08 +1,89 Palladium 747,50 Zinc 2149,0 FTSE 100 5205,85 +76,43 +1,49 Platinum 1803,75 Tin 23225,0 1177,60 +15,25 +1,31 Silver 39,47

S&P 500

Industrial Metals Aluminium Lead Copper Nickel $ per ton 2322,0 2344,0 8832,0 20820,0 Sources: Bloomberg L.P., European Banking Federation, British Bankers Association, Dow Jones, Xetra, S&P, TSE, LSE, LME.

25 August 2011

Daily Currency Briefing

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