Forex Weekly Outlook – 23 – 27 January
The deal in Greece is still a rumour, and ahead of the next B-I-G EU summit, the macro data out next week should provide evidence of whether the ECB was right when it talked about the ‘first’ tentative signs of stabilisation in the Eurozone economy. We will see the entire batch of confidence indicators. The most prominent one is the German IFO, which actually increased in the last 2 months of 2011, contrary to the general Eurozone trend. As the safety net of low inventories and high backlog orders has become thinner recently, we expect the IFO to record its first drop since October 2011, on the back of a weaker current situation assessment. In addition to the regular macro releases, those next week should also be influenced by the ongoing negotiations on the second bailout package for Greece and the PSI and the preparations for the EU Summit of January 29-30th. We still expect an agreement on the PSI and a green light for a second Greek bailout package. Moreover, the first draft of the intergovernmental agreement on stricter fiscal rules and balanced budget amendments will be at the top of the agenda. However, we do not expect too much from these legal texts. They will probably not add a lot of substance to the December agreements, but will only be the legal and formal follow-up. We think the Eurozone will take the next steps towards at least a fiscal or stability union. Whether it will work only time can tell.
As for the US, the highlight will be the Federal Reserve’s FOMC meeting. No change is expected given the stronger tone to the data, but we will, for the first time, be getting an actual official Fed forecast for the Fed funds target rate. Market expectations are for the first hike to come in ‘early’ 2014, but if the Fed suggests something different, this could have a significant impact on the Treasury yield curve. Q4 GDP will also be closely followed and should show ‘respectable’ growth of 2.5-3.0%. The high end of the forecast would be the best growth rate since spring 2010. However, this spurt seems to be temporary in nature. Much of this growth is attributable to the fact that companies ‘ramped up’ inventories at an extraordinarily quick pace. Since this is unlikely to be repeated this quarter, we expect growth to sloooow to about 2.7%. December durable goods orders are also due out next week. Especially against the backdrop of record orders for aircraft, we are reckoning. Meanwhile, existing home sales may post a 17-month record high. While the previous high in May 2010, was artificially created by the homebuyer tax credit, the current improvement in sales looks to be “real”. We do expect pending home sales to fall, but this is merely a correction after a jump in the previous 2 months.
We expect new home sales to rise to a 330,000 annual rate in December. Unusually mild weather along, as with improving homebuilder sentiment (as measured by the NAHB survey) point to a rise in sales of newly constructed residences. Our estimate implies a nearly 5.0% sequential increase. We forecast Q4 GDP growth of +2.7%. Just before Christmas, we saw Q4 GDP at ‘about’ +3.7%, but, a series of disappointing reports – particularly those for durable goods, retail sales and foreign trade – have pushed us down by 1.0%. We see consumption rising 2.3%, which would mark the best performance in the past several quarters. However, capital spending seems to have moderated – a bit surprising in view of the expiration of some tax incentives at the end of 2011. Also, it appears that defense spending registered an outright decline in Q4 following several quarters of sharp gains. Finally, the GDP price deflator is expected to be subdued (+0.5%), largely reflecting the pullback in energy prices.
In Brazil, the C/A deficit likely surpassed FDI inflows by a large margin in December, while the unemployment rate will likely be the lowest on record. The monetary policy minutes will also be released on Thursday, which should shed light on BACEN’s appetite for additional rate cuts. In Russia, the upcoming period will bring us PPI/IP figures, likely showing further signs of activity slowdown, and key data set on December macro trends, which we believe can bring higher investment growth, but a bit weaker y/y readings on real wages and retail sales dynamics. In Turkey, we expect no change in policy rates, but the 40% share in TL RRR, which can be held in hard currency, might be increased sometime soon. The central bank is also to announce new FX auction amounts. In Poland, 2011 GDP may be around 4.2%, possibly higher on favourable weather in Q4. A sudden drop in consumer confidence suggests that retail sales after 4 months of upside surprises may fail to reach the consensus.
Liquidity is likely to be thin in Asia ex-Japan due to the Lunar New Year holiday. Next week’s Chinese New Year holiday calendar –Markets Open: Monday: India, Thailand; Tuesday: India, Thailand, Indonesia; Wednesday: India, Thailand, Indonesia, Malaysia, Singapore; Thursday: India, Thailand, Indonesia, Malaysia, South Korea, Hong Kong, Singapore; Friday: India, Thailand, Indonesia, Malaysia, South Korea, Hong Kong, Singapore. China and Taiwan are on holiday for THE entire week. The Reserve Bank of India and the Bank of Thailand hold their monetary policy meetings. The RBI ‘paused’ tightening at the December 16th policy meeting. A food-driven sharp slooooowdown in WPI inflation in December has put a solid consensus behind a forecast that RBI will be on hold next week. We expect the flood-related 4Q11 crash in activity to force the BoT to cut its policy rate by another 25 bps next week, which is also the consensus forecast. Korea’s 4Q GDP is due. We forecast a manufacturing-led slowdown in growth.