Wells Fargo
FX Express™ - Monthly
Market summary and commentary provided by Nick Bennenbroek and Vassili Serebriakov, Currency Strategists, Wells Fargo Bank.
In this issue:
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October 2010
Global currency tensions have taken center stage in recent weeks amid official steps to stem currency strength in Japan and elsewhere. We do
not expect a ‘grand accord’ on currencies at the upcoming G20 meetings and see official currency activism persisting for some time.
Prospects for Fed easing at the next policy meeting remain the key driver for currency markets and should to keep the US dollar vulnerable.
As a result, we now see further near-term dollar losses versus the euro, pound and yen, followed by gradual gains thereafter. With some of our
targets for commodity and emerging currencies already reached we revise these forecasts higher, expecting further gains over the next 12
months. See our FX forecasts on page 3.
Blurred Front Lines of the ‘Currency War’
In late September, Brazil’s Finance Minister Guido Mantega
stole the limelight (and the news headlines) by arguing
that governments around the world were engaging in
a ‘currency war’. Indeed, global currency tensions have
been rising on several fronts. Over the past several weeks
there were confirmed and suspected foreign exchange
interventions as well as regulatory moves by authorities in
Japan, Brazil, South Korea, Taiwan and the Philippines. The
U.S.-China relationship also hit a rough patch as the U.S.
House of Representatives passed new currency legislation.
Subsequently, official rhetoric surrounding China’s
currency policy has escalated, with calls for ‘more flexibility’
in the renminbi from the U.S. and Europe meeting a strong
rebuke from China’s Premier Wen Jiabao. Against this
backdrop of rising ‘official’ foreign exchange activism
around the world, currency issues appear likely to play a
more prominent role at the upcoming G20 meetings in late
October and early November.
It was the Bank of Japan that fired the first shot in midSeptember by stepping into the FX markets for the first
time since 2004. Authorities later confirmed that the Bank
of Japan and the Ministry of Finance had unilaterally
intervened by selling 2.1 trillion yen. This FX intervention
was later followed up by further monetary policy easing.
The Bank of Japan cut its overnight rate to a range between
0%-0.10%, pledged to maintain ‘virtually zero’ policy
rates and said it would set up a 5 trillion yen fund to buy
government and private securities. While the Japanese yen
weakened in an initial response to currency intervention, by
early October the yen had reached and breached its preintervention highs against the dollar.
Outside of the Swiss National Bank’s interventions over
the past couple of years, Japan’s move represents the most
significant foray into the currency market by authorities
from a major economy in recent memory. At the same time,
recent FX market moves by governments in emerging
countries are consistent with a typically more activist
currency approach in these economies. In late September
and early October there were suspected interventions in
the Korean won, Taiwanese dollar and the Philippine peso,
while governments in Brazil and South Korea announced
new administrative steps. Brazil’s government doubled
the tax on foreign investments in local bonds, while South
Korea announced plans to audit banks’ FX trading.
However, the event of key significance for the currency
markets was the U.S. Federal Reserve’s dovish signal at
its September monetary policy meeting. Although the
Fed did not make any formal changes to its policy rate
or balance sheet, it did say it was “prepared to provide
© 2010 Wells Fargo Bank, N.A. Member FDIC. All rights reserved. FX-3005 (10/09)
Wells Fargo FX Express™ - Monthly
additional accommodation” if needed. Subsequent to the
Fed’s announcement, U.S. equity markets rose by 3% and
the U.S. 10-year Treasury bond yields fell by about 30bp.
Meanwhile, the US dollar weakened against both major and
emerging currencies with the dollar’s trade-weighted index
falling by about 5%.
Behind this recent rise in global currency tensions we see a
diverse and complex picture of currency stances around the
world. This picture is in part driven by divergences in the
strength of economic recoveries. In the major economies
(the U.S., Eurozone, Japan and UK) disinflationary
pressures remain strong and central banks appear set to
maintain very accommodative policies and/or ease their
monetary stance further. In this ‘race to the bottom’ among
the major central banks, currency markets have been most
sensitive to the policy signals from the Fed. The prospects
for easier U.S. policy have been a key driver of dollar
weakness, and strength in the euro and the yen.
In contrast, most emerging economies as well as
commodity exporters (Australia, Canada and New Zealand)
are on a stronger growth trajectory. Moreover, inflation
risks, while still relatively modest by historical standards,
have recently started to emerge. Thus, the strengthening
in those emerging currencies is not just a reflection of U.S.
dollar weakness but also strong domestic fundamentals
and monetary policy trends. In this context, recent activism
by emerging central banks appears to be aimed at slowing
gains in local currencies that are rising ‘too far, too fast’
amid a surge in foreign capital inflows.
Slim Chances for a G20 Currency Accord
It is against the backdrop of this mixed global picture and
escalating rhetoric that FX Markets are approaching the G20
meetings in Seoul, South Korea in late October and early
November. Currency topics have not featured prominently at
recent multilateral meetings. Indeed one has to go back to the
Dubai G7 statement in September of 2003 for the most recent
example of a significant currency impact.
In recent years, diverging opinions on exchange rates has
probably become more the norm than the exception and
we suspect there are few prospects of an international
accord on currencies in the spirit of the Plaza and the
Louvre agreements of the 1980s. There appears to be little
international consensus on what are ‘appropriate’ exchange
rates valuations. Attitudes towards FX intervention also vary
across countries. For example, just among the G10 currency
bloc there are ‘free floaters’ (US, UK and Canada), ‘activists’
(Japan) and ‘ad-hoc interventionists’ (Switzerland). At the
same time, currency policy has tended to evolve over time
within individual countries. For example, Canada has moved
from active intervention in the 1990s to a hands-off approach
over the past decade.
October 2010
What are the potential areas of common ground for the G20?
Over the recent years, official statements often invoked the
undesirability of excessive currency volatility. However, since
there is no clear definition of which currency moves can be
considered ‘volatile’, a renewed pledge on volatility is unlikely
to have a significant market impact. Furthermore, several
countries as well as the International Monetary Fund have
expressed the view that the Chinese currency is undervalued.
However, outside of the U.S., and to a lesser extent Eurozone,
few countries have been willing to openly criticize China’s
currency policy.
The China debate is also relevant for the concept of global
economic rebalancing, i.e. the reduction of current account
surpluses in Asia and the current account deficit in the U.S.
While there is broad agreement that rebalancing should
take place, there is less clarity on its speed or the role of the
currency adjustment. Given the wide representation of the
emerging nations at the G20 we believe the post-meeting
official statement will steer clear of singling out currency
policy in China or emerging Asia. We could however see a
broader message on global rebalancing and, perhaps less
likely, a pledge to refrain from competitive devaluation of
currencies, similar to the message delivered after the Leaders’
Summit in April 2009. In short, we suspect the G20 will not
fight the current weak dollar trend but will carefully avoid
reinforcing it.
Fed Holding the Cards
We suspect that in the near-term the direction of U.S.
monetary policy will remain the key influence for currencies.
Given the ongoing threat of further Fed policy easing we see
continued U.S. dollar vulnerability. The extent of U.S. dollar
losses against other major currencies will likely depend on the
aggressiveness of the Fed’s policy actions as well as central
bank actions elsewhere. Over the medium-term however, we
still see limited positives for the euro, yen and pound. The
euro remains under the ticking bomb of peripheral sovereign
debt, the Bank of England may not be too far behind the Fed
in easing policy further, while recent yen appreciation is likely
to weigh on the already fragile Japanese economy.
At the same time, recent policy and market developments
reinforce our bullish views on commodity and emerging
currencies, for which we revise higher our short and mediumterm targets. We now expect a sustained foray beyond ‘parity’
for the Australian and Canadian dollars, and further gains
in the emerging currencies. Among that group, we favor
the Korean won, Indian rupee and Chilean peso. We do see
increased risks for those currencies however once the U.S.
Fed starts transitioning towards less accommodative policy, a
move that is still far off on the horizon.
For further questions, please contact your Wells
Fargo foreign exchange specialist.
Wells Fargo FX Express™ - Monthly
October 2010
Currency Forecasts
Currency
Pair
Current Rate
3-Month
6-Month
9-Month
12-Month
15-Month
18-Month
USD/CHF
1.3972
81.78
1.5839
0.9577
1.4300
82.00
1.6000
0.9325
1.4000
84.00
1.5800
0.9500
1.3600
87.00
1.5600
0.9750
1.3400
90.00
1.5300
0.9850
1.3200
93.00
1.5100
0.9950
1.3000
95.00
1.5000
1.0075
USD/CAD
1.0022
0.9800
0.9700
0.9600
0.9500
0.9600
0.9700
AUD/USD
0.9916
1.0100
1.0300
1.0500
1.0600
1.0500
1.0400
NZD/USD
0.7626
0.7600
0.7700
0.7800
0.7900
0.7900
0.7800
USD/NOK
5.7930
5.6650
5.7500
5.8825
5.9325
6.0225
6.1550
USD/SEK
6.6235
6.4325
6.5000
6.6175
6.6425
6.7425
6.9225
USD/CNY
6.6665
6.5500
6.4500
6.3500
6.2500
6.1500
6.0500
USD/IDR
8923
8900
8800
8700
8600
8550
8500
USD/INR
44.52
43.50
42.50
41.50
41.00
40.50
40.00
USD/KRW
1117.05
1100.00
1075.00
1050.00
1025.00
1000.00
975.00
USD/MYR
3.0975
3.1000
3.0750
3.0500
3.0250
3.0000
3.0000
USD/PHP
43.38
43.00
42.50
42.00
41.50
41.00
41.00
USD/SGD
1.3018
1.2900
1.2800
1.2700
1.2600
1.2700
1.2700
USD/TWD
30.80
30.75
30.50
30.25
30.00
29.75
29.75
USD/THB
29.85
29.75
29.50
29.25
29.25
29.00
29.00
USD/BRL
1.6565
1.6500
1.6250
1.6000
1.5900
1.6000
1.6000
USD/CLP
476.90
465.00
455.00
445.00
440.00
445.00
450.00
USD/MXN
12.3693
12.4000
12.3000
12.2000
12.1000
12.0000
11.9000
G10
EUR/USD
USD/JPY
GBP/USD
Asia
Latin America
Eastern Europe/Middle East/Africa
USD/CZK
17.49
17.25
17.25
17.75
17.75
18.00
18.50
USD/HUF
194.81
188.75
189.25
191.25
194.00
200.75
207.75
USD/PLN
2.8073
2.7275
2.7500
2.7950
2.7975
2.8025
2.8450
USD/RUB
30.09
30.00
29.75
29.50
29.25
29.00
28.75
USD/ILS
3.5890
3.6000
3.5500
3.5000
3.4500
3.4500
3.5000
USD/ZAR
6.8209
6.8000
6.7000
6.6000
6.5000
6.5500
6.6000
EUR/JPY
114.26
117.25
117.50
118.25
120.50
122.75
123.50
EUR/GBP
0.8820
0.8950
0.8850
0.8725
0.8750
0.8750
0.8675
EUR/CHF
1.3381
1.3350
1.3300
1.3250
1.3200
1.3150
1.3100
EUR/NOK
8.0940
8.1000
8.0500
8.0000
7.9500
7.9500
8.0000
EUR/SEK
9.2555
9.2000
9.1000
9.0000
8.9000
8.9000
9.0000
EUR/CZK
24.44
24.50
24.25
24.00
23.75
23.75
24.00
EUR/HUF
272.20
270.00
265.00
260.00
260.00
265.00
270.00
EUR/PLN
3.9220
3.9000
3.8500
3.8000
3.7500
3.7000
3.7000
Euro Crosses
Wells Fargo FX Express™ - Monthly
Month-Ahead Outlook
October 2010
US Dollar Index (USD)
Directional Bias: Sell Rallies. While speculative short positions are sizable and technicals hint at possible dollar strength,
economic data remains subdued and anticipation of Fed easing a dollar negative. Thus our overall bias remains for a
weaker greenback in the month ahead, and we would view any strength as a selling opportunity.
Economic Watch
Technical Watch
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Most recent activity indicators point to steady, but slow,
growth.
Private payrolls rose by 64,000 in September, while the
jobless rate was steady at 9.6%.
August consumer spending rose by 0.4% m/m, while
industrial output rose just 0.2% m/m.
Housing activity generally improved in August, while
core durable goods orders rose 4.1% m/m.
The September ISM manufacturing index fell to 54.4,
while the ISM services index rose to 53.2.
Core CPI inflation remains very low at just 0.9% y/y. At
its September monetary policy announcement the Fed
said that inflation was uncomfortably low, and that it was
prepared to ease policy further if needed.
Positioning/Flow Watch
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Speculative net US dollar shorts have risen to $42.2B,
more than the peak short in late 2009 and only slightly
less than the peak short position in late 2007.
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Technicals hint at a near-term dollar bounce. The RSI of
21.2 is extended to the downside, while other momentum
indicators are also pointing higher.
The longer-term picture is negative, with the 20-day MA
crossing below the 50-day MA.
The main support levels are from prior lows at 76.91
(recent), 76.60 (January) and 74.17 (November 2009).
Resistance, both psychological and from prior lows is
near 80.00, with stronger resistance from the August
high of 83.56.
Data Watch
14 Oct
Trade balance (Aug), PPI (Sep)
15 Oct
Retail sales (Sep), CPI (Sep)
18 Oct
Industrial output (Sep)
19 Oct
Housing starts (Sep)
20 Oct
Federal Reserve Beige Book
25 Oct
Existing home sales (Sep)
27 Oct
Durable goods orders (Sep), New home sales (Sep)
29 Oct
Advance GDP (Q3), Employment cost index (Q3)
1 Nov
ISM manufacturing (Oct), Personal income, spending, prices (Sep)
3 Nov
ISM services (Oct)
4 Nov
Productivity and costs (Q3)
5 Nov
Employment report (Oct)
Central Bank Watch
Current Rate: 0% to 0.25%
Next Announcement: November 3
Forecast: No change in rates, Fed to increase its purchases
of US Treasuries.
Wells Fargo FX Express™ - Monthly
October 2010
Euro (EUR)
Month-Ahead Outlook
Directional Bias: Mildly Stronger. Although technicals hint at a euro pullback, economic data remain resilient for now and
the ECB continues to gradually normalize its policy stance. With speculative long positions below prior peaks, we see
potential for the euro to gain further in the month ahead.
Economic Watch
Technical Watch
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Recent activity data have been mixed, possibly pointing
to slower growth in Q3.
On the bright side, Germany’s September IFO index rose
to 106.8, while Eurozone economic sentiment rose to
103.2.
However, the Eurozone September manufacturing PMI
fell to 53.7, as did the services PMI to 54.1.
Eurozone August industrial output rose 1% m/m, while
August retail sales fell by 0.4% m/m.
Peripheral Eurozone bond yields have fallen slightly,
even as the past month has seen further credit ratings
downgrades for Ireland and Spain.
The ECB held its policy stance unchanged this month,
while ECB President Trichet said disorderly FX moves
were unwelcome.
Positioning/Flow Watch
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Speculative euro positioning has swung from a net short
to a net long position of 56K contracts, around threequarters of the peak long position in late 2009.
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Technicals hint at a possible pullback within an overall
positive trend.
The RSI of 74.0 is elevated, while other momentum
indicators are pointing lower.
Significant support is some way to the downside.
Uptrend support (since June) is currently near $1.2900.
Further support is at $1.2644 (September low) and
$1.2589 (August low).
To the upside the main resistance levels are $1.4027
(recent peak), $1.4580 (January peak) and $1.5145
(November 2009 peak).
Data Watch
15 Oct
CPI (Sep)
19 Oct
Current account (Aug), German ZEW survey (Oct)
21 Oct
Manufacturing & Services PMIs (Oct, estimate)
22 Oct
German IFO index (Oct), Government Debt/GDP
(2009)
25 Oct
Industrial orders (Aug)
27 Oct
M3 money supply (Sep), French consumer spending
(Sep)
28 Oct
Economic sentiment (Oct)
30 Oct
CPI (Oct, estimate)
1 Nov
Manufacturing PMI (Oct)
3 Nov
Services PMI (Oct)
4 Nov
PPI (Sep)
Central Bank Watch
Current Rate: 1.00%
Next Announcement: November 4
Forecast: No change
Wells Fargo FX Express™ - Monthly
October 2010
Japanese Yen (JPY)
Month-Ahead Outlook
Directional Bias: Buy Dips. Although the Japanese authorities did step into the FX markets for the first time since 2004, it
did not take long for the yen to return to pre-intervention levels. In the near-term, expectations of further policy easing in the
US remain the key factor supporting yen strength. For the time being we expect the Bank of Japan intervention (actual or
anticipated) to prompt buyers into temporary yen weakness.
Economic Watch
Technical Watch
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Japanese authorities intervened in the FX markets for
the first time since 2004, selling around 2.1 trillion yen in
September.
The Bank of Japan cut its overnight call rate from 0.10%
to a range of 0%-0.10% and said it would set up a 5 trillion
yen fund to buy government bonds and other assets.
The Q3 Tankan survey showed further improvement in
the large manufacturers and non-manufacturers indices
to +8 and +2 respectively.
Industrial output fell by 0.3% m/m in August, a third
straight decline.
The jobless rate fell to 5.1% in August.
The August CPI fell by 0.9% y/y at the headline by 1.0%
y/y at the core.
Positioning/Flow Watch
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While the overall technical picture for USD/JPY
remains bearish, momentum indicators are approaching
overextended territory with the RSI around 29.
Immediate support is at the October (15-year) low of
JPY81.39 followed by the April 1995 low of JPY79.75.
On the upside, there is some immediate resistance near
the October high of JPY83.99, followed by the May
daily trendline currently around JPY84.50 and the postintervention September high of JPY85.93.
Data Watch
18 Oct
Tertiary industry index (Aug)
25 Oct
Trade balance (Sep)
27 Oct
Small business confidence (Oct)
28 Oct
Retail sales (Sep)
29 Oct
CPI (Sep), Tokyo CPI (Oct), Industrial output (Sep),
Household spending (Sep), Employment (Sep)
9 Nov
Current account (Sep)
Central Bank Watch
Current Rate: 0% to 0.10%
Next Announcement: October 29
Forecast: No change
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Despite the ‘official’ intervention to weaken the yen, there
has been little reduction in speculative long positions
which are currently around 50K contracts.
Wells Fargo FX Express™ - Monthly
October 2010
UK Sterling (GBP)
Month-Ahead Outlook
Directional Bias: Neutral, Sell Rallies. While technicals and positioning do not offer a strong near-term directional signal,
recent dovish comments from some Bank of England policymakers hint that the pound’s bounce may be running out of
steam. We expect sideways trading for now but prefer to sell rallies.
Economic Watch
Technical Watch
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Recent survey data has been mixed. The manufacturing
PMI fell to 53.4 in September but the services PMI rose to
52.8.
August industrial output rose by 0.3% m/m, while retail
sales fell by 0.5% m/m.
September Nationwide house prices edged higher by 0.1%
m/m and slowed further to 3.1% y/y.
The September CPI was steady at 3.1% y/y, while the core
CPI eased to 2.7% y/y.
The Bank of England made no changes to its policy
rate or gilt purchase program at the September policy
meeting.
Monetary Policy Committee member Adam Posen said
the central bank should consider more stimulus for the
economy by expanding its asset purchase program.
Positioning/Flow Watch
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GBP/USD tested but did not break above its early August
highs.
A key resistance level is the ‘double top’ August-October
high at $1.6018. Subsequent resistance is near the 2010
high of $1.6460.
Support levels include $1.5500, the 200-day MA
currently near $1.5350 and the September low of $1.5247.
EUR/GBP technicals have turned bullish after an upside
break of the 200-day MA.
Data Watch
20 Oct
Bank of England minutes, Public sector net
borrowing (Sep)
21 Oct
Retail sales (Sep)
26 Oct
GDP (Q3)
Late Oct
Nationwide house prices (Oct)
1 Nov
Manufacturing PMI (Oct)
3 Nov
Services PMI (Oct)
9 Nov
Industrial output (Sep)
5 Nov
PPI (Oct)
10 Nov
Bank of England Inflation report
Central Bank Watch
Current Rate: 0.50%
Next Announcement: November 4
Forecast: No change
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Speculative positioning on the pound flipped into
positive territory in late September, the first multi-week
long position since March 2008.
Wells Fargo FX Express™ - Monthly
October 2010
Swiss Franc (CHF)
Month-Ahead Outlook
Directional Bias: Mildly Stronger. The Swiss franc continues to enjoy support from a strong domestic economy and its status
of an ‘alternative’ to the euro and the dollar among the major currencies. Furthermore, the central bank has shown little appetite
for FX intervention lately. Given that the franc is already at or near record highs both against the dollar and the euro, we expect
slower gains, but gains nevertheless.
Economic Watch
Technical Watch
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Recent survey data is showing only moderate signs of
slowing. The KOF leading economic indicator fell slightly
to 2.21 in September, while the manufacturing PMI fell to
59.7.
The September jobless rate fell to 3.7%.
The CPI rose by 0.3% y/y in September, in line with the
August pace.
The Swiss National Bank left its 3-month Libor target rate
unchanged at 0.25% and signaled its policy stance was
‘appropriate’
Further details of the monetary policy announcement
were more dovish than expected. The central bank said it
expected a “marked” growth slowdown in the second half
of the year and downgraded its 2011 inflation forecast to
0.3%.
Positioning/Flow Watch
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USD/CHF is trading near the all-time record lows.
Momentum indicators are starting to hint at oversold
levels with an RSI at 29.
On the downside, the next ‘round figure’ support is at
CHF0.9500.
On the upside, the June daily trendline resistance is
near CHF0.9850, followed by the September highs of
CHF1.0183 and CHF1.0279.
EUR/CHF has bounced from record lows but trend
remains negative. Support is currently at CHF1.3074 and
CHF1.2766, with resistance near CHF1.3490.
Data Watch
21 Oct
Trade balance (Sep)
26 Oct
Monthly consumption indicator (Sep)
29 Oct
KOF leading indicator (Oct)
1 Nov
Manufacturing PMI (Oct)
2 Nov
Real retail sales (Sep)
4 Nov
CPI (Oct)
8 Nov
Unemployment rate (Oct)
Central Bank Watch
Current Rate: 0.25%
Next Announcement: December 16
Forecast: No change
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Speculative long positions on the franc rose to around
33K contracts in early October, the highest level since
December 2009.
Wells Fargo FX Express™ - Monthly
October 2010
Canadian Dollar (CAD)
Month-Ahead Outlook
Directional Bias: Stronger. Despite a ‘softer patch’ in Canadian data and cautious central bank comments, expectations of Fed
policy easing should continue supporting the Canadian dollar. Speculative long positions are still well below the levels seen at
the time of the previous visit to ‘parity’ and technicals are moderately positive.
Economic Watch
Technical Watch
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Recent data hints at a slowing recovery, while the central
bank’s cautious tone suggests ‘on hold’ rates.
July GDP fell by 0.1% m/m, with both goods and services
industries contracting.
September employment fell by 6,600, although full-time
employment rose and the jobless rate fell to 8%.
The housing market continues to cool off with August
building permits dropping by 9.2% m/m.
The headline CPI slowed to 1.7% y/y in August, and the
core CPI was in line with the July pace at 1.6% y/y.
The Bank of Canada Governor Carney said the
uncertainty of the economic outlook domestically and
internationally “warrants caution” for Canadian monetary
policy.
Positioning/Flow Watch
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USD/CAD’s tentative break below its four-month trading
range hints at a revisit of ‘parity’ levels.
Momentum indicators are not yet in ‘oversold’ territory
with an RSI of around 35.
Below the psychologically important CAD1.0000 level,
key support lies near the 2010 low of CAD0.9931.
Resistance is at CAD1.0350 (200-day MA), CAD1.0380
(late September high) the late July high of CAD1.0677.
Further resistance is seen near the 2010 high of
CAD1.0853.
Data Watch
14 Oct
Trade balance (Aug)
15 Oct
Manufacturing sales (Aug)
20 Oct
Bank of Canada Monetary Policy Report
22 Oct
CPI (Sep), Retail sales (Aug)
29 Oct
GDP (Aug)
4 Nov
Manufacturing PMI (Oct)
5 Nov
Employment report (Oct)
5 Nov
Building permits (Sep)
8 Nov
Housing starts (Oct)
Central Bank Watch
Current Rate: 1.00%
Next Announcement: October 19
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Speculative long Canadian dollar positions picked up in
recent weeks but are still well below their March-April
highs.
Forecast: No change
Wells Fargo FX Express™ - Monthly
October 2010
Australian Dollar (AUD)
Month-Ahead Outlook
Directional Bias: Buy Dips. Speculative long positions are extended and technicals suggest near-term currency weakness is
possible. However, with economic data showing some renewed firmness and a November central bank rate hike likely, our
overall bias is for a stronger Australian dollar for the next month, and indeed over the medium-term.
Economic Watch
Technical Watch
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Australia’s September jobs report was much stronger than
expected. Employment rose by 49,500, while the jobless
rate was steady at 5.1%.
September business conditions rose to +7 while the
forward looking business confidence measure dipped to
+10.
The August trade surplus rose to A$2.34B as exports fell
2.4% m/m but imports fell 5.1% m/m. August retail sales
rose 0.3% m/m, a bit less than expected.
The Reserve Bank of Australia unexpectedly held its
Cash Rate at 4.50%, but said that it was likely that higher
interest rates would be required at some point.
Given firm data and hawkish central bank comments, a
rate hike seems likely at the November meeting.
Positioning/Flow Watch
•
•
•
Technicals hint a possible pullback in the Australian
dollar.
The RSI of 76.9 is over-extended to the upside and other
momentum indicators are pointing lower.
Support is some way to the downside at $0.9542 (October
low), $0.9464 (September low) and $0.9406 (prior
November 2009 peak).
The longer-term picture is constructive. The 20-day MA
remains above the 50-day MA, while there is only modest
big figure/parity resistance ahead at $1.00.
Data Watch
19 Oct
RBA monetary policy minutes
25 Oct
PPI (Q3)
27 Oct
CPI (Q3)
29 Oct
Private sector credit (Sep)
1 Nov
Manufacturing PMI (Oct), Monthly business
confidence (Oct), House prices (Q3)
3 Nov
Services PMI (Oct)
4 Nov
Retail sales (Sep), Trade balance (Sep)
5 Nov
RBA Statement on Monetary Policy
11 Nov
Employment report (Oct)
Central Bank Watch
Current Rate: 4.50%
•
Net speculative Australian dollar longs have risen to
88.1K contracts over the past month, just 15% below the
peak long position from April this year.
Next Announcement: November 2
Forecast: 25bp rate hike to 4.75%
Wells Fargo FX Express™ - Monthly
October 2010
New Zealand Dollar (NZD)
Month-Ahead Outlook
Directional Bias: Neutral. Economic activity has shifted down a gear, while the central bank had adopted a less hawkish
stance. Speculative NZ dollar longs have also rebounded close to prior peaks. With technicals also only mildly positive, it is
hard to see significant NZ dollar gains, even if the greenback remains on a weaker trend.
Economic Watch
Technical Watch
•
•
•
•
•
•
•
Recent economic data have generally disappointed.
Q2 GDP rose just 0.2% q/q and was steady at 1.9% y/y.
The June 2010 year current account deficit widened to
3.0% of GDP.
September month business confidence eased slightly to
+13.5, while Q3 business confidence fell more noticeably
to +6.
July retail sales fell 0.4% m/m, while sales excluding
autos fell 0.1% m/m. September house price inflation
slowed to 2% y/y.
The central bank held its Official Cash Rate at 2.50% and
repeated that the pace and extent of the current rate hike
cycle would likely be less than previously signaled.
Positioning/Flow Watch
•
•
Technicals are mildly favorable for the NZ dollar.
The 20-day MA has crossed back above the 50-day MA,
a positive signal. The RSI of 65.3 is elevated, but other
momentum indicators are inconclusive.
NZD/USD is currently testing initial resistance at the
October 2009 high of $0.7635. A clear break would
target a move to $0.7761 (July 2008 high) and $0.7921
(May 2008 high).
Uptrend support (since June) is current around $0.7180.
Further and stronger support is at $0.6949 (August low)
and $0.6562 (May low).
Data Watch
14 Oct
House sales & prices (Sep), Retail sales (Aug)
18 Oct
CPI (Q3)
21 Oct
Monthly consumer confidence (Oct)
27 Oct
Monthly business confidence (Oct)
29 Oct
Trade balance (Sep)
2 Nov
Labor cost index (Q3)
4 Nov
Employment report (Q3)
8 Nov
House prices (Oct)
Central Bank Watch
Current Rate: 3.00%
•
Net speculative New Zealand dollar longs have
rebounded to 18.6K contracts, and reached a 2010 high
within the past month.
Next Announcement: October 28
Forecast: No change
Wells Fargo FX Express™ - Monthly
October 2010
Mexican Peso (MXN)
Month-Ahead Outlook
Directional Bias: Neutral. The current market backdrop for the peso is relatively neutral, meaning any gains should mostly
be a result of US dollar weakness. Growth has slowed but shows signs of bottoming out, speculative long positions have
rebounded but are not yet at extremes, and technicals hint in the direction of further peso gains.
Economic Watch
Technical Watch
•
•
•
•
•
•
•
Recent Mexican data have been mixed.
July retail sales firmed slightly to 2% y/y, while August
industrial output quickened 8.1% y/y. The July economic
activity indicator slowed to 5.1% y/y.
Mexico’s September manufacturing PMI eased to 52.2,
while the services PMI eased to 52.0.
September CPI inflation ticked up slightly to 3.70%, but
core CPI inflation slowed further to 3.62% y/y.
The Bank of Mexico kept its Overnight Rate at 4.50%
and said that it expects inflation to remain at or below its
prior forecasts.
Positioning/Flow Watch
•
•
Technicals are hint at a further decline in USD/MXN.
The 20-day MA remains below the 50-day MA, a
bearish signal. The RSI of 36 is not over-extended to
the downside, while other momentum indicators are
inconclusive.
Moderate support is seen at the recent low of MXN12.36
and May low of MXN12.32. The strongest support is seen
at the April low of MXN12.13.
Resistance is some way to the upside. Moderate
resistance is seen at the late September peak of
MXN12.65, but strong resistance is not until the late
August high of MXN13.26.
Data Watch
20 Oct
Retail sales (Aug)
22 Oct
Trade balance (Sep), Unemployment rate (Sep)
27 Oct
Global economic indicator (Aug)
3 Nov
Manufacturing and services PMIs (Oct)
9 Nov
CPI (Oct)
10 Nov
Gross fixed investment (Aug)
11 Nov
Industrial output (Sep)
Central Bank Watch
•
Net speculative Mexican peso longs have rebounded
sharply over the past month, reaching 90.6K contracts,
around three-quarters of their April 2010 peak.
Current Rate: 4.50%
Next Announcement: October 15
Forecast: No change
The views expressed are intended for Wells Fargo customers only, are that of the Currency Strategy Group, and do not necessarily reflect the views of Wells Fargo & Co., its affiliates and subsidiaries. Opinions expressed are based on the experience and analysis of the Currency Strategy Group as of this date and are subject to change without notice. This is not an offer to sell or the
solicitation to buy or sell any security or foreign currency. This report has been prepared in part based on information provided by sources deemed reliable by Wells Fargo. Wells Fargo does not
warrant the accuracy of such information
Wells Fargo FX Express™ - Monthly
Indian Rupee (INR)
Asia
Outlook: Foreign capital inflows, buoyed by a strong domestic economy and
ample global liquidity, should continue to support the rupee. Given inflationary
risks, the central bank has been relatively relaxed about currency strength.
While the widening current account deficit hints at the emergence of structural
imbalances in the economy, it is probably not an immediate danger to the
currency.
Recent Events: The Reserve Bank of India raised its repo rate by 25bp to
6.00% and the reverse repo rate by 50bp to 5.00%. Meanwhile, the government
raised the cap on foreign investments in India’s bonds. In the latest data,
industrial output slowed to 5.6% y/y, August wholesales prices slowed to 8.5%
y/y and the Q2 current account deficit widened to 17.7B rupees.
Indonesian Rupiah (IDR)
Outlook: The rupiah underperformed other regional currencies in recent
weeks, in part due to fears of official intervention. Even if the central bank
continues to keep rates on hold, a strong growth profile and high nominal
interest rates should remain attractive to foreigners, implying further gradual
strengthening in the rupiah.
Recent Events: The central bank has raised its cash reserve ratio for banks
from 5% to 8% but held the policy rate steady 6.50%, in part to prevent further
upside pressure on the currency. The September CPI slowed to 5.8% (within the
central bank’s 4%-6% target range), while August export growth picked up to
30% y/y.
Philippine Peso (PHP)
Outlook: The peso is among the strongest Asian currencies in recent weeks
despite suspected central bank intervention. Strong global risk appetites and a
healthy balance of payments position supported by rising foreign remittances
should continue boosting the peso in the coming months.
Recent Events: The central bank left its policy rate steady at 4.00% in October
citing “uncertain global economic prospects”. Q2 GDP accelerated to 7.9% y/y,
the September CPI slowed to 3.5% y/y, July overseas remittances rose by 8.2%
y/y, while the government budget recorded a surplus of 1.3B pesos in August.
Malaysian Ringgit (MYR)
Outlook: The ringgit’s impressive run stalled after the central bank switched
to a more neutral policy stance. Nevertheless, the ringgit remains among the
top performing Asian currencies since the start of the year. We see a more
moderate but still bullish trend intact, based on strong fundamentals and the
government’s recent steps to ease currency controls.
Recent Events: After delivering three rate hikes earlier in the year, Malaysia’s
central bank paused in September at 2.75% citing slowing global growth.
Meawhile, July industrial output slowed to 3.2% y/y, and the CPI quickened
to 2.1% y/y. The government eased its currency controls somewhat, allowing
domestic companies to settle cross-border trade transactions in the ringgit.
October 2010
Wells Fargo FX Express™ - Monthly
Emerging Europe, Middle East & Africa
Czech Koruna (CZK)
Outlook: Expect further koruna gains versus the euro. Economic activity is
solid, and while rate hikes aren’t imminent, they could start during the first
half of next year. Budget developments appear currency favorable - the Czech
cabinet approved a 135B koruna central government deficit for 2011, 17%
narrower than in 2010.
Recent Events: Firming Czech activity data include the 2.4% y/y gain in Q2
GDP, a 12.9% y/y rise in August industrial output, and a 2.8% increase in August
retail sales. September consumer prices ticked higher to 2% y/y. The central
bank held rates at 0.75% though one policy maker voted for an increase. Finally,
the August current account deficit narrowed to 18.1B koruna, reversing most of
the widening in July.
Hungarian Forint (HUF)
Outlook: Forint prospects are turning more constructive, and we now see forint
gains versus the euro. Growth is firmer, and government comments suggest
renewed budget discipline. A strong showing by the Prime Minister’s party
in the recent local elections reinforces the prospects for budget improvement,
though budget proposals lean towards tax increases rather than spending cuts.
Recent Events: Growth is firming, with August industrial output up 14.9%
y/y and July retail sales rising 1.7% y/y. The September CPI ticked up to 3.8%
y/y, while the central bank held its benchmark rate steady at 5.25%. The 2009
budget deficit estimate was revised higher to 4.4% of GDP, but the government
has pledged to lower the deficit to 3% of GDP by 2011.
Polish Zloty (PLN)
Outlook: The economic backdrop should support zloty gains against the euro.
Growth remains sturdy, while the central bank may be nearing the start of its
rate hike cycle. The size of the general government budget deficit (around
7%-8% of GDP this year) remains a concern, though the government is aiming
reduce that deficit to 2.9% of GDP by 2013.
Recent Events: Economic growth continues at a steady clip, with Q2 GDP
accelerating to 3.5% y/y, August industrial output rising 13.5% y/y, and August
retail sales gaining 6.6% y/y. The central bank held rates at 3.50% at its latest
meeting. The September CPI quickened to 2.5% y/y, in line with the inflation
target, and sturdy growth means the consensus forecast is for rate hikes to
begin in Q4.
Chilean Peso (CLP)
Latin America
Outlook: Expect peso gains to continue, though possibly at a slower pace.
Economic momentum remains sturdy, and although the central bank has
become slightly less hawkish, the overall tightening bias is still a significant
contrast to the Fed’s dovish stance.
Recent Events: Second quarter GDP was stronger than expected, rising 4.3%
q/q and 6.5% y/y, while more recently the August economic activity indicator
quickened to 7.6% y/y. August industrial output quickened to 6.9% y/y, while
retail sales slowed to 10% y/y. On the price front, the September CPI eased to
1.9% y/y. Chile’s central bank raised rates by 50bp to 2.50%, though monetary
policy minutes showed the central bank is considering smaller rate hikes going
forward.
October 2010
Wells Fargo FX Express™ - Monthly
Disclaimer
October 2010
The views and opinions expressed in this publication are those of the Currency Strategy Group and are not necessarily consistent
with those of the management of Wells Fargo Bank. Our information is based upon diverse sources that we believe to be reliable,
though the information is not guaranteed. Wells Fargo & Co. and its affiliates do not assume any liability for any loss that may
result from the reliance by any person upon the information or opinions expressed in this publication. Opinions expressed are
based on the experience and analysis of the Currency Strategy Group, and are subject to change without notice, are for general
information only and are not intended as an offer or solicitation with respect to the purchase or sale of any security or any foreign
exchange transaction, or as personalized investment advice. Wells Fargo may maintain long or short positions in, and buy and sell,
the securities and currencies mentioned in this publication.