MARKET MOVER - BNP PARIBAS - Investment Services India
MARKET MOVER - BNP PARIBAS - Investment Services India
MARKET MOVER - BNP PARIBAS - Investment Services India
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warning to Greek banks that it might have to impose<br />
haircuts on Greek bonds used as collateral for ECB<br />
funding triggered what proved to be a significant<br />
widening of Greek bond spreads. Again, the ECB is<br />
now in a very uncomfortable position and can only<br />
hope that growth picks up quickly enough in the<br />
eurozone periphery to reduce balance sheet risks<br />
within its banking sector.<br />
As long as growth is weak, peripheral banks will<br />
remain hooked on ECB liquidity – putting the ECB<br />
between a rock and a hard place with regard to<br />
monetary policy. Providing unlimited liquidity<br />
prevents peripheral banks going down the drain, but<br />
such monetary conditions will become far too loose<br />
for core countries. The inflation-fearing German<br />
people will certainly not like the idea of inflating way<br />
peripheral countries’ problems. Alternatively, letting<br />
unlimited repos expire without replacement will send<br />
shock waves across peripheral bond markets which<br />
could easily lead to another round of EUR weakness.<br />
We expect the ECB to try to win time by keeping<br />
unlimited repos in the market well into 2011. While<br />
this implies keeping the floodgates of monetary<br />
policy open, with the ECB effectively acting as the<br />
‘liquidity provider of last resort for the embattled<br />
peripheral banking sector, banking-related issues will<br />
not be the main focus for currency traders this year.<br />
The ECB’s accommodative monetary conditions<br />
suggest the EUR will underperform against highyielding<br />
currencies. Against the USD, the EUR is<br />
expected to make moderate gains. However, next<br />
year, things may look very different. The ECB will not<br />
be able to keep its current approach indefinitely<br />
without risking its own balance sheet. But should the<br />
ECB be forced to exit its policy of providing unlimited<br />
repos at a time when peripheral Europe still needs<br />
life support, all hell would break loose. In such a<br />
case, the EUR trend would reverse quickly.<br />
Trading themes: CAD may play catch-up<br />
Trading opportunities over the next few weeks and<br />
months will come from projected USD weakness<br />
coming on the back of the Fed preparing for another<br />
round of quantitative easing. Over the past few<br />
weeks, it has been the ‘Japanisation’ theme driving<br />
the relative performance of currencies against the<br />
USD – putting the AUD in an out-performing position.<br />
Lower bond yields globally suggested investors<br />
playing the ‘yield pick-up’ theme, putting yielding<br />
currencies into demand. Although the decline in the<br />
USD was accompanied by commodity prices<br />
breaking higher, the CAD has not benefited from the<br />
USD decline. Rather, AUDCAD has rallied by more<br />
than 15% since June. In the short term, this advance<br />
looks overstretched and will be corrected if the<br />
Japanisation theme converts into an asset theme as<br />
we expect. The CAD should receive support once the<br />
Chart 6: Sweden: Export Structure<br />
Sweden Exports by Destination<br />
Scandinavia<br />
23%<br />
Asia<br />
incl<br />
Japan<br />
3%<br />
UK<br />
9%<br />
Oceania<br />
2%<br />
Canada<br />
2%<br />
Others<br />
12%<br />
EU<br />
39%<br />
US<br />
10%<br />
Pulp &<br />
Paper<br />
20%<br />
Sweden Exports by Type<br />
Motor<br />
19%<br />
Pharmaceuticals<br />
15%<br />
Basic metals<br />
2%<br />
Machinery<br />
29%<br />
Chemicals<br />
14%<br />
Communication<br />
1%<br />
Source: Statistics Sweden Exports in SEK bln, using 2009 totals<br />
(sourced via Bloomberg), Statistics Sweden Exports in SEK bln, using<br />
2009 totals (sourced via Bloomberg)<br />
EU<br />
56%<br />
Chart 7: UK: Export Structure<br />
UK Exports by Destination<br />
Asia Scandinavia<br />
incl Japan 7%<br />
4%<br />
Oceania<br />
2%<br />
Canada<br />
4%<br />
Others<br />
6%<br />
US<br />
21%<br />
Food, Beverages<br />
& Tobacco<br />
20%<br />
Finishedmanufactures<br />
12%<br />
UK Exports by Type<br />
Basic Materials<br />
19%<br />
All<br />
manuf<br />
14% Fuel<br />
18%<br />
Semimanufactures<br />
17%<br />
Source: ONS UK Trade in goods by volume indices using 2009 totals<br />
(sourced via Bloomberg), OECD International Trade Statistics Database<br />
expressed in current USD, using 2009 totals<br />
currently dominant bond-related cross-currency flow<br />
converts into an equity flow. We showed above that<br />
central bank liquidity has determined the equity trend<br />
over the past year. With central bank liquidity being<br />
printed not only in the G4 but also Asian central<br />
banks operating looser conditions than warranted by<br />
their domestic fundamental situation, there is a good<br />
chance of seeing share prices move higher. An<br />
increasing focus on equity markets should allow the<br />
CAD to catch up with the AUD.<br />
GBPSEK shorts are the conservative way to play<br />
the China boom<br />
The other big currency trading theme is China and its<br />
increasingly important domestic market. Export<br />
opportunities to China vary significantly between<br />
countries. Generally, countries with a strong<br />
manufacturing sector stand to benefit more than<br />
countries with an underdeveloped manufacturing<br />
sector. Sweden falls into the first category. It is not<br />
only the direct trade relationship that counts.<br />
Machinery exports comprise 21% of Sweden’s total<br />
exports and are exactly what Asian economies are<br />
demanding. Globally, the machinery sector is<br />
booming and Sweden is participating in this boom.<br />
On the other hand, the UK is not known for its<br />
machinery and the financial services it exports are of<br />
little use to China, with its closed capital account.<br />
Hans Redeker 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
47<br />
www.GlobalMarkets.bnpparibas.com