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The Swiss Franc may see heavy volatility in European trading hours as the central bank weighs up an increasingly credible deflationary threat. While changes to benchmark interest rates look remote, an expansion of unconventional measures that already include quantitative easing and forex market intervention seem plausible.
Key Overnight Developments
• Australia's Industrial Output, New Orders To See First Gains in 9 Months, Says Westpac
• RBA Sold A$1.4 in FX Market, Said Interest Rate Changes Losing Effect on Lending Costs
The Euro traded sideways in the overnight session, consolidating in a well-defined 40-pip band above 1.3930. The British Pound followed suit, oscillating around the 1.64 level.
Asia Session Highlights
Australia's Westpac/ACCI Industrial Trends Survey saw an index of firms' expectations rise to 47.6 in the second quarter, the highest since the three months to September 2008. Notably, sub-indices tracking output and new orders expectations swung back into positive territory for the first time in 9 months, suggesting manufacturers are expecting a bit of a rebound in demand in the months ahead. That said, employment expectations remained negative (albeit less so than in the previous two quarters), hinting at firms' intention to continue to operate with slimmer labor forces and casting doubt on whether the apparent stabilization in industrial activity will meaningfully contribute to lifting the economy out of recession.
Separately, data from the Reserve Bank of Australia showed that the central bank sold A$1.4 billion of the local currency in the spot forex market in April, the most in five years. The same month saw the Australian dollar gain a whopping 6.4% against a trade-weighted basket of top currencies, suggesting the bank is actively working to counteract upward pressure on the Aussie from a rebound in risky assets over the past three months. Indeed, the RBA's currency sales have surged by A$1.2 since March when stock markets found a bottom and began to reverse course higher. A stronger currency threatens the export sector, making Australian goods comparatively more expensive for overseas buyers. Perhaps most notably, the RBA said that the influence of changes in benchmark interest rates on bank lending rates has weakened over the past two years, suggesting monetary policy is losing potency in stimulating economic activity. On balance, this suggests deeper cuts than what has already been undertaken may be needed to bolster the economy in the months ahead. Minutes from the last policy meeting confirmed that Glenn Stevens and company are leaving the door open for additional easing.
Euro Session: What to Expect
The monetary policy announcement from the Swiss National Bank tops the economic calendar in European hours with volatility likely as the central bank weighs up an increasingly credible deflationary threat. The last policy meeting saw the SNB announce one of the most aggressively dovish monetary policies among top global economies, sending the Franc tumbling with promises of quantitative easing and currency market intervention in an effort to keep price growth from settling in negative territory. Since then, the annual pace of consumer price growth has dropped to a record-low -1.0% and appears likely to extend losses after Producer Prices fell by the most in over two decades, hinting at shrinking price tags on final goods as firms pass on lower input costs. Indeed, yesterday saw SECO revised lower the government's official CPI estimate to -0.5% in 2009, down from the -0.2% forecast reported in March. Although overnight index swaps reveal that traders are pricing in virtually no chance of a change in benchmark interest rates, an expansion of unconventional policies seems likely. However, it is uncertain what such actions could practically look like considering the SNB is already throwing everything but the kitchen sink behind its monetary efforts, adding to the likelihood of erratic price action as the announcement hits the tape.
UK Retail Sales are expected to shrink -0.4% in the year to May, the first decline since February. Receipts have trended lower since May of last year, with the forthcoming result extending falling firmly within the outlines of the overall trajectory. Although consumer confidence rose for a second consecutive time last month following a recovery in stock prices as well as signs of moderating turmoil in the housing market, rising unemployment is set to undermine retail activity going forward, trimming disposable incomes and weighing on spending for those already out of work and encouraging cautionary saving for those still holding on jobs. The latest labor-market data revealed the claimant count rose to 4.8%, the highest in over 11 years, despite a smaller-than-expected gain in jobless claims. Indeed, a survey of economists conducted by Bloomberg expects the jobless rate will average 8.2% this year and 10.2% in 2010, suggesting month-to-month volatility in claims figures is hardly reason enough to be optimistic about Britons' job prospects in the foreseeable future.
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