Morning Forex Review

After a series of disappointing US data releases, the market focus will be on whether the “soft patch” is intensifying. We put the recent weakness down to the rapid rise in energy costs, which has hurt household spending power and squeezed corporate profit margins. Additionally, Japanese component supply disruptions have led to the shutting down of some production lines. However, these supply issues should fade and with oil prices falling having fallen over $13.00/bbl since their May peak (but after the OPEC fiasco, we have now seen Brent crude trade above $120.00/bbl at the end of last week), credit conditions continuing to ease and mortgage rates down around 60 bps since February, we still feel that 2H11 will see stronger growth.

In terms of this week’s numbers, we look for an improvement in consumer confidence, but retail sales will be weak, dragged lower by very disappointing auto sales. Industrial output will also be soft given auto plant shutdowns and sharp falls in the ISM index. However, now oil is possibly dropping, we are hopeful that the regional PMIs will recover. Inflation is likely to creep higher though as the falls in gasoline prices came too late to be reflected in the survey. Core CPI is likely to edge up. Aside from May CPI, which should be confirmed at 2.7% y/y.

It is quiet data wise in the Eurozone. Consequently, we will get a continuation of the current discussion on whether or not Greece needs a debt restructuring. Finance Minister Schaeuble's recent letter shows that the German government is once again trying to get some private sector involvement. However, given the opposition of several other Eurozone governments and the ECB, the latest Schaeuble proposal will probably not fly. At least they can use it to please domestic German politics along the lines: "we at least tried...". It is a busy week for UK data. Retail sales are set to soften due to holiday effects while the labour data should remain relatively robust. Inflation is likely to move closer to 5.0% though and could prompt markets to price an earlier rate hike than they currently anticipate (March 2012).

The Bank of Japan policy board meets June 14th and will likely expand the facility for loans to regional institutions funding reconstruction projects. The policy rate will remain stable at 0.10%. Press reports suggest the BoJ will upgrade its assessment of the economy due to rising investment in the wake of the March earthquake/tsunami. In Brazil, we expect the central bank to maintain a more hawkish stance in the bank’s monetary policy minutes, which should help consolidate market expectations of at least one more rate hike in July. We continue to expect, however, that authorities are likely to extend the cycle through August, with the SELIC reaching 12.75%.

In Poland, we expect activity figures suggesting growth is stabilising at strong levels. The key market mover should be CPI for May, which we expect 0.1-0.2% above the market consensus. May industrial output in Ukraine should grow strongly (6.7% y/y) due to relatively stable demand for Ukrainian exports, which should boost the trade balance. China hard-landing worries resurfaced in early June following the release of a second consecutive weak manufacturing PMI report. Meanwhile, inflation is stubbornly high, with rising meat prices sustaining high food component inflation. Faced with a choice of strong growth with higher inflation versus low growth and lower inflation, we think the authorities will choose the former. If China hard-landing fears add to US growth anxiety, the repricing of risk assets could become more pronounced. Central bank policy meetings in India and the Philippines are the other risk events. Inflation in both countries remains elevated. The RBI surprised with a 50 bps hike at the last meeting and further hikes are probable.