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28 November 2007

Asia Open / Overnight Highlights

- Abu Dhabi Investment Authority infuses Citigroup with $7.5b.

- Nov Conf Bd consumer confidence fell to 87.3, two year low.

- Oct S&P Case Shiller Home Price index fell 0.9% m/m and 4.9% y/y.

- Redbook sales 0.4% vs 0.3%.

- PBOC said that after discussion with the RU, China and its European counterparts have agreed to cooperate on stemming sharp forex swings. Joint effort to tackle global imbalances was also agreed upon with China planning to step up structural economic adjustments.

- Fed Plosser - Rate cuts run the risk of higher inflation and inflation expectations.

- Fed Evans - Insurance already in place. Risk of surprisingly weak growth unlikely. Fed looking at growth forecasts not markets in setting policy.

- Jan crude oil, $94.25, -$3.45.

Foreign Exchange: EUR/USD saw good two-way activity. After an initial boost from stronger than anticipated German CPI and IFO, market makers, speculators and the E. European sovereign were behind a push that set off stops at 1.4860ish to reach the high of 1.4908. Despite very weak US consumer confidence data, offers from the same E. Europeans sparked a turn around that was accelerated by a rally in equities that gave USD a broad based bid and sent prices to new intraday lows of 1.4810.

USD/JPY started the day by touching 107.28, the lowest level since Jun 2005. Then equity markets started applying the usual influence. After a mixed start in Europe, US equities got some inspiration from the news of the Citi-ADIA deal and put up a solid rally, which in turn sent USD/JPY up to new intraday highs above 108.80. EUR/JPY and GBP/JPY reacted even more to the JPY sell-off that was fuelled by the equity rally, but neither of the crosses matched earlier highs of 161.83 and 225.60 respectively.

AUD and NZD benefited to an extent from a rebound in investor and stock market confidence, but progress on AUD/USD remained unimpressive. Dealers reported steady supply of AUD/NZD which helped the cross down to 1.1519, the lowest trade since mid-Aug.

Bonds: The Treasury market was under immediate pressure from the opening due to the Abu Dhabi story. Economic data was inconsequential as focus was squarely centered on equities and spread product. Prices bounced off session lows on bottom-fishing and short covering. However, the equity market regained added strength during the final thirty minutes, capping the Treasury market's ability to recover. The front end encountered the heaviest pressure. The 2yr/30yr spread flattened 12 bps to 128 bps.

- Agency spreads: 2s, Freddie/Fannie, -5 bps, 5s, Freddie/Fannie, -5 bps and -6 bps, and 10s, Freddie/Fannie, -2.5 bps/ -1.5 bps.

- Interest rate swap spreads were 3 bps to 5 bps tighter. Equities: The equity market encountered broad based strength, particularly the financial sector. The single biggest factor was the Abu Dhabi/Citigroup news. Speculation that the Gulf states would increase production by 750k b/d also helped to improve the tone. Dow climbed 1.69%; S&P gained 1.49% and Nasdaq was up 1.57%.

Asia Outlook: Rally in equity mkts overnight on bullishness drawn from the Citi-Abu Dhabi news and the drop of more than 3% in crude prices positives on which Asian mkts are likely to benefit from in trades today. The bargain hunting expected in regional bourses is seen weighing on USD/Asians. That is however not to suggest that impetus for regional pairings will be one-way. The firmer tone in the greenback is stalling appreciation in regional currency pairs. Another factor which is seen keeping bearishness in check is that Asian mkts have, to some extent, already priced in the Citi-Abu Dhabi news. Overall, bias still looks to be bearish. Overnight NDFs dribbled lower with offers focused on USD/KRW.

NORTH ASIA

USD/KRW will likely stay in the 925-930 range, with exporters continue to sell dollars to meet month-end requirements. The 1-mth NDFs traded in the 925.5-930.0 range in high volume and closed at 924.5/925.5, overnight.

USD/CNY looks to have downside momentum tempered after consecutive sessions of record retreats. Yesterday's record close at 7.3840 looks to make another bout of unbridled bearishness a tad tougher, especially with the greenback regaining come footing overnight. USD/CNY is expected to trade amid 7.3800-7.3912 for now. Break below to expose next support at 7.3775, though shorts would look overdone at these levels intraday. In overnight trades, the 1-mth NDFs traded 7.3380; closed 7.3350-7.3380. In a radio interview yesterday, President Hu Jintao said the curbing inflation was one of China's key priorities. Keeping investment in check and boosting consumption to shift the growth drivers were other priorities for China, said the President.

USD/HKD is expected to be weighed by gain in the local bourse. Adding more is the IPO-related HKD demand. However, fall in the currency pair is likely to be limited by fresh arbitrage interests amid the lower domestic interest rates. USD/HKD will likely trade in the 7.7800-7.7850 range.

USD/TWD will drift lower amid the expected gain in the domestic stock markets. Dollar sales by exporters ahead of month end also add to the momentum. We expect the pairing's trades to be in the 32.25-32.35 range. Overnight, the 1-mth NDFs traded in the 32.16 range with low volume and closed at 32 .15/32.18.

SOUTH ASIA

USD/SGD trickled lower in trades overnight as US equity mkts rebounded. The dollar gaining against the other majors however is seen tempering downside in the pairing. Intraday cues to be sought from equity mkts. For now, USD/SGD is seen consolidating in the 1.4375-1.4435 range I the meantime. Break below is seen exposing support at 1.4360.

USD/IDR is not expected to pull off strong retreats below the 9350 level in trades today despite the rebound in US equity mkts overnight. With some of the positives from Citi-Abu Dhabi already having passed yesterday, some selling interest is expected from softer oil prices. Levels below however should still see cautious bids. Overnight NDFs traded 9420-9445. The 1-mth closed 9410-9440 from opening from 9415-9445. USD/IDR still stuck in consolidation amid 9335-9445. Elsewhere the FinMin announced plans to raise IDR2 trln from auction of 15-mth zero-coupon bonds and T-bonds maturing in 2015 next week.

To recap, the Chief Econ Min said that this year's budget has been largely unaffected by high oil prices; the FinMin expects this year's deficit to be 1.3% of GDP. 2008 budget is seen at 1.8% of GDP if oil hits $100/barrel. The FinMin also said that the govt will make provision of IDR6 trln for high oil prices next year. Next year's inflation forecast was held at 5% for next year; growth was seen slowing to 6.4-6.7%

USD/MYR will likely test 3.36 given the expected rise in the local bourse. On the topside, the pairing is seen limited at the 3.3750 level. Overnight, the 1-mth NDFs closed at 3.3635/3.3685 with low volume amid 3.3650-3.3700 range.

USD/PHP is seen consolidating at levels below the 43.00 handle in trades today. Equity mkt upside and lower oil prices should induce offers in the USD/PHP while the firmer dollar and BSP intervention are seen stalling downside. Intraday range of 42.67-43.05 seen likely. Overnight NDFs closed 42