Market Outlook - BNP PARIBAS - Investment Services India

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West has consumed future income and is now deleveraging. This de facto means the West will have to convert to net exports while China will have to move in the opposite direction. In the end, re-balancing will take place and the result of rebalancing will be deceleration in currency reserve growth. The implication for currency markets is straightforward. There will be less USD supply coming via reserve reallocation. Road map to sterling weakness According to our PPP models, sterling is fairly valued, but this should not lead to the misinterpretation that the GBP will rally in the medium term. If at all, sterling has only short-term upside, with the long-term outlook remaining heavily biased to the downside. The BoE will stop QE-related monetary expansion as its inflation rates have surprised to the upside. This means that there needs to be an alternative buyer for the Gilt market. Bear in mind, the GBP 178bln budget deficit forecast by the government for 2009 has been entirely funded by the BoE, which has absorbed GBP 198bln in debt securities (mainly Gilts) from the open market (see Chart 9). This operation allowed yields to remain comparatively low despite the government borrowing record amounts. In the absence of the BoE extending its QE operations, the Gilt market must attract private funds. We doubt that these private savings can be secured from domestic sources. Ahead of the general election, the government will try to create a feel-good factor. Most of its support measures are aimed at supporting the demand side of the economy, including housing. Hence domestic savings are back in decline and, in the absence of domestic funds being invested in the Gilt market, the UK will have to import capital. This will work in favour of sterling for the next couple of weeks but will came at a high cost as Gilt yield differentials rise, moving domestic borrowing costs up. After the election there will be the reality check and that will be brutal. It will be Hobson’s choice: either cut deficits (which will weaken demand) or face rating downgrades (which will drive borrowing costs higher). But higher borrowing costs are obviously the worst option for an overleveraged economy. After all those years of exuberant consumer spending on future income expectations, it is clear that domestic demand can no longer be the main source of economic activity. The UK will need to become supply driven, but the chief thrust of the Brown government’s economic policy has been to create the aforementioned feel-good factor. Instead of promoting the supply side of the British economy, everything has been done to support private Chart 9: BoE Asset Purchases by Type Period/ WE Commercial Gilts Corporate Total paper bonds 2009 Q3 922 151,775 1,073 153,771 01-Oct-09 225 4,200 72 4,497 08-Oct-09 80 4,200 139 4,419 15-Oct-09 25 4,200 33 4,258 22-Oct-09 145 4,201 13 4,359 29-Oct-09 0 4,200 62 4,262 05-Nov-09 0 0 63 63 12-Nov-09 0 3,400 60 3,460 19-Nov-09 70 1,700 13 1,783 26-Nov-09 224 3,400 5 3,629 03-Dec-09 0 1,701 4 1,705 10-Dec-09 125 3,400 2 3,527 17-Dec-09 190 1,700 0 1,890 24-Dec-09 0 0 0 0 31-Dec-09 25 0 0 25 Amount outstanding financed by the Treasury bills as at 31 Dec - - - - Amount outstanding financed by central bank reserves as at 31 Dec 429 188,076 1,549 190,053 Total amount outstanding as at 31 Dec 429 188,076 1,549 190,053 Source: BoE Chart 10: Foreign Holdings in the Gilt market 250,000 200,000 150,000 100,000 50,000 0 Holdings (GBP m) % of Total (rhs) 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% Q1 2006Q1 2007Q1 2008Q1 2009 Source: BoE, BNPP. Foreign holdings in the Gilt market have declined below 30% of the total outstanding. However, the absolute holding has exceeded GBP 200bln, representing a new high. With the BoE expected to confirm the suspension of its QE operations next Thursday, upcoming Gilt supply needs to be absorbed by domestic private or foreign funds. The BoE withdrawing from QE may lead to sterling inflows as foreign accounts move into Gilts. Nonetheless, foreign buying interest in the Gilt market will only be generated if Gilt interest rate differentials rise; we doubt the economy can take that. consumption including housing. This approach is unsustainable and will have to be corrected after the election. In the unlikely event the current government wins another term, Labour might try muddling through by keeping government expenditure high while trying to reduce the budget gap through a higher tax take. This policy approach is unlikely to be tolerated by the rating agencies and will ultimately lead to a downgrade. A Tory government will face equally strong hurdles. The IMF has just warned that the British economy would not be able to withstand an abrupt tightening of fiscal conditions in the early stages of its current economic recovery. A fine line between fiscal consolidation and keeping the economy going needs to be found and currency strength would be counterproductive to that stance. What the UK needs is a combination of tight fiscal and loose monetary policies which will create text book style currency weakness. Rob Ryan 29 January 2010 Market Mover, Non-Objective Research Section 50 www.GlobalMarkets.bnpparibas.com
USD Bullish Signals • USD Trade Weighted Index has confirmed the break above the 200-day moving average, suggesting that the longer-term trend has turned bullish • EURUSD set to accelerate the down trend once again with a sharp decline towards longer-term pivotal support in the 1.3735 area • USDCHF has also broken higher from the major down trend that had developed over the last year confirming the bullish outlook • GBPUSD testing important near-term up trendline support and currently sitting right on the 200- day moving average. But, a bearish break-out from the major trading range still needed The overall technical outlook for the USD has continued to improve and this can been seen on the BNP Paribas USD Trade Weighted Index, which after testing the 200-day moving average over the past week has finally confirmed a bullish breakout (with a daily closing price above the 200-day ma). We would now expect further broad based USD gains, allowing the USD Index to head towards the top end of the ascending channel that has developed over the course of the past two months. At least a 50% retracement of the entire USD decline seen throughout 2009 is now expected, implying USD gains of at least 5% in the medium term. We also note that technical indicators are giving strong positive momentum signals. We expect these USD gains to become increasingly emphasised against the euro with EURUSD now putting increasing pressure on the downside, breaching important near-term support at the 1.40, which had been effective over the past six months. Given that EURUSD has already triggered many medium-term bearish signals over the course of the past few weeks (broken below the 200- day moving average and major up trendline support), a sustained break below the 1.40 level will accelerate the down trend towards the long-term pivotal support at the 1.3735 level. A decline below here would confirm that the long-term EURUSD outlook has turned bearish, with sustained losses towards the 1.33/1.31 area expected. However, one place where USD strength has yet to be fully reflected is against sterling. GBPUSD has been trapped within a broad range over the past nine months. However, signs of GBPUSD weakness are starting to develop. Initial trendline support is currently being tested and the 200-day moving average has been breached. A decline to the bottom end of the trading range at 1.5720 is now expected, but a break below here would still be required to trigger a longer-term bearish signal, implying GBPUSD weakness towards the 1.5065 area initially. EURUSD is keeping the pressure on the downside. Major medium-term bearish signals have already been triggered – break of trendline support and the 200- day moving average. Chart 1: EUR/USD – Set to Accelerate the Down Trend 1.5060 1.5144 1.49 1.4842 1.4446 1.4630 1.44 1.4340 1.4480 1.4219 1.39 1.4015 1.4582 The break below 1.40 will test the long term 1.34 pivotal support at 1.3750, a break of which opens the way to 1.33/1.31. 1.29 1.3750 09-Jun-09 06-Aug-09 05-Oct-09 02-Dec-09 27-Jan-10 Source: BNP Paribas Ian Stannard 29 January 2010 Market Mover, Non-Objective Research Section 51 www.GlobalMarkets.bnpparibas.com
Page 1 and 2: Market Economics | Interest Rate St
Page 3 and 4: GGBs and other peripherals will rem
Page 5 and 6: The subtle changes in the wording o
Page 7 and 8: US: Get It While You Can • As the
Page 9 and 10: 500,000, the months-supply level of
Page 11 and 12: France: Roaring Consumption • Ret
Page 13 and 14: should be particularly true for the
Page 15 and 16: UK Inflation: Bridging the Gap •
Page 17 and 18: eceive roughly 60/40 weight within
Page 19 and 20: 1.2% m/m in November, partly offset
Page 21 and 22: or absence of competitors in a spec
Page 23 and 24: Japan: Polarisation in Machine Tool
Page 25 and 26: Australia: The Next Step • Data r
Page 27 and 28: US: Post-FOMC Treasury Market Overv
Page 29 and 30: US: Rolling Down the Agency Spread
Page 31 and 32: US: Poor Housing Underscores MBS Su
Page 33 and 34: Fannie Mae has not discussed the in
Page 35 and 36: EUR: Timing the 20Y Point • The l
Page 37 and 38: EUR 3-5bn (new 10y) in February? Co
Page 39 and 40: JGBs: Supply Continues to Weigh •
Page 41 and 42: Table 1: BNP Paribas' Inflation For
Page 43 and 44: Table 3: BNP Paribas' Inflation For
Page 45 and 46: Pricing Date Repo Rate EUR DRI FRF
Page 47 and 48: CNY: Revaluation and FX Reserves
Page 49: domestic-demand led one is underway
Page 53 and 54: Currency Spot Trade Recommendations
Page 55 and 56: Economic Calendar: 29 Jan - 5 Feb (
Page 57 and 58: Key Data Preview Chart 3: Japanese
Page 59 and 60: Key Data Preview Chart 7: Change in
Page 61 and 62: Key Data Preview Chart 11: US PMI M
Page 63 and 64: Key Data Preview Chart 15: US Non-F
Page 65 and 66: Economic Calendar: 8 February - 5 M
Page 67 and 68: Next week's T-Bills Supply Date Cou
Page 69 and 70: Economic Forecasts GDP Year 2009 20
Page 71 and 72: Market Coverage Market Economics Pa

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