Equity markets soften

The Singapore dollar continues to trade in a tight range.

IG Markets Singapore said:

The Singapore dollar has been pretty quiet as equity markets soften in light of weak US corporate earnings.

The local currency continues to trade in a tight range sitting at $1.2210 this morning.

This week is an important one for the greenback with Q3 GDP print due out along with more corporate earnings.

Last week a spanner was thrown into the US economic recovery with weak results from the likes of McDonald’s, IBM and Google.

This could dampen sentiment towards risk currencies as traders question the strength of the global economy.

On the local front we have CPI figures for September for Singapore tomorrow which will highlight how well the government has read inflation trends.

DBS Group Research meanwhile noted:

The FOMC meeting on October 24 is likely to be a non-event. The US Federal Reserve has already announced on September 13 that it will purchase additional securities at a pace of USD85 bn a month till year-end. Fed Chairman will not be holding a press conference except at the December 13 FOMC meeting.

More importantly, Bernanke showed his weak US dollar bias at the latest International Monetary Fund meeting when he encourage emerged countries to let their currencies appreciate. With the US Treasury delaying its Currency Report into November, there is a good chance that the US will attempt to revitalize the global imbalances debate at the G20 Summit on November 4-5.

To sustain a weak US dollar, we need three ingredients. First, Eurozone needs to be stable. Despite slow progress towards EU integration at the EU Summit, the market is taking German Chancellor Angela Merkel at face value that there will be no uncontrollable developments in Eurozone. Merkel also provided assurance that Greek will not be kicked out of the single market. This stability was consistent with the lower government bond yields in Italy and Spain. In fact, the 10-year bond yield in Italy fell below the lows seen in March.

Second, the US economy must overcome fiscal cliff worries. So far, market is taking comfort in two things – the US unemployment rate is below 8% and that the US housing market appears to be on the mend. According to the latest Wall Street Journal/NBC News poll, more registered American voters are starting to believe that the US economy may be turning the corner. The share of the respondents who saw a brighter outlook 12 months out increased to 45% from 42%.

More importantly, the share who expected things to worsen in the year ahead was halved to 9% from 18%. Nonetheless, advance estimate for 3Q12 GDP will be closely watched on October 26. Consensus is expecting the annualized headline number to improve to 1.8% QoQ in 3Q12 from 1.3% in the previous quarter.

Third, China hard landing fears have been mitigated by last week’s GDP report signaling that the economy may have bottomed in 3Q12 in year-on-year terms. In fact, China’s growth accelerated on quarter-on-quarter terms, from 1.5% in 1Q12 to 2.00% in 2Q12 and 2.2% in 3Q12. This puts Beijing in a strong position to beat its official growth target of 7.5% for 2012. The People’s Bank of China has become more vigilant on inflation again, especially with regard to capital inflow from loose monetary policies in the advanced economies.

Hence, it was probably no coincidence why the Chinese yuan has started appreciating again from its weakest levels in August, especially after the Fed sent its strongest signal on QE3 intentions at its symposium in Jackson Hole.

Neither was it a coincidence that one day after China’s GDP report, the Hong Kong Monetary Authority intervened last Friday during the New York session to prevent USD/HKD from breaking below its 7.75-7.85 convertibility band.