Citibank, CitiFX , London
A timetable has been agreed for a Euro referendum–according to reports in today™s FT. The paper reports that PM Blair and Chancellor Brown have agreed to meet next April/May to assess the 5 economic conditions that underlie the government™s approach to entry. If they agree that the 5 conditions have been met, a referendum could be held in Autumn 2002 or Spring 2003. While the timetable seems quite reasonable, there remain numerous obstacles to entry, including the conditions and, of course, the actual referendum. Recent polls conducted for SSB continue to show a solid advantage for the ihnolt camp, and we remain skeptical of the government™s ability to swing the vote in favour. In addition, the leaking of a possible agreement on a schedule comes conveniently in the midst of a Conservative Party leadership contest in which Euro membership is clearly an issue. There has been virtually no impact on EUR/GBP early today, suggesting that the markets continue to focus on economic conditions which, in our view, are gradually shifting against the GBP. Significant resistance in EUR/GBP remains just above current levels with the 200-day moving average at .6170.
Deflation pressures in Japan remain strong–as the July data for the Tokyo area core CPI (CPI excluding fresh food) showed a 0.9% YOY decline, a worsening from ?0.7% YOY in June. It is worth recalling that the central forecast range of the Bank of Japan Policy Board members (with the highest and lowest number excluded) for core nationwide consumer prices in FY 2001, issued at the end of April, was -0.8%YY to -0.4%. If nationwide price trends in July mirror those of Tokyo, we will shortly find ourselves at the very low end of that range. In fact, leading indicators of prices such as domestic wholesale prices, as well as a widening output gap, suggest that prices will fall at an even faster pace next year. At some point these deflation pressures, along with weak growth and equity prices, should push the BOJ to adopt measures to inject additional liquidity into the banking system, a policy shift that remains likely before the fiscal mid-year book closings. The Upper House elections this weekend are unlikely to end the uncertainty regarding future policies ? we continue to focus on the LDP leadership contest in September as equally important (see FT, page 17 for a review of the issues). But the Koizumi iohoneymoonlc has clearly ended, and our North American client base has become net sellers of Japanese equities over the 5 days ended July 25 (buy/sell ratio at .65). Combined with continued signs of USD/JPY buying reported by the CitiFX Flows team, we remain long USD/JPY.
Ifo Chief Economist Leibfritz suggested stabilization in the German economy–although the Ifo group™s forecast of 1.2% growth remains well above our 0.8% estimate. He also added that while the ifo has called for a 25bp rate cut soon, he personally would favour a 50bp cut. The EUR continues to shrug off bad news, and even another late-day rise in US equity prices failed to dent EUR/USD. The signs that capital inflows into the US may be moderating continues to leave the USD unable to capitalize on good news in the US or bad news in the Euro area. The CitiFX Views short EUR/USD position was stopped on the NY close at .8780 yesterday, and given the strong technical evidence developing against the USD we are quite happy to be neutral EUR/USD at this time.
US GDP will be the focus today–and yesterday™s durable goods report has led us to revise lower our estimate for IIQ™01 GDP growth to 0.8% SAAR from a previous 1.0% estimate. The range appears to be clustered between 0.6-1.3%. Robert Sinche 0207-986-3313 CitiFX SM Research