DB FX Daily: London Skew in Data Surprises, Carry Drawdown in Context II

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FX Daily: London
Skew in Data Surprises, Carry Drawdown in Context II
Today's Key Data and Events
EUR HICP flash estimate for July, 1.8% expected (9:00 GMT)
GBP CBI distributive trades survey for July, 15 consensus reported sales (10:00 GMT)
CAD Canada GDP for May, +0.5% expected (12:30 GMT)
USD Personal spending/income for June, 0.3/0.2 exp.; ECI for Q2, 0.8 exp. (12:30 GMT)
USD Chicago PMI, 59.0 expected; Consumer confidence, 101.0 expected (15:00 GMT)

Upcoming Event Risks
Aug 3 US non-farm payrolls
Aug 7 FOMC rate decision
Aug. 8: RBA rate decision
Aug. 15: Norges Bank rate decision

Skew in Data Surprises Fades: Following a period with a relatively sparse US data calendar, which has allowed the market to train its focus on the potential impact of credit issues on FX, the data flow resumes from today. Over recent weeks there had been a general tendency for positive data surprises out of the US and negative surprises from the Eurozone as expectations for both economies seems to have run beyond the outcomes. But the skew in data surprises may have now faded. The chart at left below tracks our Eurozone MPI and US MPI series - both of which have now moved towards zero. If this indicates that the recent tendency to underestimate US data outcomes and overestimate Eurozone releases has dissipated, then there may be less skew in the risk/reward around data releases. That said, 2Y Eurozone - US spreads have continued to tighten against this backdrop of data surprises as US yields have dropped with the volatility in financial markets rather than following the data closely.

Current Carry Drawdown in Context, Part II
In yesterday's FX Daily we took a look at G10 FX carry to place the current drawdown in some context. In the chart at right below we look at rolling drawdowns for a carry basket of long five high-yielders, short five low-yielders (constrained to include two G10 currencies on each side of the trade). Through Friday, this basket had dropped 3.9% from the peak seen earlier last week - wiping out the past month of gains. The data set is more limited when involving EM currencies due to data limitations. But an analysis of the past 10 years shows this current drawdown is the seventh largest over this period. Yet it still is quite some distance from the largest episode whether looking at the size of decline (Dec 05-Jun 06 saw a 13% drop) or the duration (currently 5 days while Dec 05-June 06 lasted 129 days). Though this may not shed light on how much further the current drawdown has left to run, it is worth noting that once a bottom has been found the recovery has often come within 3 months as 8 of the 10 largest prior drawdowns have retraced the decline within 3 months.

Trevor Dinmore
Strategist
(+44) 20 754-71796
[email]trevor.dinmore@db.com[/email]