UK Mortgage Approvals are expected to fall for the second consecutive month in June while Net Consumer Credit growth slows from the previous month over the same period.
UK Mortgage Approvals are expected to fall for the second consecutive month in June while Net Consumer Credit growth slows from the previous month over the same period. The figures will reinforce dovish comments from BOE policymakers delivered in testimony to the Parliament’s Treasury Committee, where governor Mervyn King downplayed the stronger-than-expected second quarter GDP result to stress lingering uncertainty about the recovery in general and inflation in particular, signaling monetary policy is firmly stuck in accommodative territory for the time being.
Trading Tactics
A clear uptrend could be an opportunity to Buy GBP/USD.
The buying point is at 1.5627; Pivot point highest level is the take profit at 1.5695; Pivot point is the stop loss at 1.5590
The selling point is at 1.5570; Fibonacci 38.2% is the take profit at 1.5450; Pivot point is the stop loss at 1.5650
Technical: Sterling forms a new high and may continue the minor uptrend. A move back higher could set up a test of 1.5695
To strengthen our analysis; we use many other indicators, starting with MACD (Moving Averages convergence divergence); we notice MACD crosses the signal line upwards; Momentum and RSI (Relative Strength Index) are in an uptrend; stochastic oscillator gives a neutral signal.
*Analysis is for information purposes only and does not constitute advice in any form. Past performance is not an indicator of future performance. Trading in financial products carries a high degree of risk to your capital and it is possible to lose more than your initial investment.
Markets are trading in a lethargic manner as participants continue to nervously take on risk-correlated trades. The move toward risk is logical because without the massive sovereign crisis fear hovering over the market like the Sword of Damocles, one needs to consider the fundamentals - particularly monetary policy, as the core driver. Overall, the rate at which central banks are mopping up excess liquidity has been slower-than-expected with the BoE and Fed still discussing the potential for further QE.
In this era of ultra-low policy rates, risk taking will be encouraged. In the past few days, we’ve seen Eurozone sovereign spreads narrow considerably, the VIX index is trending lower along with decreased FX volatilities and global equity markets have demonstrated a resilience to bearish news. If corporate earnings come out strong, this could be the start of a summer rally, however we’re not so sure. Our view is that the fears surrounding sovereign risk may have subsided for the time being, but will most likely return this fall.
Even with the recent stint of positive news, foreboding signs are on the horizon. The Fed’s Beige book released yesterday reported that the US recovery remained on track but has begun to actively slow. The notion of a US slowdown was reinforced by recent US data, including yesterday’s durable goods figures.
In New Zealand, the RBNZ raised its policy rate 25 bps to 3.00% as we had predicted and the accompanying statement asserted that future growth prospects had deteriorated considerably. Traders rapidly paired down their interest rate expectations which in turn weighed on the NZD.
Governor King’s comment seemed to slam into the sterling market, which was curious because his remarks were really nothing new or original. He recommended caution over reading too much into the strong Q2 GDP figures and reaffirmed that inflation remained finely in check. Paul Fisher stated that the global outlook had weakened and David Miles resonated with the most dovish view of all – that inflation would taper off and the current ultra-loose policy was correct.
The combination of all these comments hit the GBP value like a sledge hammer. It wasn’t until Sentance’s hawkish comments that the “current policy setting was extreme” that some sanity was regained in the FX market.
We are convinced that the market is now underestimating the strength of the UK recovery and that the current downtrend in inflation will flat line and then begin to move higher. The BoE interest rate path should give GBP a boost in the mid-term.
Otherwise, there’s a frenzy of data to be released during the European session today and after that it’s onto corporate earnings. We will continue to use equity market activity as a compass for FX directions. Correlation remains particularly high between the EURUSD and S&P and should thus be traded accordingly.
Today's Key Issues (time in GMT): 07:30 SEK Jun retail sales, +0.6% m/m EXP; prior +1.6% m/m, +2.7% y/y. 08:00 EUR GER Jul unemployment rate, 7.6% sa EXP; prior 7.7%. 08:00 EUR GER Jul unemployment, nsa and sa; prior 3.153 mln, 3.23 mln. 08:00 EUR GER Jul unemployment - change, -10k sa EXP; prior -21.0k. 08:00 EUR ITA Jun wages, +2.6% y/y EXP; prior +0.1% m/m, +2.5% y/y. 08:30 GBP Jun consumer credit, GBP300 mln EXP; prior GBP331 mln. 08:30 GBP Jun mortgage appl/loans, 49k/GBP1 bln EXP; prior 49.81k/GBP1.184 bln. 08:30 GBP Jun money supply; prior unch. 09:00 EUR Jul business climate index, 0.39 EXP; prior 0.37. 09:00 EUR Jul consumer sentiment index, -14.0 EXP; prior -17.0. 09:00 EUR Jul economic sentiment index, 99.1 EXP; prior 98.7. 09:00 EUR Jul industrial sentiment index, -5.0 EXP; prior -6.0. 09:00 EUR Jul services sentiment index; prior 4.0. 12:30 USD Initial jobless claims, thous (4wma) 24-Jul 23:01 GBP GfK consumer confidence survey, bal Jul
EurUsd We’ve had another day of tight range trading in EURUSD, and for the time being there is a ceiling of resistance at 1.3046 that is blocking the path higher. We are still playing the bullish break out of a symmetrical triangle pattern on the hourly chart, and based on the projected path of that triangle we are expecting a move to 1.3290 in the coming days. Once we clear 1.3046, the next resistance level is expected at 1.3093 (10 May high) with weak resistance also anticipated at 1.3213 and 1.3254 (14 and 13 May highs respectively). Support at 1.2950 is still valid, with trendline support just below at 1.2940 –should the pair drop below there we would have to concede the failure of the bullish triangle breakout, and would then eye technical levels below at 1.2793 (23 Jul low), 1.2733 (21 Jul low), 1.2683 (14 Jul low) and 1.2522 (13 Jul low).
GbpUsd There were a few hairy moments yesterday for GBPUSD as BoE’s King hit the newswires to downplay the significance of the latest GDP reading, but tellingly the temporary sell-off was met with eager buyers clambering to get in on this impressive GBPUSD recovery, and the pair has since pushed to fresh highs of 1.5655. As previously discussed, we feel that the UK GDP figures last Friday were a game changer, and from here we would relish any dips towards the lower edge of the current uptrend channel now seen at 1.5385 to get long. The way things have gone so far, we may not even get a correction that deep as decent support is also anticipated around the 200-day moving average at 1.5545, 1.5525 pivot, then again at 1.5443 (yesterday’s low). Really there is not much standing in the way of an assault on the 17 Feb high 1.5816 in the coming days, and beyond there we open up the possibility of re-testing the top of the 8-week uptrend channel (currently at 1.5950) before the psychologically significant 1.6000.
UsdJpy USDJPY may have slumped in a rather ungainly fashion back below 87.50 in the past few sessions, but the pair is at the very least continued carve out successively higher highs and higher lows since the double bottom around 86.25 levels. The last rally (which topped out at 88.11) was thwarted by a pretty formidable confluence of resistance levels (8-week downtrend resistance, top of 1-week uptrend channel and 88.00 pivot), but we still believe the bulls can overcome these barriers on a subsequent re-test now they are more comfortably spaced out. The 8-week downtrend has now crept down to 87.90 while the top of the current uptrend channel has climbed to 88.25; however thereafter few levels are discernible ahead of our triangle target 88.85. Should the rally have the momentum to continue beyond there, look for sellers at 89.15 (12 Jul high) and 89.50 (28-29 Jun high). The most convincing support level to try getting in on the long trade appears to be the lower edge of the 1-week uptrend which is now seen at 87.10-15 (already had one test of that area this morning), then further supports anticipated at 86.82 (Tuesday’s low) and 86.25 (recent range floor).
UsdChf Despite the bullish engulfing candlestick on Monday/Tuesday of this week AND the important break of the 1-month downtrend channel, the bulls have looked lacklustre in the past 24 hours and have sloppily allowed the 1-week uptrend to break down around 1.0560. This conclusively negates the bullish flag pattern we had proposed yesterday, and seems compelling argument to move to the sidelines for the time being on this one and wait for more favourable risk-reward trades to present themselves. Buyers should be able to catch the fall if it extends to 1.0450, and an extremely important support still remains at 1.0400 so we would look to resume buying down at those levels. Strong selling interest may once again cap rallies at 1.0640-47 (13 Jul & 27 Jul highs and 200-day moving average), and given the propensity of July/August markets to be directionless and range bound, we would actually look to sell at those levels rather than look for a continuation higher. IF the bulls manage to pull their fingers out and effect that break higher, a powerful resistance level around 1.0700 is backed up but the top of the 1-week uptrend at 1.0710.
(Reuters) - New orders for long-lasting manufactured goods fell unexpectedly for a second straight month in June, posting the largest drop since August in a sign economic recovery cooled in the second quarter.
However, the Commerce Department report on Wednesday showed cash-flush businesses continued to invest in equipment. That implied underlying demand remained intact with firms exhibiting confidence in the moderate economic recovery.
"The bottom line is that the data show business investment had a very strong second quarter and, although the recovery in manufacturing may be losing a little momentum, it is hardly collapsing," said Paul Ashworth, senior U.S. economist at Capital Economics in Toronto.
Durable goods orders dropped 1.0 percent after falling 0.8 percent in May, surprising financial markets that had expected a 1.0 percent increase. Durable goods include big-ticket items such as cars and planes.
But orders for non-defense capital goods excluding aircraft, a proxy for business spending, unexpectedly rose 0.6 percent after increasing by an upwardly revised 4.6 percent in May. Markets had expected a flat reading.
Stocks on Wall Street fell as investors focused on the overall decline in orders and a full-year earnings forecast from Boeing Co that was below market consensus.
The Standard & Poor's 500 Index fell for a second straight day, closing below its 200-day moving average, currently around 1,114.
Prices for safe-haven U.S. government debt rose and the dollar rallied against the euro but fell versus the yen.
Data from consumer spending to manufacturing have suggested the recovery from the longest and deepest recession since the 1930s took a step back in the past few months.
The government is expected to report on Friday that growth slowed to a 2.5 percent annual rate in the April-June period from a 2.7 percent pace in the first three months of the year.
A separate report from the Federal Reserve showed U.S. economic activity was still rising but at a subdued rate.
"Among those districts reporting improvements in economic activity, a number of them noted that the increases were modest, and two districts, Atlanta and Chicago, said the pace of economic activity had slowed recently," the Fed said in its Beige Book, which is based on conversations with business contacts across the nation.
BUSINESS INVESTMENT GROWING
Some analysts said there was a chance second-quarter growth could beat expectations given signs of strong business investment. With profits booming, companies have stepped up spending on equipment and software after aggressively cutting back during the recession.
"There has been a loss of momentum in the past two months. It's yet to be seen how much of the upward momentum from earlier this year has been reversed," said Jim O'Sullivan, chief economist at MF Global in New York. "(But) I think the trend toward improvement is still intact."
Durable goods orders are a leading indicator of manufacturing, which has benefited from businesses replenishing inventories drawn down to record lows during the recession. However, that effort appears to be running out of steam.
Economists had expected durable goods orders to rise last month because Boeing received 49 orders for civilian aircraft in June compared to only five in May.
But non-defense aircraft orders tumbled 25.6 percent after falling 30.2 percent in May. Analysts said most of Boeing's orders were too late in the month to be caught by the report.
The drag on orders also came from bookings for computers and electronic products, which saw their largest decline since October. Orders for machinery recorded their biggest decline in 14 months, while those for primary metals fell by the most since March 2009.
"We expect further moderation in durable goods orders as the inventory cycle fades over the second half of the year," said Yelena Shulyatyeva, an economist at BNP Paribas in New York.
Durable goods shipments, which go into the calculation of gross domestic product, fell 0.3 percent after sliding 0.7 percent in May.
The Mortgage Bankers Association said on Wednesday that demand for loans to buy homes rose for the second straight week last week to the highest level since the end of June, but hovered just above 13-year lows.
Risk correlated trades had a strong showing yesterday as banking stocks rallied and concerns over the inadequacies of the Stress Test dissipated. The USD lost ground to both the GBP and EUR while longs in JPY and CHF were equally cut. Risky trades continued to benefit throughout the trading day in spite of US Consumer confidence data coming in negative. We especially like the appreciation we saw in sterling. We suspect there has been a fundamental shift in GBP prospects due to the sturdy GDP reading last Friday and we anticipate further upside to sterling in the near-to-mid term.
Asian equity markets are having a roaring day and the positive effects are spilling over into European indexes. We are seeing other encouraging signs as VIX dropped below its 200-day moving average and Gold continues to come under heavy selling pressure. There has been a noticeable lack of 1st tier economic data and we are cautious in accumulating too much risk just yet. These are the dog days of the trading summer – as such, low liquidly and inconsistent participants will continue to be as important as real data.
During the Asian session, the big news was the disappointing Australian Q2 CPI reading which came in well below markets expectations. The market was quick to shift rate hike expectations from August to later in the fall (ACM expects a November hike). The AUDUSD dropped like a rock to .8923 from .9020 in response to the release. With the inflation rate now within the RBA’s 2-3% target, markets now pricing in a late fall hike. The large AUD interest rate differential will further erode, which in turn will lend added support to currencies like CAD and NOK. Look for CAD & NOK to gain in the near term.
We are still highly constructive on the global economy and suspect commodities prices to trend higher which should give AUD a boost against the USD. With all the excitement around AUD, the CPI watchers will now be turning their gaze toward New Zealand.
In NZ, July business confidence and activity outlook surveys showed a significant deterioration from the June results. Analysts are in unanimous agreement that the RBNZ will raise the OCR 25 bps to 3.00% at its policy meeting tonight. Market and media interest will be focused on the accompanying statement released with the rate hike. Although recent NZ CPI readings have come in lower-than-expected, the markets are still pricing in roughly 75 bps worth of hikes between now and the year’s end.
We believe that the RBNZ statement will sound slightly more dovish, signaling a minor shift in interest rate trajectory as policy makers prepare for a global economic slowdown later this year. The sudden adjustment in rate path should translate into short-term NZD weakness, especially against the AUD.
As for today, US Durable Goods data is due to be released as investors continue to look for directional signals for the US recovery. The Fed’s Beige Book will likely reflect recent data softness.
Today's Key Issues (time in GMT): 00:00 EUR GER Jul HICP - prelim, +0.2% m/m, +1.1% y/y exp; prior unch, +0.8%. 07:00 EUR ESP Jun retail sales; prior -1.9% y/y. 08:45 GBP BoE Gov King, other MPC member testimony before Parliament. 10:00 GBP Jun Land Registry house prices. 12:30 USD Jun durable goods orders, +2.9% m/m exp; prior -0.6%. 12:30 USD Jun - ex-transport, +1.0% m/m exp; prior +1.6%. 18:00 USD Fed Beige Book release. 18:30 USD Senate vote on Fed nominees 21:00 NZD RBNZ interest rate announcement, % 3.00% exp, 2.75% prior
EurUsd The symmetrical triangle pattern on the hourly chart is still very much in play, and thus far we have seen a couple of nudges through the 20 Jul high at 1.3028. We are long from the original break above 1.2950 (there was even the re-test of that level yesterday which we suggested as a chance to add to longs) and expect the triangle to yield a target in the region of 1.3290. At present the bulls are steadying themselves above 1.3000 so further progress has been somewhat laboured; the next resistance level is expected at 1.3093 (10 May high) with weak resistance also anticipated at 1.3213 and 1.3254 (14 and 13 May highs respectively). Support at 1.2950 is still valid, with trendline support at 1.2905 –but should the pair drop below there we would have to concede the failure of the bullish triangle breakout, and would then expect technical levels below at 1.2793 (Friday’s low), 1.2733 (21 Jul low), 1.2683 (14 Jul low) and 1.2522 (13 Jul low).
GbpUsd GBPUSD continues to march unwaveringly higher, making easy work of the tangle of technical resistance levels between 1.5525-75 (15 April high, 200-day moving average and 23 Feb high) and going on to touch 1.5627 this morning. As previously discussed, we feel that the UK GDP figures last Friday were a game changer, and from here we would relish any dips towards the lower edge of the current uptrend channel now seen at 1.5350 (coinciding with a recent pivot level) to get long, and set a stop through 1.5300. Really there is not much standing in the way of an assault on the 17 Feb high 1.5816 in the coming days, then only uptrend resistance (currently at 1.5905) before the psychological significant 1.6000. Supports now seen below at 1.5525, 1.5450 and 1.5350.
UsdJpy Finally, a breakout from the 86.25 –87.75 range; and as expected, this has occurred on the topside –in the process activating a double bottom pattern we proposed earlier in the week. Given the depth of the two troughs we should therefore anticipate a target around 88.85, and after this morning’s break above the significant 88.00 pivot level, that now seems an extremely attainable goal. Sellers may still hinder progress up through the remaining trendline resistance around 88.45 but then the next discernable levels are all beyond our target; 89.15 (12 Jul high) and 89.50 (28-29 Jun high). Adding conviction to our view is the bullish engulfing candlestick carved out on the daily chart which suggests the bears have become overwhelmed and further upside is likely. Dips back towards the 87.75 breakout level will likely meet good bids, with the supports below there at 86.82 (yesterday’s low) and 86.25 (recent range floor).
UsdChf The bulls finally got a better grip on USDCHF yesterday, and not only managed to take out the stubborn 1.0565 resistance level, but then to print a bullish engulfing candlestick on the daily chart. We now see a fresh bullish flag pattern possible on the hourly chart which would suggest that on a break above 1.0620 we should go long and aim for a target around 1.0770. Standing in our way before that would be yesterday’s high 1.0640 (roughly coinciding with the 200-day moving average at 1.0644), the top of the 1-week uptrend channel at 1.0685, then the major 1.0700 level. Bidders are very likely to lurk around 1.0565 where the old resistance level once stood, then 1.0450and 1.0400.
€ The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2950 level and was capped around the $1.3045 level. The common currency continues to orbit the psychologically-important US$ 1.3000 figure as traders weigh an improving eurozone sovereign outlook against a deceleration in U.S. economic activity. Dealers reacted to last Friday’s eurozone bank stress tests results by pushing the euro back above the US$ 1.3000 figure on the perception the European banking system should be able to withstand additional dislocations in the sovereign credit market. European Central Bank officials talked up the stress tests late last week and yesterday, suggesting the eurozone received more than a passing grade. Data released in the eurozone today saw the June M3 money supply increase 0.2% y/y and the ECB’s bank lending survey will be released tomorrow. German data saw the August GfK consumer confidence survey climb significantly to 3.9 from the prior reading of 3.6 and the June import price index was up 0.9% m/m and 9.1% y/y. Provisional July CPI data will be released tomorrow. French data saw total June jobseekers off 8,600, an indication of an improving labour market there. In U.S. news, dealers reacted negatively to a lower-than-expected July consumer confidence print of 50.4, compared with the previous revised total of 54.3. These data suggest consumer spending may be relatively weak as final private demand is limited by current sentiment. Other data saw the July Richmond Fed manufacturing index decline to +16 from the prior print of +23 while the May S&P/CaseShiller home price index was up 0.47% m/m and 4.61% y/y. MBA mortgage applications, June durable goods orders, and the Fed’s Beige Book will be released tomorrow. Philadelphia Fed President Plosser yesterday suggested the current economic situation does not warrant additional Fed stimulus but added the FOMC is prepared to move if and when needed. Euro offers are cited around the US$ 1.3265 level.
¥/ CNY The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥87.90 level and was supported around the ¥86.80 level. Dealers pushed the yen lower today on expectations Bank of Japan could ease monetary policy further. Demand for Japanese government bonds remains strong and this is a signal that many investors expect Japanese yields could fall further. There is still talk the government may look to protect the psychologically-important ¥85 handle by selling yen for U.S. dollars or other currencies in what would be the country’s first official yen-selling intervention in several years. Many BoJ-watchers believe the central bank will maintain its ultra-accommodative monetary policy for at least two more years. Japanese banks have been investing in longer-dated debt and the swaps market to record profits as yields on five-year JGBs move lower. Data released in Japan overnight saw the June corporate service price index decline 1.0% y/y, lower than the previous -0.8% May result and the latest evidence that deflation remains a major problem for the Japanese economy. The Nikkei 225 stock index lost 0.07% to close at ¥9,496.85. U.S. dollar bids are cited around the ¥86.29 level. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥114.10 level and was supported around the ¥112.75 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥136.65 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥82.30 level. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.7784 in the over-the-counter market, down from CNY 6.7790. Data released in China overnight saw the June leading index decline to 102.84 from the revised prior tally of 103.25. People’s Bank of China reported China’s economic fundamentals remain “good” and said the recent deceleration in economic growth will likely stabilize.
£ The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.5575 level and was supported around the US$ 1.5440 level. Cable reached its strongest level since February 2010 as traders reacted positively to a surprise +33 print in July CBI reported sales, up from the prior reading of -5. Additionally, none of the £355 million in corporate bond securities Bank of England said it would purchase in its twice-weekly program was tendered today, the first time investors did not seek a BoE bid since March. This is indicative of improving sentiment in the credit markets. A perceived relaxation of terms in the Basel 3 capital accord terms is also supporting sterling. The key functions of the Financial Services Authority will be relegated to the BoE. Cable bids are cited around the US$ 1.5270 level. The euro depreciated vis-à-vis the British pound as the single currency tested bids around the £0.8345 level and was capped around the £0.8415 level.
CHF The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.0635 level and was supported around the CHF 1.0480 level. Data released in Switzerland today saw the June UBS consumption indicator improve to 1.810, up from the revised May result of 1.712 and its highest level since July 2008. Swiss unemployment remains at about half the level as the eurozone’s rate and this is resulting in positive economic activity. There is some speculation Swiss National Bank may have intervened by selling francs today given the significant move lower for the currency but SNB would not confirm this speculation. U.S. dollar offers are cited around the CHF 1.0980 level. The euro appreciated vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.3795 level while the British pound moved higher vis-à-vis the Swiss franc and tested offers around the CHF 1.6525 level.
€ The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.3005 level and was supported around the $1.2875 level. The common currency briefly traded above the US$ 1.3000 figure before settling back during the North American session. Dealers continued to chase the pair higher following the release of Friday’s stress test results on 91 eurozone banks, the details of which were better than expected. Data released in the U.S. today saw the June Chicago Fed national activity index decline to -0.63 from the revised prior reading of +0.31 while the July Dallas Fed manufacturing activity index fell sharply. Also, June new home sales evidenced a surprising 23.6% m/m increase to an annualized 330,000 units. May CaseShilller home prices data will be released tomorrow along with July consumer confidence data and and the July Richmond Fed manufacturing index. Philadelphia Fed President Plosser reported “there is underlying strength that is still there,” adding there is not much of a role for additional Fed action in the near term but conceded Fed policymakers “have ammunition to act if we want to.” San Francisco Fed President Yellen, the presumed next Vice Chairman of the Fed, reported it would be “risky” to adopt a long-run inflation goal of 4% and said regulation and supervision are the “first line of defense” against financial risks. In eurozone news, June M3 money supply data will be released tomorrow followed by the ECB’s bank lending survey on Wednesday. European Central Bank President Trichet reported the stress test on the banks was a “very important transparency exercise” while ECB member Ordonez said the tests “for sure have been enough to restore investor confidence.” Eurogroup chaiman Juncker said the stress tests evidence a “robust” European banking industry. Euro offers are cited around the US$ 1.3265 level.
¥/ CNY The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥86.80 level and was capped around the ¥87.70 level. New political party “Your Party” called on the government to weaken the yen and undertake a more expansionary fiscal policy to stimulate the domestic economy and counter deflation. Nomura, Japan’s largest brokerage, downgraded its assessment of Japanese equities to “neutral,” citing a bleaker profit outlook and decelerating economic growth prospects. Nomura expects economic growth of 2.6% this fiscal year and 1.5% next fiscal year. Data released in Japan today saw the June merchandise trade balance increase to ¥687 billion from the revised previous tally of ¥320.9 billion. The June corporate services price index will be released overnight. The Nikkei 225 stock index climbed 0.77% to close at ¥9,503.66. U.S. dollar bids are cited around the ¥86.29 level. The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥112.20 level and was capped around the ¥113.45 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥135.55 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥82.50 level. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.7790 in the over-the-counter market, down from CNY 6.7799. The June leading index will be released this week along with the July MNI business conditions survey and July PMI manufacturing. People’s Bank of China Deputy Governor Hu Xiaolian reported the “fixed” yuan exchange rate system caused excess liquidity that may cause “heightened inflation expectations and speculation in assets.”
£ The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.5515 level and was supported around the US$ 1.5405 level. Data to be released in the U.K. tomorrow include CBI July reported sales data followed by July Nationwide house prices data on Thursday and other mortgage and consumer credit numbers. Bank of England announced its new Financial Policy Committee will have eleven members and be in place by the autumn. The key functions of the Financial Services Authority will be relegated to the BoE. CEBR reported BoE will not need to raised rates for eighteen months. Chief Economist Dale has warned of lower economic growth, higher inflation, and rising unemployment. There is talk of a possible three-way split on the MPC this year if one or more policymakers voted to expand policy accommodation. Some believe the MPC may resort to increasing its asset purchase program. Cable bids are cited around the US$ 1.5140 level. The euro depreciated vis-à-vis the British pound as the single currency tested bids around the £0.8325 level and was capped around the £0.8380 level.
CHF The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.0490 level and was capped around the CHF 1.0555 level. The June UBS consumption indicator will be released tomorrow followed by the July KOF Swiss leading indicator on Friday. U.S. dollar offers are cited around the CHF 1.0980 level. The euro depreciated vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.3565 level while the British pound moved higher vis-à-vis the Swiss franc and tested offers around the CHF 1.6345 level.
* Stress test results are in--Yawn * Sterling bolstered as some of the economic gloom lifts * German recovery becoming difficult to ignore * JPY-strength becoming an issue in Tokyo * Key data and events to watch next week
Stress test results are in--Yawn
The long-awaited results of the Eurozone banking sector stress tests were delivered on Friday and markets greeted them with a collective yawn. Earlier leaks led markets to conclude the adverse scenarios would not be especially stringent, causing most to discount the results. To re-cap, only 7 of the 91 banks tested failed, requiring a total of only EUR 3.5 bio to be raised in new capital. To put that number in perspective, some analysts reckon Spanish banks alone need to raise EUR 40 bio to be adequately capitalized. The stress tests also excluded the potential for a sovereign debt default and focused only on securities held in banks' short-term trading books, and not the 90% of banks' government bond holdings that are classified 'hold to maturity.' But the basis of the European debt crisis was exactly that--banks holding large amounts of Euro-area government debt were vulnerable in the event of a sovereign default. The lack of credibility of the stress tests raises the risk that market concerns over Euro-area financial sector stability will resurface, leading to another round of speculation that the EUR is a doomed currency.
The one potential bright spot to emerge from the stress tests are disclosures of individual bank's holdings of government debt of Greece, Spain and Portugal, but those numbers were not available on Friday. They are expected to be divulged over the next two weeks. Revealing which institutions hold what amounts of troubled government debt will allow banks to more accurately determine which of their counterparties are most risky, and potentially improve credit market functioning and overall stability. Another possibility is that revealing government debt will lead to a two-tiered lending environment, with those holding significant exposures being forced to pay up or rely further on the ECB. We will be watching closely to see how European inter-bank lending rates move to start next week as the decisive measure of the market's acceptance of the stress test results. Going into the stress test results on Friday, with all that was known about the tests beforehand, 3-month Euribor rates were at the highest levels for the year, suggesting that credit markets remain on edge.
Against this backdrop, risk assets performed reasonably well in the past week, with stocks rebounding and making new gains, JPY-crosses at their highs (but still below recent highs), and the USD nearer to its lows against most others. Continued positive corporate earnings reports appear to be holding sway, but the overall environment remains extremely fragile and of low conviction. At the close of the week, risk looks like it may test higher next week, just as it looked set to extend losses at the end of last week. The passing of the stress test 'event risk' may propel risk higher in the near-term, but with more questions raised than answered, we think gains in risky assets are likely to prove unsustainable. As well, recent positive data surprises obscure the risks from a pending US slowdown into year-end, which is likely to echo around to other major economies. In this environment, we would suggest maintaining an extremely short-term trading bias and remaining alert for sharp intra-day reversals. Sterling bolstered as some of the economic gloom lifts
There is a broad consensus that the second half of this year will be difficult for the UK economy as it struggles in the face of budget reform. The news that Q2 GDP was far stronger than expected (+1.1% q/q) doesn't change this impression but it significantly reduces the chance that the UK economy will fall back into double dip recession on the back of austerity measures. The additional growth should soften the government's budget projections and should help heal the deficit a little faster than previously expected. Since UK growth in Q2 was quicker than expected it follows that inflation potential may also be a little firmer. Recent economic data does not support this view with headline CPI slipping back and average earnings moderating. That said there is sufficient fodder in price data for the UK inflation hawks to remain on edge. The impact of the GDP report was thus to send sterling sharply higher. EUR/GBP pushed below the 0.8390 technical support following the data release. A fall below 0.8310/20 could suggest another leg lower. Cable has broken above the USD1.5330 level which has strengthened the technical outlook. A break above USD1.5450 may see towards 1.5525.
German recovery becoming difficult to ignore
The German July IFO survey surged to 106.2 in July, outpacing both the market consensus and the June data by a generous margin. The release comes on the heels of stronger than expected German PMI data and provides more evidence that Germany's economic recovery continues to gather pace despite the loss of momentum in the US economy. Both the current and expectations components of the IFO surprised on the upside. Recent German surveys have shown some hesitancy in the expectations components, so the IFO's result suggests that the impact of the sovereign debt fears may have peaked. The current disparity between US and German economic data provides an interesting backdrop for the continued move higher in Euribor; though the ECB have attributed this to market forces. While there is little risk that the ECB will hike the refi rate at least before the middle of next year, the firmer Euribor is likely to offer EUR/USD decent near-term support. Medium-term the EUR remains susceptible to difficulties that some European banks may have in recapitalising themselves. Near-term, the USD1.2700 support continues to hold solid and risk is for another run at the USD1.3000 level.
JPY-strength becoming an issue in Tokyo
Japanese officials have stepped up their verbal rhetoric against continuing JPY strength, with comments coming from senior leaders at the BOJ and the MOF. Most highlighted the risk of a stronger yen being a significant danger to future growth in the Japanese economy. This week's Q2 earnings reports, as well as the highly awaited announcement of the European stress tests were major sources of pessimism over the past few weeks. The fact that both came and went without much fanfare has calmed the markets and reassured investor sentiment. Thus, the Yen has weakened against every major currency in the G10 this week; of note: USD/JPY (86.50 to 87.40), EUR/JPY (111.60 to 112.90) and AUD/JPY (75.25 to 78.30) rose over 4% this week alone.
The BOJ will continue to monitor market activity closely as increased global risk aversion is still on the forefront and could lead to fresh JPY-strength. There have been rumors of semi-official interest to buy USD/JPY down around 86.20/30 in the short term and we're likely to see further verbal intervention if it reaches 85.00. However, it is rather unlikely the BOJ will take further measures on additional strength unless it rapidly appreciates towards the 80.00 level, then the odds of actual intervention would become highly probable.
Key data and events to watch next week
The calendar in the US is moderately busy in the week ahead. Housing numbers kick off the week with June New Home Sales on Monday and the May S&P/CaseSchiller Home Price Index to follow on Tuesday. Also on tap for Tuesday are the Richmond Fed Manufacturing Index and the Consumer Board's Confidence Index for July. The data slate for Wednesday sees Durable Goods Orders for June followed by the Fed's Beige Book in the NY afternoon. Weekly Jobless Claims are scheduled for its regular release on Thursday. Friday's data sees Q2 GDP, Q2 Personal Consumption, Q2 GDP Price Index, and Q2 Employment Cost Index. Data for the week wraps up with Chicago PMI and University of Michigan Survey of Consumer Confidence Sentiment for July.
In the Eurozone, Wednesday sees the release of the Business Climate Indicator, Consumer Confidence, and Industrial Confidence numbers for July. Friday closes out the week with June Euro-zone Unemployment Rate and July CPI Estimate. In Germany, Tuesday sees the August GfK Consumer Confidence Survey and June Import Price Index. The data session comes to a close on Thursday with July Consumer Price Index and July CPI - EU Harmonized. In addition to the upcoming data releases, there will be top tier Q2 and first half earnings releases, kicking off with Deutsche Bank on Tuesday.
A light week of data in the UK starts with July Nationwide House prices, June Net Consumer Credit, and June Mortgage Approvals on Tuesday. There is no significant data due out until Friday, however the BOE's King, Bean, Fisher, and Sentance will be testifying on the May Inflation Report at Parliament's Treasury Committee on Thursday. Friday closes out the week with the July GfK Consumer Confidence Survey.
Data out of Tokyo is moderate, starting with June Retail Trade and Large Retailers' Sales on Wednesday. Thursday sees June Unemployment Rate, July Tokyo CPI, June National CPI, and June Industrial Production. Friday wraps up the week with June Housing Starts.
Canada begins a light week of data with Industrial Product Prices and Raw Materials Price Index for June on Thursday. The data session comes to a close with May Gross Domestic Product MoM on Friday.
A light calendar down under begins with Q2 PPI and CPI due out on Sunday and Tuesday. The week wraps up with June Private Sector Credit on Thursday. New Zealand begins the week with July NBNZ Business Confidence on Tuesday. Wednesday will have the RBNZ rate decision with expectations for a 25 basis point hike to 3%. Data continues on Wednesday with June Trade Balance and wraps up on Friday with June Building Permits.
Weekly Economic and Financial Commentary U.S. Review
Home Is Where the Economy's Heart Is
* Housing starts and existing home sales declined in June, reflecting the winding down of homebuyer tax credits. * Building confidence fell to 14 in July, and June's numbers were revised down slightly. * The effect from the unwinding of various economic stimulus programs is evident in other data, with the leading indicators declining 0.2 percent and weekly firsttime unemployment claims bouncing back to 464,000. * Bernanke's midyear report to Congress outlined possible future steps the Fed may take to boost economic growth.
We Have Got to Get in Shape
If the state of the nation's housing market is at the center of the economy's near-term prospects, then we have got to get in shape. Nearly all of the major housing indicators reported this past week showed more weakness than was widely expected, suggesting that the payback from the homebuyer tax credit program will be a bit deeper and longer lasting than many had hoped. One of the most disconcerting pieces of news was housing starts, which fell 5 percent in June, following a downwardly revised 14.9 percent drop in May. A slight 2.1 percent rise in building permits initially took some of the sting out of the headline number, but all of that gain was in the volatile multi-family unit series. Permits for new single-family homes fell 3.4 percent, following 10.3 percent drops in both May and April
Single-family permits are now running at just a 421,000-unit pace, well below the recent trend in starts. When you couple this with July's decline in the Wells Fargo/NAHB homebuilders' index, there is no reason to expect housing starts to increase in July, and we may not see a gain in August either. With demand flat and credit for homebuilders still extremely tight, there is no incentive for builders to get out ahead of demand.
Existing home sales actually fell less that expected, but the trend remains unfavorable. Existing home sales have been harder to read because of the extension of the closing deadline for homebuyer tax credits from June 30 to September 30. The net effect of the deadline extension will be to moderate the slide in existing home sales over the new few months.
The latest data from the National Association of Realtors (NAR) shows that first-time homebuyers accounted for 43 percent of home sales, about the same as the prior month. Distressed transactions, which include foreclosures and short sales, accounted for 32 percent of existing home sales in June, and investor purchases accounted for 13 percent. One of the more worrisome aspects of the report is that the number of homes on the market increased in June and remains relatively high. There is currently a 10.6-month supply of condominiums on the market and 8.7-month supply of single-family homes.
There were also a couple of pieces of encouraging news. The median price of an existing home rose 1.0 percent from last June to $183,700. The NAR also noted that home prices rose in 10 of the 19 MSAs that report monthly, and sales increased in 12 of those 19 areas. In addition, mortgage applications for the purchase of a home rose 3.4 percent, as the lowest mortgage rates on record are beginning to pull some buyers back into the market.
Fed Chairman Bernanke delivered his midyear report to Congress this week and basically reiterated the forecast released in the minutes of the June FOMC meeting. The markets were initially bewildered that the Fed chairman did not focus more on the deterioration in economic activity and growth prospects that has occurred since that forecast was put together. He redeemed himself, however, by focusing on what steps the Fed could take to further stimulate economic activity.
U.S. Outlook
New Home Sales • Monday
Giving back two months of solid gains, new home sales plummeted 32.7 percent in May to a 300,000-unit pace, the lowest level on record. Demand for new homes was pulled forward due to the homebuyers' tax credit, which required buyers to sign a contract by April 30. With mortgage applications for purchase declining 14.8 percent in June, we expect at least one more month of payback. New home sales will likely fall 3.3 percent in June to a 290,000- unit pace, setting a new record low. Moreover, the downward trend in other indicators such as builder sentiment, permits, and starts continue to suggest weakness in the housing market. With new home sales at such depressed levels, a modest recovery in sales could be imminent following the tax credit payback, but any rebound in housing will likely be painfully slow.
Previous: 300K Wells Fargo: 290K Consensus: 320K
Durable Goods • Wednesday
Advance orders for durable goods fell 1.1 percent in May, driven largely by a 29.6 percent drop in nondefense aircraft orders. The decline in aircraft bookings was mostly payback from a 215.7 percent surge in April. The underlying components of the report were far more sanguine than the headline suggested, with machinery, primary metals and computers and electronics bookings all increasing on the month. New orders excluding the volatile transportation sector were up 0.9 percent in May and will likely continue to improve in coming months, but at a modest pace. Moderating its positive momentum, the ISM manufacturing index pulled back for the second consecutive month in June, likely suggesting slower manufacturing activity in the second half of the year. We expect headline durable goods to increase 1.2 percent in June, with orders excluding transportation rising 0.8 percent.
Previous: -1.1% Wells Fargo: 1.2% Consensus: 0.8%
GDP • Friday
The economic recovery that likely began a little more than a year ago is beginning to lose momentum. Much of the slowdown can be attributed to the fading of fiscal stimulus programs and the ending of the inventory cycle. Moreover, recently released economic data on retail sales and foreign trade also suggest the economic recovery is moderating. Core retail sales, which excludes auto dealers, gasoline stations and building material stores, rose only 0.2 percent in June and posted negative readings in April and May. This component of retail sales closely parallels personal consumption and suggests another quarter of weak consumer demand. International trade could also weigh down economic growth. The trade deficit widened in May and may shave 1.0 percentage point from second quarter GDP growth. Consequently, we expect real GDP likely grew at a 2.4 percent pace in the second quarter.
Previous: 2.7% Wells Fargo: 2.4% Consensus: 2.5%
Global Review
U.K. Economy Breaks into a Sprint, but Will It Last?
* The U.K. became the first major economy to report GDP growth for the second quarter. Expectations were blown away as growth expanded at the fastest clip in nearly a decade. But, given the fiscal deficit problems and upcoming cuts in government spending, does the U.K. economy really have the legs to keep up this pace? * Fiscal tightening is not the only concern in the United Kingdom. The overall rate of CPI inflation is well above the Bank of England's target of 2 percent, and the January increase in the value-added tax complicates the outlook for inflation.
Strong Growth Will Face Headwinds in the U.K.
During the global recession, the U.K. economy was among the hardest hit in terms of major developed economies, with real GDP falling more than 6 percent. Since then, a tepid recovery has taken hold and, until very recently, sequential economic growth has been weak even with the benefit of low base effects. But developments in the United Kingdom this week including a decent retail sales report and a stellar GDP print for the second quarter might seem to suggest something different. Is the U.K. economy finally catching the wind in its sails? Unfortunately, we suspect the sequential growth rate in the second quarter will likely be the high-water mark for the next several quarters and the expansion will slow somewhat as fiscal tightening and deficit reduction programs sap economic growth in coming quarters.
The Bank of England's (BoE) Monetary Policy Committee (MPC) on Wednesday released the minutes from its meeting earlier this month. As was widely expected, the MPC left rates at the very stimulative present level of 0.50 percent. There is clearly a divergence among the members of the MPC as to the timing of dialing back stimulus from the U.K. economy. Even as one member voted for a hike in the target benchmark rate, the minutes revealed that the "committee considered arguments in favour of a modest easing in the stance of monetary policy." While the recovery appears to be building up steam, the overall rate of CPI inflation is well above the Bank of England's target of 2 percent at present. Adding to inflation concerns, the MPC agreed that, in the near term, "inflation was likely to be higher." Our view is that fiscal tightening will exert headwinds on growth over the next few quarters, and there seems to be support for that position among the MPC members. That is why we are not forecasting a rate hike until the second half of 2011. The valueadded tax hike in January may keep the overall rate of CPI inflation elevated, but underlying inflationary pressures should remain benign.
Thursday's retail sales report for June showed that sales climbed 0.7 percent in the month and, excluding the volatile auto fuel component, sales climbed 1.0 percent. Month-to-month changes in retail sales are notoriously choppy, and it should be noted that retail sales have been tepid so far in this recovery; the jump in June may also reflect a temporary boost in spending related to England's participation in the World Cup.
Finally, at the end of the week, the United Kingdom became the first major developed economy to report second quarter GDP. U.K. GDP grew at a 4.5 percent pace in the second quarter after increasing at a mere 1.3 percent pace in the previous quarter. We do not yet have a breakdown of GDP into its various components, but preliminary details suggest a jump in construction sector spending. There was also an increase in government services output, an area where support will likely be absent in coming quarters as government spending is scaled back. Going forward, we do not expect the U.K. economy to match this pace of growth as it struggles to overcome headwinds from fiscal tightening.
Global Outlook
Japanese Retail Sales • Tuesday
The Japanese economy has expanded in each of the past four quarters, and total real GDP has retraced roughly half of the ground lost in the recession. Part of the recovery story in Japan has had to do with surprising strength in domestic demand. Indeed, retail sales climbed steadily in every month of the year through April before falling 2.0 percent in May. This moderation is consistent with our outlook for slower growth in the second half of the year. On Tuesday, retail sales data for June will become available. The June measure of consumer confidence surged to its highest level since 2007, which may suggest shoppers in Japan returned to the stores in June, but we do not expect strong consumer spending to last. Also out next week in Japan are data on housing starts and construction orders on Friday, which will shed light on the housing situation.
Previous: 2.8% Consensus: 3.2%
German CPI • Wednesday
As the largest economy in the Euro-zone, economic trends in Germany can influence decisions made by the European Central Bank (ECB). In ordinary times, the ECB targets an inflation rate of just under 2 percent. The year-over-year harmonized inflation rate for Germany slipped to 0.8 percent in June. A July CPI figure is expected on Wednesday of next week. A modest recovery in oil prices during the month could help lift the year-over-year rate somewhat, but inflation pressures will likely remain benign for the near future. This gives the ECB cover to keep its target rate at 1.00 percent, and to continue its other unconventional methods of stimulating the economy such as providing a nearly limitless supply of credit to banks. In addition to usual concerns like balancing growth and inflation, the ECB has the additional consideration of keeping the sovereign debt situation from spinning out of control.
Previous: 0.8% Consensus: 1.1%
Euro-zone Unemployment Rate • Friday
The unemployment rate in the Euro-zone held steady at 10 percent in May - the highest level of joblessness in more than 11 years. When the ECB recently dialed back its growth outlook for the second half of the year, ECB President Jean-Claude Trichet noted "weak labor market prospects" as one of the bank's primary worries.
The June unemployment number will hit the wire on Friday and will give financial markets a sense of whether hiring is picking up. We suspect employers across the Euro-zone will be sitting on their hands, holding back on big expansions or mass hiring until they become convinced that the sovereign debt situation is under control and until they get a better sense of how growth will be shaping up in the second half of the year.
Previous: 10.0% Consensus: 10.0%
Point of View
Interest Rate Watch
The Fed Still Has Some Bullets Left
Fed Chairman Ben Bernanke broke precious little new ground in his midyear report to Congress and essentially reiterated the forecast issued in the minutes of the June FOMC meeting. The problem with that is economic conditions have clearly deteriorated since the Fed last met, and many forecasts for second quarter growth have been scaled back by a full percentage point or more. With conditions widely thought to have deteriorated further, many of the questions the Fed chairman faced were whether the Fed had any bullets left if the recovery should falter.
Bernanke outlined the steps the Fed could take to provide more stimulus if conditions warranted. He stated the Fed could change its policy statement to indicate that shortterm interest rates would remain near zero for an even longer period. The Fed could also reduce the interest rate it pays on excess reserves. In addition, it could reinvest the proceeds of maturing mortgage backed securities or buy more securities.
While Bernanke's reasoning is perfectly sound, the first option already appears to have been played out. The financial markets have already pushed the first Fed tightening all the way out into late 2011. Announcing that the extended period had been extended further would seem anticlimactic at this point.
We believe the Fed is putting on a brave front. While he stood by the Fed's forecast, Bernanke also noted there are downside risks to the forecast and also spent considerable time lamenting the problems with persistently high unemployment. We expect the Fed to reduce its forecast later this year.
A second round of quantitative easing was always a long shot unless we saw severe deterioration in the economic outlook or some sort of exogenous shock. That said, the Fed would be wise to keep its powder dry. There are still huge unresolved issues with the sovereign debt crisis in Europe and municipal finances in the U.S.
Consumer Credit Insights
A New Credit Paradigm
Consumer spending as a share of real gross domestic product (GDP) has risen from 60 percent in the early 1950s to 70 percent today. These were the heydays of American consumer might. These were the days when if you wanted something, you bought it, with little thought to if you could afford it. This was fueled by a post-war economy that continued to innovate, expand and grow. More recently, this was accompanied by a severe lack of concern for the credit quality of borrowers, which led to a credit explosion. Even the Great Recession didn't stop this trend, as the peak of consumers' share of real GDP was reached in the third quarter of 2009. But the U.S. economy is going through a structural shift, characterized by a new credit paradigm.
With the passage of the Financial Regulation (FINREG) Bill, as the banks warned, credit is likely to be more scarce than it already is. The new rules will force banks to hold more capital, which could restrain loan growth. In addition, due to the reduction in interchange fees and other stipulations in the bill, banks will need to find new sources of revenue. All of this will likely lead to less reliance on credit, a more frugal consumer and a smaller consumer contribution to GDP. But maybe this isn't such a bad thing. After all, diversification is a good thing, right? Maybe it's time to focus more on trade. Increasing exports would support economic growth, likely create more jobs and would help to reduce the current account deficit. Topic of the Week
A Glimmer of Hope in the Construction Outlook
The Architectural Billings Index (ABI) is a monthly diffusion index that can serve as a leading economic indicator for nonresidential construction spending. The American Institute of Architects surveys around 300 architecture firms across the country where participants are asked whether their billings increased, decreased, or stayed the same. In June, the ABI posted a reading of 46.0, remaining below the breakeven of 50 for nearly two and a half years. The score continues to suggest further weakness ahead for nonresidential outlays.
All is not doom and gloom, however. The ABI, although still below the threshold of 50, has risen significantly since reaching its record low of 33.9 in January 2009. Despite May's subpar reading, a closer look at its components sheds some light on the future of the nonresidential construction industry. Billings for architecture firms with a commercial/industrial specialization posted a score of 50.6 in June, putting the sub-index in expansionary territory for a second consecutive month. Commercial and industrial construction spending can lag the commercial/industrial sub-index up to 11 months, which suggests better times could be less than a year away in this sector.
The ISM Manufacturing Index, which also closely parallels the commercial/industrial sub-index, has been in expansionary territory for nearly a year and could also portend future growth in the commercial and industrial sector.
It is still too early to predict what will come of the sector and nonresidential construction spending overall, however. Sure, the commercial/industrial sub-index surpassed the breakeven of 50, but two months in positive territory is not nearly enough evidence to prove a recovery. Moreover, while the index provides valuable insight, it is a diffusion index, which can only accurately portray the breadth and not the depth of the industry's strength. We expect nonresidential construction outlays will continue to fall well into 2010.
(Reuters) - The Obama administration warned on Friday the U.S. economy had encountered "strong headwinds" and the country's fiscal challenge remained grim, but it lowered an estimate for the budget deficit this year.
Outlining the country's fiscal path over the next decade, the White House said the numbers were moving in the right direction but the deficit and debt were too high.
"The economy is still struggling; too many Americans are still out of work; and the nation's long-term fiscal trajectory is unsustainable," the White House said in the annual midsession review of President Barack Obama's budget.
Polls show Americans are anxious about the economy and could punish Obama's Democrats in November 2 midterm congressional elections for perceptions of big government spending and high unemployment after a severe recession.
Investors are also focused on U.S. debt at a time when European governments are stressing fiscal consolidation. The White House said the country was on track to meet its June commitment in Toronto to the Group of 20 to halve the deficit by 2013.
The administration trimmed an expected funding gap in the current fiscal year by $84 billion, to $1.47 trillion, versus the estimate released in February. The gap was seen narrowing to $1.42 trillion in 2011.
Republicans jumped on the numbers as proof "Obamanomics" was not working.
"This report confirms that our national debt will double in five years and triple in 10 years. It confirms that our deficits are not sustainable," U.S. House of Representatives Republican Leader John Boehner said in a statement.
The review also tweaked White House assumptions about the economy, which have been criticized as overly optimistic in the past. The White House forecast growth at 3.2 percent this year, 3.6 percent in 2011 and 4.2 percent in 2012.
Unemployment will only decline slowly, to 8.1 percent in 2012, the year of next presidential election, and stay above 6 percent until 2015.
The forecasts were based on data available through May and finalized in early June.
"The most pressing danger we now face is unacceptably weak growth and persistent unemployment, rather than outright economic collapse, and that is a very substantial difference," White House Budget Director Peter Orszag told reporters.
Job creation is a vital goal for Obama and will loom large in the November poll, but unemployment has lagged growth and remains at a lofty 9.5 percent.
EUROPEAN RISKS
"The U.S. economy still faces strong headwinds," the White House said, citing a weak housing market and doubts about the recovery in Europe, which could sap demand for exports.
"The European recovery is at risk because of increased uncertainty while government stimulus is withdrawn, and a further slowdown in Europe would pose problems for the rest of the world whose exports to Europe may be reduced," it said.
Britain and Germany have announced austerity plans to reassure investors, contrasting with the U.S. preference of phasing in budget controls going forward.
European Central Bank President Jean-Claude Trichet, in an article in the Financial Times on Friday, urged countries using the common euro currency to "implement a credible medium-term fiscal consolidation strategy."
In contrast, Federal Reserve Chairman Ben Bernanke argued this week the economy still needed fiscal support and it did not make sense to try to rein in this year's deficit.
But he stressed the country needs to curb the deficit over the next 2 to 3 years.
Obama signed an $862 billion emergency stimulus last year, which the White House says helped restore U.S. growth. But his subsequent efforts to increase aid to cash-strapped states and small businesses have been thwarted in Congress, mainly by Republicans in the Senate objecting to more deficit spending.
U.S. government debt held by the public is projected to rise above 70 percent of gross domestic product in 2012 and reach 77 percent by 2020.
Critics warn adding to the deficit could sap investor faith in the administration's commitment to phase in budget controls, risking a sovereign debt crisis here that unnerved European markets earlier this year.
Long-term U.S. interest rates have stayed low despite the grim U.S. budget outlook, supporting the recovery by holding down borrowing costs on mortgages and auto loans. But that could quickly change if bond investors take fright.
Obama vows to halve the deficit by 2013, a promise the larger Group of 20 rich and emerging nations also adopted at a meeting in Toronto last month, and the president has appointed a bipartisan commission to suggest how to tackle the fiscal challenge.
Obama's 18-strong panel is expected to recommend a mixture of spending cuts and tax increases when it reports findings by the end of December, well after the congressional vote.
(Reporting by Alister Bull; Editing by Andrew Hay and Dan Grebler)
The British Pound extended the rally from the previous day and rallied to a fresh weekly high of 1.5412 during the European trade as the advanced 2Q GDP report for the U.K. reinforced an improved outlook for future growth, and the GBP/USD is likely to maintain the upward trending channel from the June low (1.4346) as the recovery gathers pace.
Talking Points • Japanese Yen: Weighed by Risk Appetite • Pound: 2Q GDP Exceeds Forecast • Euro: German Businesses Confidence Unexpectedly Improves • U.S. Dollar: European Bank Stress Test on Tap
However, a report by the British Bankers’ Association showed loans for home purchases unexpectedly slumped to 34.8K in June from a revised 36.4K in the previous month to mark the lowest reading since February, and the slack within the real economy may lead the Bank of England to maintain a dovish policy stance over the coming months as it aims to balance the downside risks for the region.
Economic activity in Britain expanded 1.1% in the second quarter, which exceeded forecasts for a 0.6% rise, while the growth rate increased an annualized pace of 1.6% to mark the first positive reading since 2008, and the larger-than-expected rise in economic activity could give the BoE scope to normalize monetary policy going into the following year as price growth continues to hold above the government’s 3% limit for inflation. The breakdown of the report showed manufacturing increased at the fastest pace in over a decade, with construction surging 6.6% to mark the largest advance since 1963, while service-based activity, which accounts for more than two-thirds of the economy, expanded 0.9% from the first three-months of 2010. However, as the new coalition in the U.K. targets the budget deficit and tightens fiscal policy, the central bank may look to support the economy throughout the remainder of the year as the outlook for future growth remains clouded with uncertainties.
The Euro crossed back above the 100-Day SMA (1.2878) and surged to a high of 1.2965 following an unexpected rise in business confidence, and the single-currency is likely to face increased volatility later today as the European Central Bank is scheduled to release the results of the commercial bank stress test at 16:00 GMT. The German IFO business confidence survey increased to 106.2 in July from 101.8 amid forecasts for a decline to 101.5, with the gauge for future expectations advancing to 105.5 from a revised 102.5 in June, and businesses may turn increasingly optimistic going forward as the region benefits from the rebound in global trade. Nevertheless, as the stress test takes center stage, dismal results is likely to weigh on the exchange rate, which could stoke a sharp selloff in the euro-dollar, but even a lackluster outcome may keep the single-currency above the 100-Day SMA as the economic outlook improves.
U.S. dollar price action was mixed overnight, while the USD/JPY advancing to a high of 87.22 as the Japanese Yen weakened against most of its major counterparts, and the reserve currency is likely to face increased volatility later today following the results of the European stress test as investors weigh the outlook for the global financial system. However, the major currencies could face choppy price action as market liquidity thins ahead of the weekend, but the rise in risk appetite is likely to dictate price action going into the North American trade as equity futures foreshadow a higher open for the U.S. market.
How Will The European Bank Stress Test Affect The Exchange Rate? Join us in the Forum
Related Articles:
US Dollar to Rise Against Yen, Decline vs Pound and Euro
To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com
The amount of nervous energy in today’s FX market has already translated into some choppy, range-bound trading. The source is obviously the impending release of the EU bank stress test due to be issued at 16:00 GMT.
Today, German IFO data came in much stronger than expected spiking the EURUSD 40 pips rallying up to 1.2965. In the back of our minds, we remember that torrent of support risk-correlated trades gained on the release of the US stress test despite the market’s criticism then. Nevertheless, we remain unconvinced that today’s risk appetite will receive the same boost.
The EU stress test lacks the rigor of the US test and has lost enormous credibility based on the handling of the assignment. Swiss regulators highlighted this fact when the FT reported that they had conducted their own bank stress tests which were twice as stringent. The FT reported that the Swiss regulators conducted 13 different mega-risk scenarios including the collapse of the credit market and a drastic fall in GDP. I would suspect that investors will look at the Swiss test and feel kind of slighted when the actual EU tests & methodology are released.
As we have yet to see the actual report, the assumptions we’re making are based solely off official statements and newswires, thus we may be proved incorrect. The most important factors for the release will be the credibility of the results, the transparency of information and the explanation of all assumptions made during the research.
According to the most recent reports, all vital banks (read: too big to fail) will pass including Germany’s Landesbanken and all Greek banks. If all Greek banks are set to pass this test, something must be awry somewhere. To create the illusion of authenticity, the EU may throw a few minor banks under the bus. There are still significant EURUSD shorts lingering in the market and if the report is truly first-rate, we could see some heavy short covering and quickly.
In the UK this morning, the Office for National Statistics released their first estimate for Q2 GDP. The numbers came in much stronger than expected at +1.6%, exceeding the +1.1% consensus among economists and a -0.2% previous reading. The surprise number significantly decreases the probability of further QE by the BoE. Although an entire strategy cannot be based off one data point, the BoE’s MPC will most likely focus more on inflation and less on growth in future meetings. Perhaps Mr. Sentence, the lone dissenter in the last meeting, may not have been too far off base after all.
Finally, the ECB’s Trichet suggested that fiscal tighten was necessary around the globe and should not be delayed. The comment is in direct contrast to the Fed’s view that some level of stimulus was still required, a point just reiterated by Bernanke this week. We don’t expect any reaction in the USD, but it will be interesting to monitor because strict fiscal policy compounded by loose monetary policy should be extremely supportive for the underlying currency.
Today's Key Issues (time in GMT): 07:30 EUR ITA Jul consumer confidence index, 103.9 exp; last 104.4. 08:00 EUR GER Jul Ifo sentiment index, 101.6 exp; last 101.8. 08:00 EUR GER Jul Ifo current conditions index, 101.7 exp; last 101.1. 08:00 EUR GER Jul Ifo expectations index, 101.6 exp; last 102.4. 08:00 EUR ITA May retail sales; last -0.3% m/m, -0.5% y/y. 08:30 GBP Q2 GDP - prelim, +0.6% q/q, +1.1% y/y exp; last +0.3%, -0.2%. 08:30 GBP Jun BBA mortgage lending data 16:00 EUR Stress Test results for individual banks expected start 17:00 EUR CEBS press conference regarding Stress Test results
EurUsd We may have written EURUSD off prematurely yesterday as our short trade at 1.2790 was thwarted by the bulls managing to break back within the 4-week uptrend channel. Fortunately, leaving a tight stop just above the trendline around 1.2830 shielded us from being dragged all the way back up to 1.2933 highs, but it has somewhat dented conviction in our short-term bearish view (the medium-term bearish view still prevails). Not only does the break back inside the uptrend signal that the bulls are not quite done, but there is also a bullish engulfing candlestick on the daily chart which also suggests the bears are lacking the energy to do much about it at the moment. We are currently toying with the 100-day moving average at 1.2881 but next resistance levels on the topside are expected at 1.2933 (yesterday’s peak), 1.3028 (20 Jul high) and 1.3093 (10 May high). The lower edge of the 4-week uptrend now comes in at 1.2830, but should there be another break below there we would once again attempt a short with a view to re-visiting 1.2733 (yesterday’s low), and 1.2683 (14 Jul low) in extension.
GbpUsd Yet another currency pair to give us the head-fake this week, GBPUSD’s break below its 6-week uptrend touched a low of 1.5125 before rebounding sharply back up towards 1.5350 resistance (19 Jul high). This 1.5350 level still poses a difficult challenge for the bulls to overcome, especially as 1-week downtrend channel resistance comes in just ahead of there at 1.5340; but should they manage to push it higher then look for next resistance up at 1.5472 (last Thursday’s high), and 1.5525 (15 Apr high). Next support is that lower edge of the 6-week uptrend at 1.5250; but if the trend breaks lower once more then first stop on the downside will be 1.5125 (Wednesday’s low), followed by 1.5080. Should we managed to conquer those supports, there is a much clearer path towards the next downside targets of 1.4992 (100-day moving average), then the 12 Jul low 1.4949.
UsdJpy Yesterday we outlined the two possible scenarios in play for USDJPY –the first being a potentially bullish symmetrical triangle pattern with a target at 88.15, and the second one a larger bearish flag pattern which had not yet been activated. That latter pattern now looks to have become activated by the sell-off through trendline support at 87.00-05, and with that we now feel that the smaller symmetrical triangle pattern is as good as dead in the water. The classically defined target on the downside for this new flag pattern is 84.30 with supports ahead of there eyed at 86.27 (16 Jul low) and Nov 2009 lows of 84.83; but as we have mentioned a couple of times recently, down at those levels we would be playing Russian roulette with possible BoJ intervention so anything below 85.50 seems an ambitious enough take profit level for our fear/greed ratio. Any rallies from here are likely to meet fresh sellers around 87.15-20 (back side of the flag) where those who missed the break-out first time around will want to jump in, then further resistance seen at 87.57 (this week’s high from 20 Jul), 88.00 (former pivot), 89.15 (12 Jul high) and 89.50 (28-29 Jun high).
UsdChf The 3-week downtrend channel has been violated a number of times in the past few sessions, but the bulls failed to capitalize on the upside break and the pair is has since tumbled back towards major support at 1.0400. Until we get a decisive break out one way or another –either below 1.0400 or above the downtrend resistance 1.0470 –we are likely to be confined to achingly tight ranges. Those who favour buying on dips should only do so around 1.0400, as the landscape below 1.0400 is dotted only with stale support levels at 1.0365 and 1.0230. Sellers are likely to step in back up towards 1.0450 former pivot, aforementioned downtrend channel resistance at 1.0470, then 1.0560 (19 Jul ) highs.
Risk appetite was pared down during the Asian session as investors chose to focus on Fed Chairman Bernanke’s dovish comments. Bernanke's semiannual report to Congress basically reiterated the position reported in the FOMC minutes and policy speeches. However, the markets seemed to have latched on the words “we recognize that the economic outlook remains unusually uncertain. We will continue to carefully assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed." That statement sent a rush of capital back to recent safe havens in the US dollar, Swiss Franc and Japanese Yen. Just as USD, CHF and JPY all received their boost, US yields & equities dropped like a stone with 10y yields falling 10bp as the chairman spoke.
As Europeans sat down at their collective desks this morning, the merits of the stress test are now being hotly debated. The chasm emerging between proponents and opponents is considerable. On one side are EU officials who believe everything will be repaired by this magical report and on the other side is the real market, which remains overall skeptical and unconvinced. For those that have been reading our reports for the last two weeks, we firmly remain in the skeptical camp. One of the CNBC anchors summed up our opinion best when speaking to a Greek finance official declaring that “if Greek banks pass, the stress test fails.” The increased dialog surrounding this issue is obviously due to the proximity of the data release, further amplified by the Wall Street Journal’s report that EU officials are looking to publish the results before tomorrow’s European open rather than at its close.
This begs the question, if the regulators haven’t even cemented questions regarding the distribution of their report, how confident can we feel in their thoroughness in analyzing complex balance sheets? The uncertainty and debate still surrounding this report is caustically eroding confidence. We still hold that the stress test will not provide the transparency needed, will not build nor shore up confidence in the EU and will leave us with more questions than answers.
In the UK, BoE MPC minutes revealed a 7-1 vote in favor of an unchanged policy rate with Andrew Sentance being the lone dissenter…again. The committee further voted unanimously to hold the QE program unchanged at £200 bn. There was a discussion of increasing QE easing, however no member actually voted for the move. BoE Governor Mervyn King still believes that inflation will continue to ease as growth is expected to deteriorate a bit further. Given these developments, we suspect the sterling will continue to come under selling pressure as the risk is now skewed towards policymakers opting to hold rates steady longer than the market currently expects.
Over the past few days, CAD remains the relative outperformer in the FX market. Canadian retail sales and their Monetary Policy Report are due out today and we believe that growth expectations will continue to be adjusted to the upside - giving the CAD even further support.
Today's Key Issues (time in GMT): 08:30 GBP Jun retail sales, +0.5% m/m, +1.0% exp; last +0.6%, +2.2%. 09:00 EUR May ind new orders, unch m/m, +20.2% y/y exp; last +0.9%, +22.1%. 13:30 USD FOMC Chair Bernanke semi-annual House testimony 14:00 EUR Jul consumer confidence index; last -17. 14:00 USD Existing home sales, mn saar 5.20 exp 14:00 USD Leading indicators index, % m/m Jun -0.3 exp 15:00 ZAR South Africa: Interest rate announcement, % Jul 6.50% 14:30 CAD BoC Monetary Policy Report.
EurUsd As the credibility of the European bank stress tests is put up to increasing scrutiny, the bears continue to pile the pressure on EURUSD; and in the last 24 hours we have seen the 3-week uptrend channel break down, leading to a low of 1.2733. From here the risk-reward profile strongly favours short positions, so we would look to use the back side of that 3-week uptrend as a good entry level for shorts; that trendline resistance is seen at 1.2790 currently, so we’d be happy getting in around there and setting a stop just above 1.2830 (yesterday’s US session high). First destination on the downside will be the 14 Jul low 1.2683, although it’s worth noting that today that level coincides with a very short-term downtrend support so the pair will likely bounce off there on the first attempt. Ultimately we see this bearish trend eventually taking another look at 1.2522 (13 Jul low) and 1.2483 (2 & 6 Jul lows), and very possibly a further extension back towards 1.2000. Should the bears relent enough for the pair to break back within the uptrend channel at 1.2790, expect further selling interest to lie around 1.2840 (support-turned-resistance from earlier this week), the 100-day moving average 1.2887, and 1.2925.
GbpUsd After a choppy and indecisive few days trading, we feel GBPUSD is gathering momentum for a move lower –a view based on yesterday’s break below the significant 6-week uptrend and reinforced by a bearish engulfing candlestick on the daily chart over the last 2 days of this week. We now look to sell around 1.5200 levels –the back side of the 6-week downtrend seen at 1.5210 –and await a return to 1.5125 (yesterday’s low). Further downside is highly possible but likely to become laboured below 1.5125 as trendline support is currently seen around 1.5110 and a significant former pivot level remains at 1.5080.Should we managed to conquer those supports, there is a much clearer path towards the next downside targets of 1.4992 (100-day moving average), then the 12 Jul low 1.4949. The risk-reward profile does look a little edgy should we break back above the uptrend at 1.5210, with next resistance not seen until 1.5350 (19 Jul high), 1.5472 (last Thursday’s high), and 1.5525 (15 Apr high).
UsdJpy Yesterday we outlined the two possible scenarios in play for USDJPY –the first being a potentially bullish symmetrical triangle pattern with a target at 88.15, and the second one a larger bearish flag pattern which had not yet been activated. That latter pattern now looks to have become activated by the sell-off through trendline support at 87.00-05, and with that we now feel that the smaller symmetrical triangle pattern is as good as dead in the water. The classically defined target on the downside for this new flag pattern is 84.30 with supports ahead of there eyed at 86.27 (16 Jul low) and Nov 2009 lows of 84.83; but as we have mentioned a couple of times recently, down at those levels we would be playing Russian roulette with possible BoJ intervention so anything below 85.50 seems an ambitious enough take profit level for our fear/greed ratio. Any rallies from here are likely to meet fresh sellers around 87.15-20 (back side of the flag) where those who missed the break-out first time around will want to jump in, then further resistance seen at 87.57 (this week’s high from 20 Jul), 88.00 (former pivot), 89.15 (12 Jul high) and 89.50 (28-29 Jun high).
UsdChf The 3-week downtrend channel has been violated a number of times in the past 24 hours, but as of yet the bulls have failed to capitalize on the upside break and the pair is continuing to stutter around the trendline resistance. We are still short at 1.0530 from yesterday’s trade recommendation (taking the view that a lack of directional impetus from either the bulls or the bears made it a prime range-trading environment) and are looking at a first target of 1.0450 (Monday’s low), with 1.0400 (double bottom seen last week) as a possible extended target. Some bulls may favour buying on the dips towards, 1.0400, but should they be wrong the landscape below 1.0400 is only dotted with stale support levels at 1.0365, 1.0315 (trendline support), then 1.0230 –could be a nasty plunge with few buyers to slow the descent.
The dollar fell to a one-week low against the yen in Asia Thursday as Federal Reserve Chairman Ben Bernanke's bearish remarks overnight made investors wary of the direction of the U.S. economy.
While he made no mention of changes to the Fed's ultra-easy policy in his semi-annual report to Congress, Bernanke noted the economic outlook is "unusually uncertain."
Earlier in the day, the greenback fell to as low as JPY86.43, lower than JPY87.01 in New York Wednesday.
The U.S. unit was at JPY86.47 at 0450 GMT, while the ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, was at 83.183 from 83.274 overnight.
The yen rose against the euro as well due to the knock-on effects of its surge against the dollar. It hit a two-week high as the single unit touched JPY110.35.
Japanese investors have been aggressively selling the euro so far today, and it is possible that the unit will fall below JPY110.00 later in the global day, dealers said.
It was at JPY110.45 as of 0450 GMT, down from JPY111.09 last night.
Meanwhile, the euro was little changed against the dollar. It was trading around USD1.2773 compared with New York overnight's USD1.2763.
The Pound slipped after Bank of England minutes showed a 7-1 vote in favor of keeping interest rates stable. This news largely diminished speculation that the BoE may begin raising rates before year end.
The Australian dollar was lower late Thursday taking its lead from weakness in share markets across most of Asia with the release of European bank stress tests Friday also provoking caution.
Market expectation
EURCHF rally running out of steam, the pair is likely to move toward CHF1.30 in coming months, although the Swiss National Bank is likely to remain sidelined.
Analysts said US dollar may fall below JPY86.00 soon if European share prices drop later in the day following weakness in Japanese shares, caused by investors reacting to Bernanke's testimony.
Such a decline should open the way for the dollar to fall to JPY85.00 or even lower because there are plenty of automated stop-loss selling orders below JPY86.00.
Once the U.S. currency enters the JPY84 zone, market participants will begin to speculate on the Japanese government taking steps to curb yen gains, said analysts.
European stocks are expected to start lower Thursday, after the Federal Reserve Chairman's comments late Wednesday on the state of the U.S. economy sent the Dow Jones Industrials Average on a one hundred point decline, and Asian markets followed in kind.
Markets gained a temporary sense of optimism as FX risk-correlated trades recover from yesterday’s sell off and equity markets rally in Asia. Yesterday we saw a sharp reversal - especially in the EURUSD as leveraged players cut their long positions after the pair lost momentum and seemed to run into resistance. EU officials are on the wires talking up the bank stress test due to be released this Friday.
As we’ve already stated this week, we suspected that EU officials would throw a few sick banks under the bus in an effort to create the illusion of rigor. Greek, Spanish and now French officials have all been vocal affirming that the vast majority of their banks will pass the test. French Economic Minister Christine Lagarde stated she was "confident" about the results of the stress test for French banks, but failed to provide any details as to why.
The show boating is making us a bit concerned about the “stressfulness” of their methodology. Our best guess is that the test will measure the two major types of bond portfolios within banks. One bond type is used for trading which the ECB can apply a haircut to, the second is your traditional hold-to-maturity bonds which are going to be mark-to-market and potentially deemed immaterial. EU offical move in this direction since they are concerned with a "trading shock" more then a default. However, we hearing rumors that there’s been a fascinating migration of tradable bonds into the hold-to-maturity classification as of late.
The EU structured safe haven for these bonds and not looking at the full picture concerns us as it is a convenient place to hide bad assets and tell half the story. We don’t believe that this stress test will provide the confidence the market is searching for and certainly not be as successful as the US stress test. We suspect that the EUR will continue to come under selling pressure and we are watching for a test of the 1.2750 lvl.
In Japan, the BoJ minutes released this morning asserted the central bank’s commitment to "continues to aim at maintaining the extremely accommodative financial environment” and that the BoJ’s new scheme to encourage commercial lending to growth industries would be initiated in August. Perhaps the most intriguing aspect is that officials continue to make comments on the recent Yen strength while BoJ Deputy Governor Yamaguchi reiterated that they are watching forex moves very carefully.
While we don’t expect US yields to reverse their current direction, which would provide a great catalyst for a JPY sell-off, we do believe that Japanese comments and potential intervention around the 85 lvl will provide some ample USDJPY buying opportunities in the near-to-mid term.
Today’s focus will be on the BoE’s MPC minutes release & Chairman Bernanke’s testimony to Congress. MPC member Sentance voted for a rate hike at the June meeting and his recent public comments continue to be hawkish. However, dovish MPC member Posen maintained to Dow Jones that there was more than a 50% probability that the next BoE move would be a policy loosening, not tightening. Sterling has been very jumpy as of late as traders try to anticipate the BoE’s next move. Without any clear guidance, this is a currency we would avoid for the time being.
Today's Key Issues (time in GMT): 08:30 GBP retail sales, +0.5% m/m, +1.0% y/y eyed; last +0.6%, +2.2%. 08:30 GBP BoE MPC minutes, vote 7-1 prior 09:30 EUR German FinMin Schaeuble, French FinMin Lagarde meeting in Paris. 10:00 EUR Germany E4.0 bln 3.25% 2042 Bund auction. 00:00 EUR Portugal E1.25 bln 12-month Treasury bill auction. 10:15 EUR Schaeuble-Lagarde, Franco-German Econ-Fin"l Council press conference. 18:00 USD FOMC Chair Bernanke semi-annual Senate testimony
EurUsd Just as we suspected in yesterday’s report, the brief visit above 1.3000 (1.3028 the high) soon attracted the attention of bears who re-emerged in numbers and drove the pair all the way back down to lows of 1.2839. We feel that at these lofty levels, a short bias seems the most attractive in terms of risk-reward (recall that the rally to 1.3028 represented a 9.5% appreciation in the space of just 6 weeks), and significant resistance level appear to cap the upside to 1.3095-1.3125. That zone of anticipated selling interest includes the triple whammy of 10 May high (1.3095), the 4-week uptrend channel resistance at 1.3115, and also the 38.2% fibonacci retracement of the entire sell-off from 1.5145 to 1.1876 which comes in at 1.3125. The tricky part here is selecting favourable entry levels and a small enough position size to tolerate a wide stop; 1.2950 would be the ideal area for us to re-load shorts, with the view that the pair should at the very least re-visit the lower edge of this 4-week uptrend channel in the coming days (currently seen at 1.2745). We still expect some buyers to lie around 1.2780 (a former pivot) and 1.2683 (last Wednesday’s low).
GbpUsd The fickle short-term trends in GBPUSD are making trading conditions difficult, and indeed the 1-week downtrend channel we highlighted yesterday morning has already broken its originally defined ceiling –a development made all the more frustrating by the fact it came very shortly after the pair had broken through 1.5230 support (which would have suggested in our minds that the next significant leg of this move would be to the downside). Given this whipsaw action, we prefer to steer clear of fresh trade entry for the time being, and should the bulls clear the next significant resistance at 1.5350 (19 Jul high), we could be induced to consider longs once more. Above there the likely targets are 1.5472 (last Thursday’s high), and 1.5525 (15 Apr high). Should the pair opt to go lower instead, yesterday’s low was 1.5154, and next supports are seen at 1.5080 former neckline, 100-day moving average 1.4992, then the 12 Jul low 1.4949.
UsdJpy A very interesting picture for USDJPY at the moment with the possibility of both a bullish triangle pattern and a bearish flag pattern currently on the table. Yesterday we highlighted an ascending triangle pattern on the hourly chart with a target at 88.15 which looks to have been activated by the move up through 87.22; but having assessed the subsequent price action, it looks more accurately like this was in fact a symmetrical triangle. The consequences of this shift in definition is a mere 5 pips (the target now 88.20), so our view of the topside prospects remain unaltered;resistance is seen around 88.00 (i.e. might use discretion on taking profit a little earlier than the pattern’s defined target), and further supply remains at 89.15 (12 Jul high) and 89.50 (28-29 Jun high). What is intriguing however about the current picture is that there is also the possibility of a bearish flag coming into play in the coming sessions, and which currently suggests a break below 86.95 (lower edge of the flag) would be a good trigger for short entry –implying a target of 84.20 below. This bearish scenario does tie in nicely with the recent break of 86.97 (1 Jul low) which opened up the possibility of another plunge towards Nov 2009 lows of 84.83; but once again we should remain cautious that such a bearish target would almost certainly catch the attention of the BoJ in which case intervention may be a very real and ruthless threat.
UsdChf The 3-week downtrend channel continues to direct price action in the short term, but trendline resistance has already been under threat this morning around 1.0515. Given that the bears looked unable to muster a decent assault on 1.0400 at the end of last week, they are likely to capitulate soon enough in defending this trendline too. Having said that, it doesn’t look like the bulls are all that feisty for a move higher either, so perhaps we will be confined to ranges for the time being. If that’s the case, we think that current levels (1.0530) actually look pretty attractive for short entry given the previous price action around 1.0550-60. We’d be satisfied using 1.0580 as our stop, and set a first target on the downside of 1.0450 (Monday’s low), with 1.0400 (double bottom seen last week) as a possible extended target. Some bulls may favour buying on the dips towards, 1.0400, but should they be wrong the landscape below 1.0400 is only dotted with stale support levels at 1.0365, 1.0315 (trendline support), then 1.0230 –could be a nasty plunge with few buyers to slow the descent.
(Reuters) - President Barack Obama sought on Wednesday to lift sagging confidence in his economic stewardship by enlisting the help of predecessor Bill Clinton, as a leading business group issued a scathing critique of the administration's policies.
Clinton, who presided over the 1990s economic boom, was to join Obama at a White House meeting with business leaders at 2:35 p.m. Eastern time (1835 GMT) to encourage job creation and investment, including in clean energy.
Obama also consulted investment guru Warren Buffett earlier in the Oval Office as he gathered views on how to boost growth, the White House said.
The U.S. Chamber of Commerce, a leading business group, issued a rebuke of Obama's economic agenda, accusing him and his Democrats in Congress of neglecting job creation and hampering growth with burdensome regulatory and tax policies.
Four months before the November congressional elections, Republicans have tried to paint Obama and his Democrats as anti-business.
Obama is increasingly turning to former President Clinton to help win over voters and the business community.
Clinton, seen by many in corporate America as sympathetic, has helped the White House by campaigning for Democratic candidates running in November's elections.
And Obama on Tuesday named former Clinton administration veteran Jack Lew as the White House budget chief to help cut the huge deficit.
With unemployment stubbornly high, polls have reinforced Democrats' fears of big losses in November.
A survey by The Washington Post-ABC News showed 54 percent of Americans disapproved of Obama's leadership on the economy. In a CBS News poll, only 40 percent of Americans said they approved of Obama's handling of the economy.
JOBS SAVED
To counter such perceptions, the administration trumpeted an analysis from the White House Council of Economic Advisers that said government funding of clean energy, economic development, construction projects and other initiatives was spurring "co-investment" by the private sector.
The report, unveiled by CEA Chairman Christina Romer and Vice President Joseph Biden, estimated that Obama's $862 billion economic stimulus package had saved or created roughly 3 million jobs, and was on track to meet its goal of 3.5 million jobs by the end of this year.
"The impact of the fiscal stimulus suggest that the (Recovery Act) has raised the level of GDP as of the second quarter of 2010, relative to what it otherwise would have been, by between 2.7 and 3.2 percent," the report said.
"Real GDP growth is expected to remain steady in the second half of 2010 and throughout 2011."
Republicans disputed the numbers and said Obama was letting Americans down.
"No amount of Washington spin or fuzzy math can change the fact that the trillion-dollar 'stimulus' is failing by the Obama Administration's own standards," House of Representatives Republican Leader John Boehner said in a statement.
An open letter from the Chamber of Commerce also threatened to overshadow the White House analysis. The Chamber's letter gave Obama credit for stabilizing the economy and preventing another Great Depression.
"But once accomplished, the congressional leadership and the administration took their eyes off the ball," the letter said.
"They neglected America's number one priority -- creating the more than 20 million jobs we need over the next 10 years for those who lost their jobs, have left the job market, or were cut to part-time status -- as well as new entrants into our workforce."
The Chamber released the letter to coincide with its "Jobs for America" summit in Washington on Wednesday.
A White House request to have senior Obama aide Valerie Jarrett address the event was declined because the offer came too late. The Chamber said the request arrived on Tuesday.
High budget deficits are among the complaints business groups have lodged against the Obama administration. A healthcare overhaul, financial regulatory reform and proposals to cap carbon emissions are cited by some corporate chieftains as examples of regulatory overreach.
(Additional reporting by Alister Bull and Patricia Zengerle; Editing by Alistair Bell and Eric Beech)
The euro appreciated sharply vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2735 level and was supported around the $1.2520 level. The common currency reached its highest level since 12 May as dealers positioned themselves ahead of the U.S. corporate earnings season that many dealers believe will evidence strong results for the second quarter. Alcoa, the U.S. aluminum production giant, reported better-than-expected earnings results. Dealers also moved into the euro after Greece sold €1.625 billion in 26-week Treasury bills at a yield of 4.65% - below the 5% rate the European Union lent funds at in its bailout package to Greece. The euro easily absorbed news that Portugal’s credit rating was reduced two notches to A1 by Moody’s on account of that country’s expanding debt position and weaker economic growth. Eurozone finance ministers convened yesterday and Dutch finance minister de Jager reported eurozone banks “will get a certain period to refinance themselves in the market, but the countries will immediately announce that there is a certain backstop.” European regulators are conducting stress tests on 91 different banks to evaluate their ability to withstand losses on sovereign bond holdings. Data released in the eurozone today saw the EMU-16 July ZEW economic sentiment survey come in weaker-than-expected at 10.7, down from the prior reading of 18.8, while Germany’s ZEW economic sentiment survey fell to 21.2 and the current situation sub-index improved to 14.6. Other German data saw the June wholesale price index decline 0.2% m/m and climb 5.1% y/y. Other data released today saw French June consumer price inflation up 0.0% m/m and 1.5% y/y while the harmonized components were up 0.0% m/m and 1.7% y/y. In U.S. news, traders are waiting to see if the U.S. Senate achieves a final passage of the financial overhaul legislation on 15 July. The Federal Reserves sold US$ 2.12 billion of term deposits in its third test auction today, a new tool the Fed may use to absord excess liquidity from the banking system. Data released in the U.S. today saw June NFIB small business optimism recede while the May trade balance deficit worsened to –US$ 42.3 billion. Many data including retail sales will be released tomorrow along with minutes from the most recent Federal Open Market Committee meeting. Euro offers are cited around the US$ 1.2830 level.
¥/ CNY
The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥88.00 figure and was capped around the ¥88.85 level. Bank of Japan’s Policy Board is expected to keep its overnight call rate target unchanged at 0.10% when its interest rate announcement is made tonight. BoJ Governor Shirakawa last week noted Japan’s economy is “likely to stay on a recovery trend” with improving domestic demand. The central bank will likely retain some policy tools ready to deploy in case the situation in Europe deteriorates further or deflation worsens in Japan. BoJ is likely to be pressured by the government following this weekend’s election loss, the yen’s ongoing strength, and unstable equity markets. Last month, BoJ unveiled details about its new ¥3 trillion lending program to stimulate lending to companies. Data released in Japan overnight saw May industrial production up 0.1% m/m and 20.4% y/y with May capacity utilization up 0.8% m/m. Also, June consumer confidence improved to 43.6 from the prior print of 42.7. The Nikkei 225 stock index lost 0.11% to close at ¥9,537.23. U.S. dollar bids are cited around the ¥86.29 level. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥112.35 level and was supported around the ¥110.65 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥134.05 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥84.00 figure. In Chinese news, the U.S. dollar appreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.7725 in the over-the-counter market, up from CNY 6.7711. Data to be released in China tomorrow night include Q2 GDP growth, June producer prices, June consumer prices, June retail sales, and June industrial production. The economy is expected to have expanded an annualized 10.5% in the second quarter.
£
The British pound appreciated sharply vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.5190 level and was supported around the US$ 1.4965 level. Data released in the U.K. today saw June consumer price inflation up 0.1% n/n and 3.2% y/y while the core index came in much stronger-than-expected at 3.1%, up from the prior result of 2.9%. DCLG May house prices were up 11.0% y/y and June Nationwide consumer confidence will be released tonight followed by jobless data tomorrow. Sterling climbed higher after the release of the CPI data on the premise that additional Bank of England Monetary Policy Committee members will vote for higher interest rates. BoE’s Main Bank Rate target currently stands at 0.50%. MPC member Sentance reported the MPC’s rate decision should support the private sector and said rate-setting is becoming more difficult. MPC member Bailey said U.K. banks that are experiencing difficulties should restructure their debts. Cable bids are cited around the US$ 1.4620 level. The euro appreciated vis-à-vis the British pound as the single currency tested offers around the £0.8390 level and was supported around the £0.8315 level.
CHF
The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.0515 level and was capped around the CHF 1.0645 level. Data released in Switzerland today saw June producer and import prices decline 0.4% m/m and climb 0.9% y/y. Swiss National Bank President Hildebrand last week said he is “closely monitoring” the franc, adding its fluctuation has “clearly increased.” Most dealers believe SNB has been forced to intervene less on account of all of the euro-denominated assets on its balance sheet but some note the SNB will likely continue to intervene at opportune levels. U.S. dollar offers are cited around the CHF 1.0980 level. The euro appreciated vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.3400 figure while the British pound moved higher vis-à-vis the Swiss franc and tested offers around the CHF 1.6055 level.
Yesterday, the Euro was able to shrug-off Moody’s downgrade of Portugal with the buttress of a well-received Greek debt auction – the positive move was even further resistant to yesterday’s positive run in US equity earnings. As a result, EURUSD climbed quickly and was able to break the 1.2700 threshold. Nevertheless, we are not convinced that this rally has any real legs, as liquidity has been poor and leveraged buyers seem to be the core participants driving the EURUSD higher. We suspect the thaw in investor concern will not be as quick or smooth as many talking-heads posit. We do anticipate a sudden reversal in risk appetite but suspect the catalyst will likely be an inconsequential figure such as the underperformance of a bank’s earnings or some other, otherwise minor event.
In Asia, regional indexes grabbed onto the positive sentiment and charged higher with the Nikkei up 2.71%, aided by Intel's earnings and Singapore's strong GDP growth. The BoJ’s two-day policy meeting began today with analysts universally expecting the central bank to hold rates steady. We are still interested to see if the BoJ will release details pertaining to its stated desire to see bolstered lending from banks to the broader economy. The Yen continues to be influenced by the finicky nature of global risk appetite – yet should rating agencies shift their focus onto Japanese fiscal imbalances, we could see JPY strength quickly unwind. It’s our core belief that the sovereign rate crisis radar will eventually target Japan in the mid-term. Mid-to-long term, we are looking for opportunities to the sell the JPY.
In the United Kingdom, the BoE’s MPC Sentance continues to rattle his inflationary saber. Today in an interview with the Reading Post, he stressed and affirmed that “a gradual withdrawal of some of the stimulus" is necessary for future UK economic health. Market participants are re-evaluating whether or not there is some merit to the lone dissenter’s arguments as English CPI came in higher-than-expected at 3.2%.
Today’s key events are US retail sales and the release of the FOMC minutes. For retail sales, we suspect that the data will disappoint to the downside as fiscal stimulus wears thin and US labor markets fail to convincingly recover in the right places. The minutes should contain some fresh Fed forecasts for the US/global economy. Given the adjustment in recent statements, we believe that the Fed will lower 2010 growth expectations and give recognition to the elevated and resistant unemployment rate. Both events would be significantly negative for risk-correlated trades – something which just could be the EURUSD catalyst we’re looking for (and if not we always have China's data tomorrow, including CPI).
Today's Key Issues (time in GMT): 00:00 JPY BoJ Policy Board begins meeting (to July 15). 00:00 Basel Committee to discuss global bank capital rules. 00:00 France: Bank holiday 08:30 GBP Jun claimant count, -20k exp; prior-30.9k. 08:30 GBP May avge weekly earnings, +3.0% exp; prior +4.2%. 08:30 GBP May ILO unemployment, 7.9% exp; prior 7.9%. 09:00 EUR May ind production, 09:00 EUR Jun HICP, unch m/m, 09:00 EUR Jun ex-F/E, unch m/m, 12:30 USD Retail sales/ex-autos -0.1% exp; -1.1% prior 14:00 USD Business inventories, % m/m 0.2% exp; 0.4% prior 18:00 USD FOMC June 22-23 meeting minutes.
EurUsd Yesterday’s better than expected Greek debt sale and ensuing risk rally was the kiss of death for our short EURUSD positions, and after ripping through our stop just above the Monday night highs of 1.2615, the pair then went on to take out the week’s high of 1.2650 and then to a peak of 1.2739. This price action now conclusively negates the potential head and shoulders pattern on the hourly chart that we discussed yesterday, and instead lays the foundation for a possible bullish flag pattern in the very short-term. Should this new pattern be confirmed by a break above 1.2735, we can expect an upside target in the region of 1.2950. We are however wary that some residual selling pressure may lurk around 1.2750 and these July markets can be notoriously rangey, so ideally we’d like to see a breakout hold above 1.2750 to bolster our conviction. Once 1.2750 is conclusively overcome, the skies above are very clear for a move higher, with very little resistance before 1.3000 (perhaps the only anticipated level being the 100-day moving average 1.2930). Until that break-out however, the bias seems skewed to a fresh visit to the downside; next supports seen around 1.2690, 1.2600 and 1.2522.
GbpUsd After initial joy that GBPUSD was squeezing back up towards its 1.5080 break-out level yesterday morning (thereby giving the latecomers a second chance to get in on the short trade), the higher than expected UK CPI soon turned that joy to pain by ramping the pair up past the 1.5230 resistance, even tickling a high of 1.5259. Thus far, the brief nudges at the former 1-month uptrend have failed to break above there, but should the sellers eventually step aside, next resistance is not expected until 1.5390 (30 Apr high) and 1.5525. Next support is eyed at today’s European low 1.5190, 1.5080 former neckline, then the 12 Jul low 1.4949.
UsdJpy We’re still long USDJPY from the double bottom break-out that took place around 88.20, but there has been frustratingly slow progress since Monday morning’s promising JPY weakness. The high this week remains 89.15 (a mere 25 pips from our 89.40 target), but the pair has been meandering between 88.00 –89.00 for much of the last few sessions. As we foresaw on Monday, the delay in reaching our target at 89.40 has now allowed the 5-week downtrend to creep onto the horizon at 89.20, so we may end up having to settle for a slightly lower take-profit level should this latest attempt at the highs fail to overcome considerable resistance around 89.00-10. Should the move have the momentum to burst through the 1-month downtrend, next resistance beyond lies at 89.50 (28-29 Jun high), 90.50 (50-day moving average), and 90.75 (25 Jun highs and 200-day moving average). Nearest supports expected at 88.00 then 86.97.
UsdChf The bears look to have run out of steam after the last three days of last week carved out a morning star formation on the daily chart, and this week the 1-/2-week downtrend finally broke to the topside with a surge up to 1.0676. Thus far, the broad USD sell-off has failed to push USDCHF back within that downtrend channel (trendline support now 1.0520), so we retain a cautiously bullish stance. Buying on dips towards 1.0550 now looks to be the smartest choice this week, targeting a revisit of 1.0700 levels, with resistance ahead at 1.0650 (yesterday’s high) and once again at the 1.0676 high. Down below, support lies at 1.0628 (200-day moving average), 1.0515-20 (13 Jul low and trendline support), then 1.0480 (8-9 Jul lows).
Markets continue to trade at their unhurried summer pace with no signs that we’ll encounter any directional momentum today. The highlight of yesterday’s trading day was the BoE MPC Posen addressing comments advanced by S&P regarding the UK’s cherished AAA sovereign rating. S&P asserted that UK debt levels were approaching levels incompatible with their AAA rating. Posen later addressed fears that the UK could fall back into economic recession and further warned that recent austerity measures across the EU could weigh on the UK’s fragile recovery.
Should the UK government fail to develop a concrete strategy, the nation’s risk-free rating could be in jeopardy – something we’ve seen quite a bit of in the EU. As can be expected, the GBP has come under noticeable selling pressure. Sterling continues to struggle with the market’s shifting views on the inflationary path set by the BoE holding rates low and steady for an extended period of time. The ill-timed comments by S&P just exacerbated GBP selling mostly due to apprehension already present in the marketplace.
In the near term, we expect GBPUSD to be sold on any rallies as MPC members fail to follow Sentence’s call to raise rates and the fact that sovereign debt fears will likely cloud any positive developments.
In the Eurozone, recent ECB data demonstrated that the central bank only purchased €1 billion worth of Eurozone bonds as part of its Securities Market program. The figure represents a significant deceleration in bond intervention and potentially signals a quazi-return to normalcy. Portugal was downgraded today by Moody’s to the A1 level with a “stable” outlook for the future.
Fitches holds Portugal 1 notch above A1 while the S&P relegates the small nation 2 levels below. While the “stable” outlook should calm markets, the initial knee-jerk reaction sent the EURUSD down 25 points. Portugal’s growth is likely to remain weak until structural reforms are implemented and effective.
Lastly, Greece is due to auction off €1.25bn of its own debt today on the open market. Should the rate close below 5%, this would be a positive sign of returning investor confidence and broadly Euro positive.
EurUsd We are still short EURUSD after the rising wedge formation was activated last week (around 1.2650), and thus far the sell-off has played out nicely to touch a low of 1.2543 (albeit a brief touch). As discussed in yesterday’s report, we set a target for this break out at 1.2510-20 (to give some cushion ahead of the 1.2483 support where the pair bounced on 2 & 6 Jul), but there is now good cause to expect further downside is possible. Looking at the hourly chart, there is a head and shoulders pattern being carved out with a neckline approximately 1.2550 (7 Jul low 1.2553), so we would actually look to add to longs on an hourly break below there. The target for this pattern (measured as the height of the head applied to the point of the breakout) should be 1.2390, however given this is only a few pips shy of the 50-day moving average (1.2387) and behind the psychological support 1.2400, not to mention the scene of some previous highs in the last week of June, we would happily take profits early around 1.2420. Should the pair bounce off the neckline on the first attempt, resistance is eyed at 1.2614 overnight highs, 1.2650, 1.2722 (Friday’s high), then 1.2937 (100-day moving average).
GbpUsd After plunging to lows of 1.4949 early in yesterday’s European session (9 pips short of the bearish break-out target), GBPUSD squeezed all the way back up towards its former range floor of 1.5080 –fantastic news for those who left for the weekend early on Friday and missed the break-out first time around. We have added to shorts back up there, and thus far the bearish strategy is paying off well. As noted yesterday 1.4930-40 is a very manageable first target, with further downside easily possible.Next support is eyed at yesterday’s low 1.4949, 1.4874 (1 Jul low), with another cluster of support around 1.4850-55 (23 & 25 Jun lows), and the 100-day moving average 1.4983. Sellers will almost certainly appear again back towards the old range floor of 1.5080, and once again at the back side of the former uptrend 1.5170.
UsdJpy We’re still long USDJPY from the double bottom break-out that took place around 88.20, but there has been frustratingly slow progress since yesterday morning’s promising JPY weakness. The high this week remains 89.15 (a mere 25 pips from our 89.40 target), but the pair has been meandering around the mid-88s for much of the last few sessions, with 88.35-40 acting as a supporting area of buying interest in the interim. As we foresaw yesterday, the delay in reaching our target at 89.40 has now allowed the 5-week downtrend to creep onto the horizon at 89.35, so we may end up having to settle for a slightly lower take-profit level depending on how the price action plays out. Should the move have the momentum to burst through the 1-month downtrend next resistance beyond lies at 89.50 (28-29 Jun high), and 90.61-76 (resistance zone containing the 25 Jun highs, 50-day and 200-day moving averages). Nearest supports expected at 88.20 neckline, 88.00, then 86.97.
UsdChf The bears look to have run out of steam after the last three days of last week carved out a morning star formation on the daily chart, and this morning’s rally looks to threaten the 1-week downtrend channel. Significantly we have managed to take out resistance clustered around 1.0580 that represented the neckline of a possible double bottom, and now the skies are clear for a revisit of 1.0700 levels. Buying on dips towards 1.0580-1.0600 now looks to be the smartest choice this week, but watch for progress to slow in the upper echelons of the 1.06-handle. It is unlikely the pair is going to break above 1.0700 on the first go so bears will look to sell more back up there, knowing that further protection lies just behind at 1.0750-70.
Stronger than forecast employment data from Australia and Canada along with short covering in risk assets boosted the AUD, CAD, NZD and NOK, but doubts over momentum have not disappeared as markets square up to the first reports of US Q2 company earnings. With market positioning still overwhelmingly short EUR, we look for bearish EUR trends eventually to be reasserted on profit taking ahead of July 23, release date of the bank stress tests. Correlation with risk assets remains elevated for higher yield and commodities currencies, but with the balance tipping in favour of a second rate hike by the Bank of Canada later this month, the CAD looks well placed to resume its upward move vs the AUD. The prospect of a 7th drop in the UK claimant count rate in June may neutralise this month's rally in EUR/GBP. Greece will tap the capital markets on Tuesday. Recap
A rally in global equities propelled the AUD to the top of the G10 ranking, helping the currency to log a 4.7% gain vs the JPY, a 4.4% gain vs GBP and a 4% profit vs the USD. GBP fell against all G10 peers, but losses were limited to 1.3% vs the EUR and 0.7% vs the USD. The weakness in sterling was partially attributed to the compression in UK/G10 yields. UK/EU 2y benchmark yields fell into negative territory for the first time since February. The unwinding of safe haven flows put the JPY at the bottom of the G10 table, with losses ranging between 5% vs the AUD to 0.4% vs GBP, despite the report of record JGB buying by China in May and a 0.5% upward revision by the IMF to Japan's 2010 growth outlook.
UK economic data came up short of expectations this week for most of the releases, except for the bullish report by the NIESR on Q2 GDP. The NIESR estimates that the economy expanded by 0.7% q/q in Q2, down from an upward revised 0.9% in Q1. The BoE left Bank rate and the APF unchanged at 0.50% and £200bln, respectively. The services PMI slipped to 54.4 in June from 55.4 in May, marking a 3rd drop in 4 months. The global trade deficit widened to £8.0bln in May, a 3-month high as imports rose 2.4% to £29.5bln, the highest since Jul-08. Industrial output rose a stronger than forecast 0.7% m/m in May, and PPI output price inflation slowed to 5.1% in June vs 5.7% in May (core up to 4.8%).
A mixed week for UK rates but overall yields stayed within the tight recent ranges and close to the cycle lows observed since mid-May. 5y swaps finished the week at 2.44% and 10y yields dropped back to 3.32% following a very solid session on Friday post weaker PPI and trade data. The prospect of lower June CPI data next week could bring the prospect of new lows and a bull flattening of the 2y/10y curve. The 3mth Libor/Ois spread narrowed a fraction to 22.5bp. EUR libor/Ois also tightened to 27bp (-5bp). The 2020 gilt sale drew very solid demand and was covered 2.45 times (0.2bp tail). G10 FX - EUR/USD Update: No 'Stress'?
The rally in EUR/USD from a 1.1877 low in June to a 1.2722 high on July 9 begs the question whether the negative trend has reversed and whether additional upside should be targeted. Though additional gains towards the 1.2800-50 area cannot be ruled out in the short-term, we think bullish EUR momentum is set to fade over the coming weeks and drag the cross back below 1.25.
Rationale for the EUR/USD bounce since June:
1/ record short EUR positioning and consequent short covering
2/ a deterioration in the US economic backdrop vs Germany and a tightening in actual and implied EU/US rate differentials
3/ fading of the USD as safe haven refuge since SNB policy tweak on Franc (June 17)
4/ cautious optimism surrounding recent EUR government bond auctions, a successful transition from ECB one-year LTRO to a 3- month tender Key factors to watch
1/ A rise in the Eonia swap curve is not a sign that the monetary policy bias at the ECB is normalising. A change in ECB money market operations since the expiry of unlimited one-year liquidity last week and the drain of excess liquidity explain the rise in the 3-mth Eonia swap rate above 0.70%, but this does not imply that the chance of an ECB rate hike has now increased. President Trichet confirmed this in the July 8th press conference and council member Stark has also warned not to read too much in higher money market rates. Uncertainty in the months ahead, bank stress tests and nervousness in funding markets will keep the ECB sidelined into 2011, but may result in EUR libor rates staying above US and UK libor equivalents.
2/ The stalling of US economic growth in Q2 is in contrast to Germany where activity has accelerated. Early indications show that the euro zone economy probably expanded in Q2 at the fastest rate since Q1-08 (+0.7% q/q) whereas in the US, dreadful housing and weak confidence and labour market data suggest the opposite, causing speculation of the Fed resuming asset purchases. This has helped EUR/USD to rally from the 1.1877 low but in our view only partially explains the break above 1.25.
3/ As we have stated before, the aversion for the USD follows the decision of the SNB on June 17 to drop its ultra-dovish stance and halt its policy of Franc intervention as deflationary pressures in Switzerland recede. This has promoted the swissy as the new refuge of choice. The starting point of the USD reversal in June also incidentally coincided with the appointment of Japanese PM Kan on June 4, though Mr Kan's explicit desire for a weaker yen means one should not overstate Japanese politics for the retracement in USD/JPY below 88.0. The move does not reflect the heavy buying of foreign denominated government bonds (Treasuries) by Japanese investors over the last 8 weeks. Instead, record buying of short-term JGBs by China may have kept the JPY artificially strong, though the safe-haven status of the JPY cannot be underestimated if US Q2 company earnings disappoint.
4/ A widening of the EU/US 2y benchmark spread has been a powerful driver of EUR/USD as chart 2 demonstrates. In comparison to the 10y spread, the correlation of EUR/USD with 2y spread recently rose to 0.8. The 2y spread now stands at 15bp, the highest since March. The deterioration in US macro data bears some explanation for the move in spreads, though the reversal from overbought conditions in short-dated bunds also has to be cited as bank shares bounce back ahead of the release of the EU stress tests on July 23. An unsatisfactory response to the latter would inevitably cause EUR sentiment to wobble and the compression in EU/US spreads to resume, even though EU governments have committed to backstop facilities to recapitalise individual institutions. This would possibly include the 440bln eur stability mechanism agreed in May.
5/ Speculative IMM positioning has been overweight EUR short contracts for most of Q2 and has only recently started to reverse some of these positions. At -83,500 contracts, overall EUR shorts are still above recent norms (see chart 3), suggesting that the market retains a still 'natural' bearish view of where EUR/USD is headed. However, the counter-argument is also true and argues that the scope for short covering remains powerful if USD sentiment continues to sour.
6/ The correlation of EUR/USD with risk assets (S&P 500) flipped markedly in July, with the sharp fall pointing to complete opposite price behaviour between stocks and the currency pair. In other words, the sharp fall in equities has not translated into safe haven USD flows, as the dollar index testifies. The release of US Q2 earnings from next week onwards will in our view be key to sentiment in risk assets. Positive results may help negative US D sentiment to stabilise, with participants potentially also inclined to take profits in EUR/USD ahead of the release of the stress tests on July 23.
Equity indices bounced this week, many from key support levels, to recover most if not all of the previous week's sell-off. This is to be expected as we test and re-test important support and ponder the implications for other markets, business and politics. Bond yields backed up in tandem though benchmark 10YR Australian Treasuries dipped to 4.95% (lowest since May 2009) and Swiss Conf to a new record low at 1.43%. Nearly all Eurodollar interest rate futures rallied to new record highs as the prospect for rate rises is put back yet again - as has been the case for the last six quarters though pundits still find this hard to grasp. Meanwhile nearly all Euribor futures are priced at 99.00 or lower, so that the spread between these and dollar futures is up to 50 basis points. This may be an element in the Euro's reappraisal, rallying to $1.2723, when consensus opinion this month is that it should weaken over the coming year to $1.1900, one brave soul targeting $0.9800. This week's best performer was the Australian dollar ($0.8792) on better than expected job creation taking Unemployment down to 5.1%; the yen lost against all currencies. Commodities remain sidelined though Grains and Soybeans rallied to this year's best levels, CBOT Wheat leading as Europe's heat wave threatens this year's crop. Most Baltic Freight rates are lowest in a year.
Political and Economic Developments
South Korea's Central Bank raised it key rate by 25 basis points from a record low 2.00%. Australia, the Eurozone and UK sat on their hands at 4.50%, 1.00% and 0.50%.
China bought a record net 735B yen's worth of JGB's in May, but before rushing to the conclusion that they have decided to diversify out of US Treasuries and avoid Eurozone debt, it should be noted that in the main they bought short-dated paper. Germany's May Current Account dropped to +€2.2B (from €18.3B in March), the lowest since August 2004, with the Trade Balance shrinking by €3.4B. Despite strong exports, growing imports and a deficit of €3.2B in investment income account for much of the shrinkage. The UK's Visible Trade Balance widened to £8.06B in May, not far off 2007's record of £8.28B, a weaker pound obviously having negligible effect. The French Trade Balance meanwhile hit -€5.5B, the worst after 2008's record -€6.17B, Euro weakness not helping here either.
Americans are paying down debt: May Consumer Credit shrank by $9.1B after $14.9B in April, less than the record $23.4B of Nov09 but the nineteenth monthly repayment over two years, making this a much-needed trend.
Underlying Themes
The Committee of European Banking Supervisors will announce on the 23rd the results of the 91 Eurozone banks currently being ‘stress tested'. The media, investors and bankers themselves have been pondering at length the criteria being used and the reliability of data provided. The US is held up as a model of how to do things properly, early in 2009 telling us which banks needed recapitalising and by how much - matching then Fed borrowings exactly. Government bailouts would follow and, if short of cash, they will have recourse to the EU's €500B support fund; the ECB is not involved. Mr. Trichet insists ‘transparency has its virtue..(and is) confidence building', that the economy is and will grow (albeit unevenly), and that it is still too early to declare the crisis over. Many finance ministers are confident of a rosy outcome for their banks while ECB board member Juergen Stark does not see deflation in EZ16, says the IMF is underestimating growth in the zone,and that the worst of the crisis is over. Nothing like singing from the same hymn-sheet and do they really expect us to believe it's all done and dusted? Confidence, once lost, is slow to recover while displaying all the skeletons might frighten the children.
What to watch for next week
Sunday the 11th Upper House Japanese parliamentary elections. Monday just Japan June Domestic CGPI and UK final Q1 GDP. Tuesday Japan June Consumer Confidence, UK RICS House Price Balance, BRC Retail Sales Monitor, CPI, May DCLG House Prices, US Trade Balance, June Monthly Budget Statement, NFIB Small Business Optimism, German and Eurozone July ZEW Surveys. Wednesday UK June Nationwide Consumer Confidence, Jobless Claims, May ILO Unemployment, Average Earnings, EZ16 Industrial Production, June CPI, US Import Price Index, Retail Sales, May Business Inventories and June 23rd FOMC Minutes. Thursday Tokyo June Condominium Sales, the Bank of Japan concludes a two-day meeting, EU27 June New Car Registrations, UK Q1 BoE Housing Equity Withdrawl, US June PPI, Industrial Production and Capacity Utilisation, July Empire State Manufacturing while a Senate hearing on the Fed's board members takes place. Friday Japan May Tertiary Industry Index, EZ16 Trade Balance, US Net TIC Flows, June CPI and July University of Michigan Confidence Survey. Sunday 18th second round of presidential elections in Guinea and Monday the 19th a Marine Day holiday in Japan.
Positioning and Technical Analysis
Markets will probably swing sharply either side of current levels as we gear up for decisive breaks; thin July/early August conditions are likely to exacerbate moves. Only the very top quality financial products are worth holding and though yields may be peanuts by historical standards, add in potential deflation and they may buff up a bit.
