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.
The dollar was flat to lower Wednesday, slightly extending a loss versus the Japanese yen while seeing little movement versus other currencies after U.S. durable-goods orders showed an unexpected June drop.
The dollar index (DXY), which tracks the greenback against a basket of major currencies, was slightly lower at 82.123 versus 82.200 in North American trade late Tuesday.
The euro, which failed to maintain an earlier push above the USD1.30 level, slipped to USD1.2980, down slightly from USD1.2989 in North American trading late Tuesday.
Against Japan's yen, the euro erased an early gain to stand at JPY113.82, off slightly from JPY114.05 late Tuesday.
The dollar, meanwhile, slightly extended a loss versus the yen to trade at JPY87.56, down from JPY87.82 late Tuesday. The yen tends to be among the largest beneficiaries of declines in risk appetite.
The Commerce Department said orders for durable goods fell 1% in June, defying expectations for a 1% rise.
The British pound traded at USD1.5601, up 0.1%. The currency showed little reaction to testimony by Bank of England Governor Mervyn King and other central bankers, including Andrew Sentence, before a parliamentary committee.
Market expectation
Worry over the U.S. economy taking a downturn is weighing on the dollar, analysts said. Investors will pour over the Federal Reserve's Beige Book, to be released at 2 p.m. EDT, for another assessment of the U.S. recovery from the perspective of the regional Fed banks.
Economists widely expect the Reserve Bank of New Zealand to raise its key interest rate by 25 basis points during late Wednesday New York hours to 3.00%. But a slightly more cautious statement is expected as the economic recovery remains fairly tepid.
Until key data from major economies grow gloomier the franc is likely to remain on its weaker path. Should the data published in the U.S. continue to disappoint, sentiment could deteriorate once again, benefiting the franc. While that is not the case, the franc is likely to remain under pressure, said analysts.
€ 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.
(Reuters) - The euro hovered close to a two-month peak against the dollar on Tuesday, retaining support after last week's European bank stress tests revealed no horrors while increased demand for riskier assets weighed on the dollar.
Although concerns lingered that the stress tests were not tough enough, analysts said these could be calmed when Deutsche Bank discloses its exposure to euro zone sovereign debt.
The dollar fell to a 12-week low against a basket of currencies as recent weak U.S. data accompanied an otherwise brighter outlook for the broader global economy, encouraging investors to move into higher-yielding and riskier assets.
Underscoring this, India hiked interest rates on Tuesday [ID:nSGE66Q06N], citing inflationary pressures and a firm economic recovery, while the Reserve Bank of New Zealand is expected to raise rates later this week.
"We are seeing a more risk friendly environment," said Peter Frank, currency strategist at Societe Generale.
"The market has drifted away from fears of a double dip, and the rate tightening environment -- with a rate hike in India and one expected in New Zealand -- is attracting flows into higher yielding and emerging market assets and out of the dollar."
At 4:07 a.m. ET, the euro was steady at $1.2992, having earlier risen as high as $1.3023. Traders cited Asian central bank bids around $1.2970-80, but said reported offers above $1.3020 on behalf of a European sovereign were capping gains.
The euro headed toward last week's more than two-month peak of $1.3029. If it scales this, its next target will be $1.3125, the 38.2 percent retracement of its December-June fall, technical analysts said.
Falls were also seen limited while it remained above support at $1.2870 -- close to its 100-day moving average -- and last week's low around $1.2730.
Traders were cautious as they awaited clarity on Deutsche Bank's (DBKGn.DE) debt exposure after the German bank posted second-quarter earnings.
However, they said if the bank discloses no shocks, this could help build confidence in euro zone banks and dispel concerns about a lack of transparency in the stress tests, triggering buying in the euro.
"Despite all the negative talk about the stress test results, German interest rates are rising and the euro firmed, which seems to suggest lingering euro short-covering needs," said Osamu Takashima, chief FX strategist at Citibank in Tokyo.
DOLLAR INDEX
The dollar index .DXY was steady at 82.102, having earlier fallen to 81.913, its weakest since early May.
Sterling hit a five-month high of $1.5530 as the UK currency made further gains in the wake of surprisingly strong gross domestic product data on Friday.
Among higher-yielding currencies, the Australian dollar was steady at $0.9023, holding above the key $0.90 level and close to 11-week high of $0.9031 hit on Monday, while the New Zealand dollar touched a six-month high of $0.7355.
Investors' greater appetite for risk also weighed on the low-yielding yen, with the U.S. dollar gaining 0.4 percent to 87.19 yen. The euro rose to a seven-week high against the yen of 113.64 yen, with traders saying gains accelerated after stops were triggered above 113.50 yen.
€ The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 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.
In the absence of any notable European economic data on Monday, the regional day has been dominated by the performance of equity indexes in the aftermath of the release of the bank stress tests on Friday.
European equities are currently mixed. The German DAX stock index was recently lower by 0.2% at 6,156 after falling as low as 6,141. Meanwhile, the Eurostoxx 50 is 0.1% higher at 2,721 versus a high of 2,741 and a low of 2,711.
Earlier on Monday, regional markets heard from a couple of European central bankers. In an op-ed written in Frankfurter Allegemeine Zeitung, ECB Executive Board member Lorenzo Bini Smaghi said the EU-IMF loans package is the “best route” to make sure Greece achieves fiscal consolidation.
He added that decisions made by Athens in recent weeks indicate that the Mediterranean country will be able to reduce its budget deficit to manageable levels.
In an interview with Spanish radio station Cadena Ser, ECB Executive Board member Jose Manuel Gonzalez-Paramo said that the European stress tests indicate the strength of the regional banking sector.
Noting that they were very demanding, the central banker added that he was satisfied with the tests’ results.
Against this backdrop, the euro is slightly weaker against the U.S. dollar. However, the three Scandinavian currencies are all underperforming the euro.
Outperforming is the pound sterling after UK Treasury Minister Mark Hoban told an audience in London that the government will create a consumer protection and markets agency.
He added that prudential regulation will be overseen by the Bank of England. Hoban also said that the central bank unit, whose members will be from banks, will also regulate clearing houses and is scheduled to meet four times a year.
The remainder of Monday will focus on the U.S. June new home sales report.
The Chinese yuan strengthened today as the central bank kept its reference rate unchanged and after the stress test of the European banks failed to improve the confidence in the strength of Europe’s economy.
Seven from 91 banks tested required to raise the combined €3.5 billion of capital, signaling that the recovery may be faltering. China’s economy continues to expand, in the same time, threatening to increase the inflation rapidly. More flexible yuan may help in this matter. Chinese currency expected to appreciate further by 3 percent this year.
USD/CNY declined from 6.7813 to 6.7798 today as of 10:37 GMT.
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.
A week spent speculating which banks might fail their 'stress tests', and whether these were worth doing at all, indices alternating between fairly large up and down days to end the week in positive territory. Jakarta, Mumbai and Thailand set new highs for 2010. The Japanese stock market closed near the lowest levels in two years, pressured by a strong yen (86.27) and dragged down by the banks index. The US dollar has lost ground against all major currencies this week, the Australian dollar leading at $0.8972 (a ten-week high) and the Swiss franc at 1.0400, best this year. The Hungarian forint weakened to 292.00 per Euro because of new PM Viktor Orban's refusal to implement IMF-suggested austerity measures. Top-quality Treasuries remain well bid, those of weaker Eurozone countries still all too close to their records over Bunds. US asset-backed securities the first casualty of new financial regulation, so the SEC has had to allow a 6-month grace period for implementation. [Rating agencies can now be sued for fraud and reckless behaviour so they are not allowing their ratings to be published in prospectuses]. ICE Sugar rallied to 18.66 cents per pound, its most expensive since March though a fraction of February's unsustainable 30.40 peak. Most Baltic Freight rates are at their lowest in a year or more. Political and Economic Developments
The Bank of Canada raised it key rate by 25 basis points to 0.75%; Brazil raised its Selic rate 50 basis points to 10.75%, slightly less than expected on negative inflation in June.
UK Q2 GDP came in a better than expected +1.1% Q/Q taking Y/Y growth to +1.6%, helped in part by June Retail Sales which rose by 1.0% M/M and +3.1% Y/Y excluding auto-fuel. No doubt the football World Cup had an effect, but this keeps it at the average of the last decade. With June Core CPI also running at +3.1% Y/Y (RPI +5.0% Y/Y and among the highest in two decades) yet Gilts maturing within 9 years yielding under 3.00%, real interest rates are decidedly negative. Pity then that National Savings and Investments was forced to withdraw its index-linked securities (RPI +1.00% per annum) to all new investors, the first time in their 35-year history, because of huge inflows. Hometrack has annual house prices rising by under 3.00% or shrinking since December 2007, Rightmove suggests +3.7% Y/Y, though the Halifax and Nationwide calculate 6.3% and 8.7% respectively. Gains on main homes tax free.
German and Eurozone Purchasing Managers' Indices, IFO and Consumer Confidence Surveys all upbeat versus June's.
Underlying Themes
For several weeks now politicians and central bankers have been suggesting we shouldn't be so gloomy, that in fact the economy was growing and banks were sound, many giving lengthy TV interviews on these subjects. Mercifully chairman Bernanke in his semi-annual testimony to the Senate Banking Committee spared us the usual drivel. Saying the number one concern for small businesses was a lack of demand not access to credit and that funding was not a constraint on large firms, that state and local governments were under fiscal stress, plus the worrisome structural problems of high unemployment, were all drags on economic recovery; above all the 'economic outlook remains unusually uncertain'. Perhaps they have at last grasped the enormity of the problem; perhaps they now know there are no more tools in the box; perhaps they now understand that deleveraging and rebuilding overstretched balance sheets takes a very long time. Perhaps the Bank of England's MPC is also adopting a more realistic approach. After predicting UK CPI would be back at target by the end of this year (their usual mañana mentality) chief economist Spencer Dale suggested this might now not happen until the end of 2011, and that the country would not get back to normal 'for an awfully long time'.
What to watch for next week
Monday Japan June Trade Balance, German Import Prices due from this day, US New Home Sales and UK July Hometrack Survey. Tuesday Japan June Corporate Service Prices, EZ16 M3 Money Supply, UK CBI July Distributive Trades, US Consumer Confidence, German August GfK Consumer Confidence and US May CaseShiller House Prices. Wednesday Japan July Small Business Confidence, ECB Bank Lending Survey, July CPI for the various German states due and US June Durable Goods Orders. Thursday Japan June Retail Trade, Large Retailers' Sales, UK Net Consumer Credit, Mortgage Approvals, German July Business Confidence, Unemployment, EZ16 Business Climate and Confidence and the Fed's Beige Book. Friday Japan June Unemployment, Household Spending, CPI, Industrial and Vehicle Production, Housing Starts, Construction Orders and Tokyo July CPI. Then EZ16 June Unemployment, CPI, US Q2 GDP, July Chicago Purchasing Managers and final University of Michigan Confidence Survey. Monday 2nd August holidays in Canada and Iceland.
Positioning and Technical Analysis
The last week of another thin summer month and many markets are tottering at fairly pivotal levels. August will probably see trends develop and more chaotic conditions predominate. Watch FX weekly closes for important breaks; another round of generalised US dollar selling is due, something which should prop up commodity prices. Top-notch Treasuries and Corporate bonds should remain well bid maintaining the pressure on credit spreads. Stock markets will probably be subject to increasingly violent intra-day swings.
€ The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2965 level and was supported around the $1.2790 level. Results of stress tests on the largest European banks were released today and they confirmed most financial institutions have sufficient capital to absorb soverign debt-related problems. Some dealers doubted the reliability of the exams. European Central Bank member Nowotny reported the tests conducted on 91 banks revealed the European banking system is in a “stable and promising” position. ECB policymakers revealed seven of 91 banks failed the European Union’s stress tests and noted today’s results should increase confidence in the eurozone. Data released in the eurozone today saw the July PMI composite improve to 56.7 from the prior reading of 56.0 while EMU-16 PMI services and manufacturing improved. Also, EMU-16 May industrial new orders were up 3.8% m/m and 22.7% y/y. Moreover, EMU-16 July consumer confidence improved to -14 from the revised reading of -17. German July PMI manufacturing and services improved and data to be released tomorrow include July Ifo business sentiment. French data released today saw July PMI manufacturing decline while PMI services moved higher. French July consumer confidence remained unchanged at -39. In U.S. news, data released in the U.S. this week saw weekly initial jobless claims climb to 464,000 from a revised 427,000 while continuing jobless claims climbed to 4.487 million from 4.710 million. Also, June existing home sales were off 5.1% m/m to an annualized 5.37 million units while June leading indicators came off 0.2% from the previous tally of 0.5%. Also, the May house price index printed at +0.5% m/m, down from +0.9%. Federal Reserve Chairman Bernanke this week called for an extension of the Bush tax cuts and cited the elevated U.S. unemployment rate as the biggest problem in the U.S. economy. Bernanke also cited additional monetary easing options including reducing the rate paid on banks’ reserves held at the Fed and purchasing more securities. New York Fed President Dudley reported said the “road to recovery is turning out to be a bit bumpy.” 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 ¥87.50 level and was supported around the ¥86.75 level. Bank of Japan issued a report that noted emerging market economies need to begin tightening monetary policy to avert overheating. The pair moved higher on an improvement in asset prices including equities as risk appetite bettered. Traders may have steered away of testing the resolve of the Japanese government to intervene in a bid to stop the yen’s appreciation. The government has not officially intervened for several years but there are increasing whispers that Japanese monetary authorities will try to protect the ¥85 level. Bank of Japan Deputy Governor Yamaguchi this week suggested the central bank is considering other policy options, noting “Ways to strengthen the foundations for economic growth are not necessarily limited to the measure the bank has introduced. We will continue to make sufficient considerations while exploring various possibilities.” Minutes from the June BoJ Policy Board were released this week in which policymakers said the central bank should consider additional policy options other than the ¥3 trillion loan scheme recently announced. Vice finance minister Ikeda said the government “wants to avoid excessive gains in the yen” while trade minister Naoshima said the yen’s gains pose a threat to economic growth. The government’s ability to provide additional fiscal stimulus is limited by its commitment to cap annual fiscal spending at ¥71 trillion. The Nikkei 225 stock index climbed 2.28% to close at ¥9,430.96. 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 ¥113.00 figure and was supported around the ¥111.55 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥135.00 figure while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥82.65 level. In Chinese news, the U.S. dollar appreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.7799 in the over-the-counter market, up from CNY 6.7797. A Chinese source reported Chinese banks may struggle to recover approximately 23% of the CNY 7.7 trillion in loans to local government infrastructure projects. People’s Bank of China set its daily fixing rate at the strongest level this week and yesterday said it may begin to publish the yuan’s exchange rate against a basket of currency and not just the U.S. dollar. PBoC also warned Chinese home prices may fall sharply.
£
The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.5450 level and was supported around the US$ 1.5250 level. Data released in the U.K. today saw Q2 gross domestic product climb 1.1% q/q and 1.6% y/y while June BBA loans for house purchases moved higher and the May index of services improved. Minutes from the July Bank of England Monetary Policy Committee meeting were released this week in which policymakers voted 7-to-1 to keep the Bank rate unchanged at 0.5%. The minutes read “On balance, most members thought that it was appropriate to leave the stance of monetary policy unchanged. The committee considered arguments in favour of a modest easing in the stance of monetary policy. The softening in the medium-term outlook for GDP growth over recent months would put further downwards pressure on inflation, once the impact of temporary factors had waned.” MPC member Sentance voted again to raise interest rates. 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 £0.8315 level and was capped around the £0.8450 level.
CHF
The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.0565 level and was supported around the CHF 1.0405 level. Data to be released in Switzerland on 27 July include the June UBS consumption indicator. UBS reported the Swiss National Bank may intervene again if the euro/ franc rate falls “sharply.” SNB reported its euro holdings doubled in the second quarter on intervention. 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 1.3605 level while the British pound moved higher vis-à-vis the Swiss franc and tested offers around the CHF 1.6270 level.
The euro has fallen fast after investors judged the European bank stress-test results to be overly lenient, with just hours to go before the results are officially released.
Traders have reacted negatively to news that the tests would cover only banks' trading books, rather than their outstanding debt holdings, with the euro shedding around a cent against the dollar to trade under USD1.28.
The ICE Dollar Index, which tracks the dollar against a trade-weighted basket of currencies, was at 82.887 from 82.611.
The London-based Committee of European Banking Supervisors has tested 91 euro-zone banks to see whether they would fall short of minimum capital requirements under different adverse scenarios.
A steady drip of leaks and optimistic predictions from lenders, central bankers and politicians suggests that the vast majority of banks in even the most troubled economies are likely to pass.
That has prompted economists to wonder whether the tests would be sufficiently stringent to convince investors that Europe's banks had put the debt crisis behind them.
Market expectation
The tests, which gauge whether Europe's banking sector has sufficient capital, are the day's biggest event, and the outcome could determine the direction of the euro as well as the dollar next week, said analysts. Results are due at 1600 GMT.
If too many banks fail, it could spark panic about the health of the euro-zone banking sector; if too many banks pass, markets may discount the tests as not credible.
(Reuters) - The Federal Reserve may try to push borrowing costs even lower if the job market continues to languish, Fed Chairman Ben Bernanke said on Thursday, offering a hint of what might trigger additional monetary easing.
After three quarters of solid growth, the U.S. economy has been losing steam, with firms still reluctant to hire and the housing sector seemingly unable to exit a prolonged rut.
Bernanke's comments accompanied Labor Department data on Thursday showing new claims for state unemployment benefits spiked to 464,000 last week.
With fears of a "double-dip" recession mounting in recent weeks, Bernanke reassured lawmakers the Fed is prepared to take further steps if the situation worsens appreciably.
"We are ready and will act if the economy does not continue to improve, if we don't see the kind of improvements in the labor market that we are hoping for and expecting," Bernanke told the House of Representatives Financial Services Committee.
As he did before a Senate panel on Wednesday, Bernanke indicated the Fed does not expect the economy to stall, and therefore does not foresee any extra policy measures being needed.
Another top Fed official, New York Fed Bank President William Dudley, said on Thursday the U.S. economic recovery was "a bit bumpy," with growth that is "far less robust" than the U.S. central bank wanted. However, he added that a renewed recession was not likely.
Even with interest rates effectively at zero, Bernanke argued there is more the central bank can do if needed to spur growth.
One possibility would be to lower the rate it pays banks to park excess reserves at the Fed, currently 0.25 percent. Asked by a legislator why the Fed continues to pay banks to keep their money idle despite weak lending conditions, Bernanke said cutting the rate carries risks.
"If rates go to zero there will be no incentive for buying and selling federal funds, overnight money in the banking system and if that market shuts down ... it'll be more difficult to manage short-term interest rates," Bernanke said.
Other options for the Fed include bolstering its stated commitment to keep official rates low for an "extended period," or purchase yet more debt, Bernanke said.
In addition to slashing interest rates to rock-bottom levels, the Fed bought more than $1.5 trillion in mortgage and Treasury securities in an effort to combat the deepest recession since the Great Depression.
On Wednesday, financial markets took a dive after Bernanke's plans for additional monetary stimulus appeared more remote and theoretical than investors had expected. But by Thursday traders had forgotten all about that, with U.S. stocks rallying sharply on robust earnings reports and better economic news out of Europe.
POLICY IN A TIME OF STRESS
Many analysts worry the Fed's policy arsenal is too depleted to be of any major additional benefit to the economy.
But Bernanke said under conditions of greater financial turmoil, the impact of its remaining policy options might be significant.
"If financial conditions become more stressed, as would happen presumably if the economy began to weaken, I think those steps would be more effective relatively speaking," he said.
With unemployment still hovering around 9.5 percent, one legislator accused Bernanke and the Fed of not doing enough to address the problem.
But Bernanke countered that the Fed had already done a lot.
"I absolutely agree with you that unemployment is the most important problem that we have right now," Bernanke said. "What we can do is make financial conditions as supportive of growth as we can and we certainly are doing that."
His testimony highlighted just how much of the Fed's near-term policy path hinges on a labor market that has remained stubbornly stagnant despite a better economic backdrop.
The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2930 level and was supported around the $1.2735 level. The common currency reversed yesterday’s intraday losses as risk appetite improved, driving some global equity markets higher. Data released in the U.S. today saw weekly initial jobless claims climb to 464,000 from a revised 427,000 while continuing jobless claims climbed to 4.487 million from 4.710 million. Also, June existing home sales were off 5.1% m/m to an annualized 5.37 million units while June leading indicators came off 0.2% from the previous tally of 0.5%. Also, the May house price index printed at +0.5% m/m, down from +0.9%. Federal Reserve Chairman Bernanke called for an extension of the Bush tax cuts and cited the elevated U.S. unemployment rate as the biggest problem in the U.S. economy. Bernanke also cited additional monetary easing options including reducing the rate paid on banks’ reserves held at the Fed and purchasing more securities. New York Fed President Dudley today said the “road to recovery is turning out to be a bit bumpy.” In contrast, former Fed Chairman Greenspan said the Bush tax cuts should not be continued and noted an end to cuts “would probably” slow economic growth. In eurozone news, eurozone data released today saw the July PMI composite improve to 56.7 from the prior reading of 56.0 while EMU-16 PMI services and manufacturing improved. Also, EMU-16 May industrial new orders were up 3.8% m/m and 22.7% y/y. Moreover, EMU-16 July consumer confidence improved to -14 from the revised reading of -17. German July PMI manufacturing and services improved and data to be released tomorrow include July Ifo business sentiment. French data released today saw July PMI manufacturing decline while PMI services moved higher. French July consumer confidence remained unchanged at -39. Results of stress tests on up to 91 European banks will be reduced tomorrow. Euro offers are cited around the US$ 1.2955 level.
¥/ CNY
The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥86.35 level and was capped around the ¥87.20 level. The pair continued to inch lower as traders tested the resolve of the Japanese government to intervene in a bid to stop the yen’s appreciation. The government has not officially intervened for several years but there are increasing whispers that Japanese monetary authorities will try to protect the ¥85 level. Bank of Japan Deputy Governor Yamaguchi suggested the central bank is considering other policy options, noting “Ways to strengthen the foundations for economic growth are not necessarily limited to the measure the bank has introduced. We will continue to make sufficient considerations while exploring various possibilities.” Minutes from the June BoJ Policy Board were released yesterday in which policymakers said the central bank should consider additional policy options other than the ¥3 trillion loan scheme recently announced. Vice finance minister Ikeda said the government “wants to avoid excessive gains in the yen” while trade minister Naoshima said the yen’s gains pose a threat to economic growth. The government’s ability to provide additional fiscal stimulus is limited by its commitment to cap annual fiscal spending at ¥71 trillion. Former BoJ Governor Fukui cited elevated global financial uncertainty. Data released in Japan overnight saw May all-industry activity index decline to +0.2% from the revised April print of +1.9%. The Nikkei 225 stock index lost 0.62% to close at ¥9,220.88. 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 ¥112.70 level and was supported around the ¥110.00 figure. The British pound moved lower vis-à-vis the yen as sterling tested offers around the ¥133.25 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥83.75 level. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.7797 in the over-the-counter market, down from CNY 6.7767. Premier Wen said policy stability should be carried forth in the second half of the year. There are rumours the Chinese government could ease lending controls and Wen said China may “improve” stimulus measures to boost domestic consumption. Ratings agency S&P said Chinese banks are facing escalating credit risks and non-performing loan growth. PBoC also said it will seek to avoid major fluctuations in the yuan’s exchange rate.
£
The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.5295 level and was supported around the US$ 1.5150 level. Data released in the U.K. today saw June headline retail sales climb 0.7% m/m and 1.3% y/y while the ex-autos component was up 1.0% m/m and 3.1% y/y. Data to be released tomorrow include Q2 gross domestic product and June BBA loans for house purchases. Minutes from the July Bank of England Monetary Policy Committee meeting were released yesterday in which policymakers voted 7-to-1 to keep the Bank rate unchanged at 0.5%. The minutes read “On balance, most members thought that it was appropriate to leave the stance of monetary policy unchanged. The committee considered arguments in favour of a modest easing in the stance of monetary policy. The softening in the medium-term outlook for GDP growth over recent months would put further downwards pressure on inflation, once the impact of temporary factors had waned.” MPC member Sentance voted again to raise interest rates. 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 appreciated vis-à-vis the British pound as the single currency tested offers around the £0.8465 level and was supported around the £0.8385 level.
CHF
The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.0395 level and was capped around the CHF 1.0515 level. Data to be released in Switzerland on 27 July include the June UBS consumption indicator. UBS reported the Swiss National Bank may intervene again if the euro/ franc rate falls “sharply.” SNB reported its euro holdings doubled in the second quarter on intervention. 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 1.3460 level while the British pound moved lower vis-à-vis the Swiss franc and tested bids around the CHF 1.5850 level.
(Reuters) - Federal Reserve Chairman Ben Bernanke said on Wednesday the U.S. economy faces "unusually uncertain" prospects, and that the central bank was ready to take further steps to bolster growth if needed.
"Even as the Federal Reserve continues prudent planning for the ultimate withdrawal of monetary policy accommodation, we also recognize that the economic outlook remains unusually uncertain," Bernanke told the Senate Banking Committee.
"We remain prepared to take further policy actions as needed to foster a return to full utilization of our nation's productive potential in a context of price stability."
Bernanke, delivering the central bank's semiannual report to Congress on monetary policy, said Fed officials believe the U.S. economy is still on a path to recovery.
"Although fiscal policy and inventory restocking will likely be providing less impetus to the recovery than they have in recent quarters, rising demand from households and businesses should help sustain growth," Bernanke said.
For now, he said the Fed expects economic conditions will warrant an exceptionally low benchmark federal funds rate for an "extended period" -- repeating a vow the central bank has kept in place for more than a year.
Bernanke stopped short of describing what steps the Fed might take if growth were to falter. Analysts say the central bank could resume asset purchases or lower the rate it pays banks to park their excess reserves at the Fed.
"The testimony was not particularly optimistic," said Lawrence Glazer, managing partner of Mayflower Advisors in Boston. "It implied that the Fed had a relatively cloudy view of the future."
Stocks turned lower to trade down modestly after the testimony was released, while the dollar extended losses versus the yen and U.S. Treasuries rallied, with the 30-year bond gaining a full point.
Stocks had risen on Tuesday in part on speculation the Fed could ease monetary conditions further.
After emerging from its longest and deepest downturn since the Great Depression, the U.S. economy began expanding again about a year ago. It grew at an annualized 2.7 percent in the first quarter.
But stubbornly high unemployment, a fresh drop in housing activity and a slowdown in manufacturing have raised fears of a "double-dip" recession.
In response to the financial crisis and deep recession, the Fed slashed interest rates to near zero and bought more than $1.5 trillion in mortgage and Treasury bonds.
Bernanke spent much of his testimony reviewing tools the Fed has at its disposal to remove the extraordinary monetary stimulus pumped into the economy during the 2007-2009 crisis.
He said there was broad agreement among Fed officials that asset sales will eventually play a role in withdrawing some of that accommodation. But he also noted that any such sales would be flagged well in advance.
Bernanke said a weak job market will likely remain a drag on consumer spending, and said it would take a long time before the economy can restore the nearly 8.5 million jobs lost in 2008 and 2009.
Against that backdrop, Bernanke indicated inflation is not a concern, and is unlikely to become a problem any time soon.
He said Fed policymakers "expect continued moderate growth, a gradual decline in the unemployment rate, and subdued inflation over the next several years."
Anxiety over high debt levels in Europe have added an important element of uncertainty to the global economic recovery. Bernanke said such worries had driven U.S. stock prices lower and corporate credit premia higher.
He argued the Fed's reopening of foreign exchange swap lines with overseas central banks has helped eased pressures in interbank lending and kept credit flowing in the U.S. financial system.
(Reuters) - Two regional Federal Reserve banks, Kansas City and Dallas, last month continued to push for an increase in the rate the central bank charges banks for emergency loans, according to meeting minutes released on Tuesday.
The Fed has kept the discount rate unchanged at 0.75 percent since February, when it raised the rate by a quarter percentage point. Directors of the Kansas City and Dallas Fed boards requested an increase to 1 percent in June, while St. Louis Fed board members dropped earlier calls for an increase.
Minutes of meetings of the Fed's Washington board, which needs to approve any requests to change the discount rate, showed regional Fed directors remained cautious on the economic outlook, even though some wanted to bump the discount rate higher.
"Although the labor market showed signs of gradual improvement, directors generally expected hiring to remain subdued," the minutes said. "Directors also expressed concerns about downside risks posed by the fiscal condition of state and local governments and by financial developments abroad."
When the Fed's policy-setting Federal Open Market Committee met on June 22-23, it decided to hold the federal funds rate, the central bank's main policy tool, in a zero to 0.25 percent range. At the same time, the Fed's Washington board decided to make no change in the discount rate, which normally moves in tandem with the federal funds rate.
Before the credit crisis struck in 2007, the spread between the two rates was a full percentage point. There is internal disagreement at the Fed as to whether that gap should be returned to that level, a debate that has likely taken on new importance given a recent weakening in the economic data.
"As another step toward restoring a pre-crisis discount rate structure, some directors supported increasing the primary credit rate by 25 basis points (to 1 percent) at this time," the meeting minutes said.
Softer economic activity has driven analysts to push back the timing of any hike in the benchmark federal funds rate well into next year. There has even been growing speculation that the Fed would have to ease monetary policy further, perhaps by adding to a program of mortgage-linked and Treasury debt purchases that already totals more than $1.5 trillion.
Fed Chairman Ben Bernanke is expected to shed more light on the matter on Wednesday and Thursday as he goes to Capitol Hill to deliver testimony on the central bank's semi-annual monetary policy report.
EURUSD was able to shake off yesterday’s Moody downgrade of Ireland and the speculation that a German Bank would fail the stress test to rally to 1.3028. The Hungarian decision to halt talks with the IMF/EU remains risk negative but was not able to weigh on the Euro. While none of the events are on-their-own monumental or unexpected for the Euro, we still believe that the there is a growing fundamental argument that the recent EUR run is losing momentum and should reverse in the near-term.
The key catalyst should be the inadequacy of the bank stress test due to be released Friday. We doubt that this report will provide the clarity investors need and participants will potentially find significant flaws in the methodology. Even with EU officials throwing a few well-publicized “sick” banks under-the-bus such as German lender Hypo Real Estate Holding AG, we suspect the market will remain nervous.
The path to the next resistance at 1.3093 looks heavily congested which should provide the barrier we are looking for.
In Australia the published RBA minutes were slightly less hawkish than the markets had anticipating prompting traders to cut their long AUDUSD spec positions. The language was broadly in line with the policy statement released two weeks ago but highlighted two core issues that is on the market’s mind.
The RBA stated that the "critical medium-term question was the extent to which economies in Asia could continue to grow strongly in the face of what could be an extended period of subdued conditions in the major North Atlantic economies" and discussing the EU stress test stated "it’s critical that the stress tests be regarded as credible and that plans be in place to deal with any capital shortfalls identified." Questions we too would like to see addressed and convincingly answered. Given the overall tone we suspect that the RBA will opt to pause in August but will raise rates another 25 basis points in September.
As for the AUD prospects, clearly there has been little decoupling from risk which will be the key determinate for the currency’s movement.
Today, markets are expecting that the Bank of Canada will continue to tighten monetary policy when they meet on Tuesday, with the median forecast for a hike of 25 bps to 0.75%. After holding interests rates at 0.25% for over a year, the central bank finally submitted to restarting monetary tightening at the last meeting and since then data from Canada has been rather encouraging, including a surprisingly strong June employment report (+93.2K) that has brought the unemployment rate back below 8% to 7.9%. There is still a small probability that the BoC might choose to wait on raising rates till after the EU banks stress tests, however we now believe this is a long shot. A lack of scheduled economic data and events will place the short term focus on GS and BONY earning releases.
Today's Key Issues (time in GMT): 06:00 EUR GER PPI 06:15 CHF Trade 08:00 EUR ITA Ind orders 08:00 EUR ITA Ind sales 08:30 GBP Money supply 08:30 GBP PS new brwing 08:30 GBP PSNCR 09:00 EUR ITA Trade non-EU 10:00 GBP CBI orders -23 exp 12:30 USD Housing starts, thous saar Jun 580 exp, 593 prior 12:30 USD Building permits, thous saar 570 exp, 574 prior 13:30 CAD Interest rate announcement, % .75 exp vs. 50 prior 14:00 USD Fed Governor Tarullo (FOMC voter) testifies on financial regulation
EurUsd The rally continues for EURUSD, with today’s surge clocking up a high of 1.3028. Over the last few sessions our focus has predominantly been on the hourly chart (and the 4-week uptrend channel that has guided up from 1.2150), but today it is worth taking a look at the bigger picture revealed by the daily chart as it appears we may be approaching a significant juncture where the bears may start to exert their force once more. Since touching the lows of 1.1876 back on 7 Jun, EURUSD has taken a mere 6 weeks to rally over 9.5% (!), but a formidable resistance zone is now on the horizon which would prompt us to start getting short and selling on any rallies towards 1.3050 (we may not even get to see that level though so our preference is to scale into the position gradually above 1.3000). For one thing, the 4-week uptrend channel resistance we’ve been monitoring on the hourly chart now comes in at 1.3080, and is backed up by a significant former high at 1.3095 (seen on 10 May). The added information the daily chart can give us is that at 1.3125 there is also the 38.2% fibonacci retracement of the entire sell-off from 1.5145 to 1.1876 which should present a major hurdle for this relief rally to overcome. We still expect some buyers to lie around 1.2905 (100-day moving average), 1.2871 (yesterday’s low), 1.2780 (a former pivot), and 1.2683 (last Wednesday’s low).
GbpUsd A 1-week downtrend channel appears to be the main driver of GBPUSD so far this week, but the pair still hasn’t posed a serious threat to the significant support down at 1.5230. Indeed, as mentioned yesterday, we have been using that 1.5230 level as a pivot to buy off and after picking up some cheap GBPUSD late yesterday afternoon we have managed to scalp 50-60 pips of upside this morning. With the 1-week downtrend now imposing its effect even lower down today (trendline resistance 1.5305) we won’t attempt to go long again just yet –at least until the price action is able negate that downtrend and make the risk-reward profile more attractive. Once the bulls can break above that downtrend we’d be more confident of a continued rally to targets around 1.5350 (yesterday’s high), 1.5472 (last Thursday’s high), and 1.5525 (15 Apr high). Should the downtrend actually outlast the support at 1.5230, we would be willing to flip to a shortbias andexpect next supports at the 1.5080 former neckline, 100-day moving average 1.4989, then the 12 Jul low 1.4949.
UsdJpy USDJPY has managed to consolidate for the last 24 hours despite the recent break of major support at 86.97 (1 Jul low) which has opened up the possibility of another plunge back towards the November 2009 low of 84.83. The potential bearish pennant we highlighted on the hourly chart yesterday failed to activate (so no position entered), and indeed the move back above 86.97 has negated the possibility of that pattern playing out later on. Instead, we now see the possibility of an ascending triangle in play which would become active on a break above 87.22 and which would look to target 88.15. We are slightly wary that resistance may come into play around 88.00 so will have to use discretion on perhaps taking profit a little earlier than the pattern’s defined target. Further supply remains at 89.15 (12 Jul high) and 89.50 (28-29 Jun high).
UsdChf The 3-week downtrend channel continues to direct price action in the short term, but thus far the bears have not managed to muster a decent attempt at breaking below 1.0400 despite a couple of attempts late last week. We think that current levels (1.0530) actually look pretty attractive for short entry given the previous price action around 1.0550-60 is now bolstered by downtrend resistance at 1.0535. We’d be satisfied using 1.0580 as our stop, and set a first target on the downside of 1.0450 (yesterday’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) - How much would the U.S. economy have to weaken for the Federal Reserve to try to push borrowing costs even lower?
That question will loom over Capitol Hill this week as Fed Chairman Ben Bernanke delivers his semi-annual testimony on monetary policy to Congress on Wednesday and Thursday.
The answer may rest, as it so often does, on jobs. If a recent softening in a range of economic data is matched by greater unemployment, the U.S. central bank may be forced to take action, even if its room for maneuver is now limited.
Lawmakers, keen to appear proactive ahead of mid-term elections in November, will try to coax Bernanke into backing their respective agendas, with Republicans pressing him on the budget deficit and Democrats on the need for more stimulus.
He will probably stop short on both counts, preferring instead to dwell on the monetary policy options available to the Fed if the economy were to worsen appreciably.
Bernanke faces the difficult task of convincing Congress the Fed is not powerless to deal with slower growth, without appearing so worried about the outlook as to suggest further easing may be imminent.
"At this moment, he and the (Fed's policy) committee are not prepared to do anything. They feel they've used up most of their bullets, and they don't want to go there," said Kevin Logan, chief U.S. economist at HSBC.
"It will be a fine line between not showing any panic or undue concern but at the same time making it clear that they're watching this and will do what's necessary."
There are good reasons for the Fed to be reluctant. A renewed easing would represent a big about-face for a central bank that just a couple of months back was avidly discussing its exit strategy from extraordinary stimulus measures.
Then there is the issue of effectiveness. With interest rates effectively at zero, can the Fed really do more?
Sure. It could resume buying longer-term Treasury debt or mortgage-related assets, extending a controversial program that saw the Fed take on more than $1.5 trillion of these assets.
It could also reduce the amount it pays banks to park their excess reserves at the Fed. It could even, at an extreme, target a specific yield level on Treasury notes, a possibility broached by Bernanke in a 2002 speech on battling deflation.
DIVIDED WE STAND STILL
But none of these options are very attractive. With asset purchases, or even yield targets, it is unclear how much bang the Fed would get for its newly minted bucks. The same applies to interest on reserves. If the problem is lack of demand for credit, steps aimed at encouraging banks to lend more may not do any good.
Some regional Fed officials have a natural dislike of buying mortgage debt, believing it comes too close to crossing the line into a fiscal policy that benefits one sector of the economy over others.
Such concerns raise the bar for any Fed action to a high level. Fed Governor Kevin Warsh indicated as much last month when he argued further expansion of Fed credit to the banking system, already at a record $2.3 trillion, would need to be subject to "strict scrutiny."
"It would require a heck of a lot more," said Paul Ballew, a former Fed staffer and now chief U.S. economist at Nationwide in Columbus, Ohio.
U.S. unemployment currently stands at 9.5 percent, while inflation remains quite tame, and does not appear to be a near-term threat. Bernanke will have to be careful not to spook investors into believing things are actually even worse than they thought.
"If they signal they're going to do something, that could have an adverse effect on financial markets," Ballew said.
The Fed faced some tough times during the financial crisis that began in the summer of 2007 and reached fever pitch in 2008. But from a policy standpoint, the current period may be even tougher, Ballew says.
The uncertainty is creating rifts within the Fed's policy-setting Federal Open Market Committee. The minutes of the last FOMC meeting suggested as much.
Some members were worried about deflation and were keen to talk about what steps the Fed might take in the event of further economic deterioration. Others, in contrast, were still pushing to tighten financial conditions by beginning asset sales in the near term.
One official, Kansas City Fed President Thomas Hoenig, continues to push for a near-term rate increase to thwart inflation threats.
Yet with so many Americans dealing with foreclosures, unemployment or both, lawmakers are likely to press hard on the issue of what more can be done to bolster growth.
A key impediment to further easing is the fear among policymakers that markets will see the Fed as monetizing the U.S. government's budget deficit. So if Congress does want the Fed to act, it better not push too hard.
(Reuters) - The U.S. Federal Reserve's balance sheet rose in the latest week on an increase of its holdings of mortgage-backed securities, Fed data released on Thursday showed.
The balance sheet -- a broad gauge of Fed lending to the financial system -- rose to $2.324 trillion in the week ended July 14 from $2.314 trillion the previous week.
They reached a record $2.333 trillion on May 19 on rising ownership of mortgage-backed securities guaranteed by Fannie Mae (FNMA.OB), Freddie Mac (FMCC.OB) and the Government National Mortgage Association (Ginnie Mae).
The central bank's holding of housing agency MBS grew to 1.129 trillion on Wednesday, up from $1.118 trillion a week earlier.
The Fed had committed to buy up $1.25 trillion in MBS and $175 billion in bonds issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank System.
It held $162.11 billion in agency securities on Wednesday, fewer than the $164.76 billion a week earlier.
These purchases were part of the Fed's quantitative easing program intended to help the ailing housing market and hold down home borrowing costs in an effort to end the worst U.S. recession in 70 years.
The Fed ended its purchases of these securities at the end of March but has continued to take delivery on them.
The central bank also began switching into lower-coupon MBS in a bid to achieve timely settlement on its purchases.
As for emergency lending, the Fed said overnight direct loans to banks via its discount window averaged $86 million in the week ended July 14, compared with a daily pace of $41 million the previous week.
(Reporting by Richard Leong; Editing by Andrew Hay)
The euro weakened today s the Spanish lenders borrowed the record amount form the European Central Bank and after the region’s industrial production expanded less than predicted.
Spain’s financial institutions borrowed the record €126.3 billion from the ECB last month as the investors avoided the local banks. The seasonally adjusted industrial production grew by 0.9 percent in May compared with April in the Eurozone. The median forecast was the growth by 1.2 percent.
EUR/USD traded at 1.2700 as of 12:06 GMT today after it opened at 1.2722. EUR/JPY dropped to 112.46 from its opening level of 112.87.
The euro appreciated sharply vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 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.
