€ The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2965 level and was capped around the $1.3040 level. The big news in the market today was a weaker-than-expected result for U.S. June durable goods orders. Defying expectations of a positive print, the headline number came in at -1.0%, down from the revised May tally of -0.8%, while the ex-transportation component fell to -0.6% from the May result of 1.2%. Sub-components such as capital goods orders non-defense ex-air were also considerably weaker and these data suggest the U.S. economy sputtered lower at the end of the first half of the year. Other data saw MBA mortgage applications off 4.4% from the prior +7.6% result. Weekly initial jobless claims and continuing jobless claims data will be released tomrorow followed by GDP, PCE, and final July University of Michigan consumer sentiment data on Friday. The Federal Reserve released its July Beige Book today and its noted that economic growth decelerated in some areas over the past two months. The expiration of a homebuyers’ tax credit and a decline in commercial real estate both had a negative impact on the U.S. economy. The Fed continues to anticipate “continued moderate growth.” New Fed nominees Yellen, Diamons, and Raskin won their Senate votes today and will soon join the Board of Governors. In eurozone news, provisional German states’ July consumer price inflation data released today came in on the elevated side. The preliminary national July CPI came in at 0.2% m/m and 1.1% y/y with the harmonized measure at +0.3% m/m and +1.2% y/y. French June CPI data will be released tomorrow. The European Central Bank introduced more stringent rules today on bank collateral including new haircuts on certain bonds. Euro offers are cited around the US$ 1.3265 level.
¥/ CNY The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥87.25 level and was capped around the ¥88.10 level. Bank of Japan Policy Board member Kamezaki reported the central bank “wants to make utmost efforts proactively to escape from deflation and return to a sustainable growth path under price stability,” noting a stronger yen will hurt exporters. In contrast, other BoJ officials including Governor Shirakawa have been hesitant about commenting on the strong yen. There is speculation that industrial production growth in Japan is decelerating and this may increase pressure on the BoJ to ease further. Yen gains were also prompted by weaker-than-expected Australian consumer price inflation data, suggesting global growth continues to decelerate. Reserve Bank of Australia will likely not hike rates next week and the yen could stay bid as a result of this evolving monetary and economic landscape. While Kamezaki’s remarks may not increase the changes of yen-selling intervention by the government, traders remain fixated on the ¥85 level. Economic growth in Japan may also slow in the fourth quarter. The spread between three-month U.S. Dollar Libor and three-month yen Libor narrowed to 23.937 basis points today, the smallest difference since 20 May. Data released in Japan overnight saw July small business confidence improve to 48.1 from the prior reading of 47.4. June retail trade data will be released tonight. The Nikkei 225 stock index climbed 2.70% to close at ¥9,573.27. 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 ¥113.20 level and was capped around the ¥114.70 level. The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥135.85 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 6.7778 in the over-the-counter market, down from CNY 6.7784. The Federal Reserve Bank of Cleveland warned that the anticipated appreciation of the Chinese yuan will not lead to a “substantial” reduction in the U.S. trade deficit. People’s Bank of China is expected to keep monetary policy relatively stable and continue to promote domestic final private demand.
£ The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.5635 level and was supported around the US$ 1.5545 level. Data to be released in the U.K. tomorrow include July Nationwide house prices, June net consumer credit, June net lending secured on dwellings, June mortgage approvals, and the July GfK consumer confidence survey. Bank of England Governor King today expressed concerns that proposed reforms to the Basel capital accord will not be strong enough. Monetary Policy Committee member Miles said now is not the proper time to change policy while MPC member Bean said sterling’s decline will likely have a larger-than-expected impact on consumer prices. 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 £0.8310 level and was capped around the £0.8365 level.
The Swiss franc weakened today versus the U.S. dollar and the euro as the U.S. and the European economies show signs of recovery, damping demand for the franc as the safe currency and drawing the investors to the riskier assets.
The MSCI World Index of stocks and futures gained 0.3 percent. The economists, including Charles Plosser, the president of the Federal Reserve Bank of Philadelphia, think that it’s too early to talk about increasing the stimulus, which is already significant, by the Federal Reserve. Plosser said that
Talk of new efforts to stimulate the economy are premature right now. I don’t think the data have been sufficiently compelling one way or another.
USD/CHF jumped to 1.0588 from 1.0484 today as of 11:02 GMT. EUR/CHF traded at 1.3761 after it opened at 1.3773.
€ The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2950 level and was capped around the $1.3045 level. The common currency continues to orbit the psychologically-important US$ 1.3000 figure as traders weigh an improving eurozone sovereign outlook against a deceleration in U.S. economic activity. Dealers reacted to last Friday’s eurozone bank stress tests results by pushing the euro back above the US$ 1.3000 figure on the perception the European banking system should be able to withstand additional dislocations in the sovereign credit market. European Central Bank officials talked up the stress tests late last week and yesterday, suggesting the eurozone received more than a passing grade. Data released in the eurozone today saw the June M3 money supply increase 0.2% y/y and the ECB’s bank lending survey will be released tomorrow. German data saw the August GfK consumer confidence survey climb significantly to 3.9 from the prior reading of 3.6 and the June import price index was up 0.9% m/m and 9.1% y/y. Provisional July CPI data will be released tomorrow. French data saw total June jobseekers off 8,600, an indication of an improving labour market there. In U.S. news, dealers reacted negatively to a lower-than-expected July consumer confidence print of 50.4, compared with the previous revised total of 54.3. These data suggest consumer spending may be relatively weak as final private demand is limited by current sentiment. Other data saw the July Richmond Fed manufacturing index decline to +16 from the prior print of +23 while the May S&P/CaseShiller home price index was up 0.47% m/m and 4.61% y/y. MBA mortgage applications, June durable goods orders, and the Fed’s Beige Book will be released tomorrow. Philadelphia Fed President Plosser yesterday suggested the current economic situation does not warrant additional Fed stimulus but added the FOMC is prepared to move if and when needed. Euro offers are cited around the US$ 1.3265 level.
¥/ CNY The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥87.90 level and was supported around the ¥86.80 level. Dealers pushed the yen lower today on expectations Bank of Japan could ease monetary policy further. Demand for Japanese government bonds remains strong and this is a signal that many investors expect Japanese yields could fall further. There is still talk the government may look to protect the psychologically-important ¥85 handle by selling yen for U.S. dollars or other currencies in what would be the country’s first official yen-selling intervention in several years. Many BoJ-watchers believe the central bank will maintain its ultra-accommodative monetary policy for at least two more years. Japanese banks have been investing in longer-dated debt and the swaps market to record profits as yields on five-year JGBs move lower. Data released in Japan overnight saw the June corporate service price index decline 1.0% y/y, lower than the previous -0.8% May result and the latest evidence that deflation remains a major problem for the Japanese economy. The Nikkei 225 stock index lost 0.07% to close at ¥9,496.85. U.S. dollar bids are cited around the ¥86.29 level. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥114.10 level and was supported around the ¥112.75 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥136.65 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥82.30 level. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.7784 in the over-the-counter market, down from CNY 6.7790. Data released in China overnight saw the June leading index decline to 102.84 from the revised prior tally of 103.25. People’s Bank of China reported China’s economic fundamentals remain “good” and said the recent deceleration in economic growth will likely stabilize.
£ The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.5575 level and was supported around the US$ 1.5440 level. Cable reached its strongest level since February 2010 as traders reacted positively to a surprise +33 print in July CBI reported sales, up from the prior reading of -5. Additionally, none of the £355 million in corporate bond securities Bank of England said it would purchase in its twice-weekly program was tendered today, the first time investors did not seek a BoE bid since March. This is indicative of improving sentiment in the credit markets. A perceived relaxation of terms in the Basel 3 capital accord terms is also supporting sterling. The key functions of the Financial Services Authority will be relegated to the BoE. Cable bids are cited around the US$ 1.5270 level. The euro depreciated vis-à-vis the British pound as the single currency tested bids around the £0.8345 level and was capped around the £0.8415 level.
CHF The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.0635 level and was supported around the CHF 1.0480 level. Data released in Switzerland today saw the June UBS consumption indicator improve to 1.810, up from the revised May result of 1.712 and its highest level since July 2008. Swiss unemployment remains at about half the level as the eurozone’s rate and this is resulting in positive economic activity. There is some speculation Swiss National Bank may have intervened by selling francs today given the significant move lower for the currency but SNB would not confirm this speculation. U.S. dollar offers are cited around the CHF 1.0980 level. The euro appreciated vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.3795 level while the British pound moved higher vis-à-vis the Swiss franc and tested offers around the CHF 1.6525 level.
€ The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.3005 level and was supported around the $1.2875 level. The common currency briefly traded above the US$ 1.3000 figure before settling back during the North American session. Dealers continued to chase the pair higher following the release of Friday’s stress test results on 91 eurozone banks, the details of which were better than expected. Data released in the U.S. today saw the June Chicago Fed national activity index decline to -0.63 from the revised prior reading of +0.31 while the July Dallas Fed manufacturing activity index fell sharply. Also, June new home sales evidenced a surprising 23.6% m/m increase to an annualized 330,000 units. May CaseShilller home prices data will be released tomorrow along with July consumer confidence data and and the July Richmond Fed manufacturing index. Philadelphia Fed President Plosser reported “there is underlying strength that is still there,” adding there is not much of a role for additional Fed action in the near term but conceded Fed policymakers “have ammunition to act if we want to.” San Francisco Fed President Yellen, the presumed next Vice Chairman of the Fed, reported it would be “risky” to adopt a long-run inflation goal of 4% and said regulation and supervision are the “first line of defense” against financial risks. In eurozone news, June M3 money supply data will be released tomorrow followed by the ECB’s bank lending survey on Wednesday. European Central Bank President Trichet reported the stress test on the banks was a “very important transparency exercise” while ECB member Ordonez said the tests “for sure have been enough to restore investor confidence.” Eurogroup chaiman Juncker said the stress tests evidence a “robust” European banking industry. Euro offers are cited around the US$ 1.3265 level.
¥/ CNY The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥86.80 level and was capped around the ¥87.70 level. New political party “Your Party” called on the government to weaken the yen and undertake a more expansionary fiscal policy to stimulate the domestic economy and counter deflation. Nomura, Japan’s largest brokerage, downgraded its assessment of Japanese equities to “neutral,” citing a bleaker profit outlook and decelerating economic growth prospects. Nomura expects economic growth of 2.6% this fiscal year and 1.5% next fiscal year. Data released in Japan today saw the June merchandise trade balance increase to ¥687 billion from the revised previous tally of ¥320.9 billion. The June corporate services price index will be released overnight. The Nikkei 225 stock index climbed 0.77% to close at ¥9,503.66. U.S. dollar bids are cited around the ¥86.29 level. The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥112.20 level and was capped around the ¥113.45 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥135.55 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥82.50 level. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.7790 in the over-the-counter market, down from CNY 6.7799. The June leading index will be released this week along with the July MNI business conditions survey and July PMI manufacturing. People’s Bank of China Deputy Governor Hu Xiaolian reported the “fixed” yuan exchange rate system caused excess liquidity that may cause “heightened inflation expectations and speculation in assets.”
£ The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.5515 level and was supported around the US$ 1.5405 level. Data to be released in the U.K. tomorrow include CBI July reported sales data followed by July Nationwide house prices data on Thursday and other mortgage and consumer credit numbers. Bank of England announced its new Financial Policy Committee will have eleven members and be in place by the autumn. The key functions of the Financial Services Authority will be relegated to the BoE. CEBR reported BoE will not need to raised rates for eighteen months. Chief Economist Dale has warned of lower economic growth, higher inflation, and rising unemployment. There is talk of a possible three-way split on the MPC this year if one or more policymakers voted to expand policy accommodation. Some believe the MPC may resort to increasing its asset purchase program. Cable bids are cited around the US$ 1.5140 level. The euro depreciated vis-à-vis the British pound as the single currency tested bids around the £0.8325 level and was capped around the £0.8380 level.
CHF The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.0490 level and was capped around the CHF 1.0555 level. The June UBS consumption indicator will be released tomorrow followed by the July KOF Swiss leading indicator on Friday. U.S. dollar offers are cited around the CHF 1.0980 level. The euro depreciated vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.3565 level while the British pound moved higher vis-à-vis the Swiss franc and tested offers around the CHF 1.6345 level.
The substance and meaning of Friday’s Stress test results are still be hotly debated. Financial pundits are putting enormous emphasis on the European open as the barometer of the market’s sudden confidence in the results. We are still unconvinced about the stress tests and doubt that a single market open/trading day will create the directional rush some participants are looking for. FX markets initially took on risk in Asia but the gains were quickly eroded.
Seven of the EU banks, out of a total of 91, failed the stress test. The test did not find any troubled institutions in countries such as Italy and Portugal and just one in Greece. Of the banks that did fail, they only needed to 3 million Euros to meet their Tier-1 capital ratio of 6%, quite a low figure for major banks. The EU’s widespread denial of the possibility of a sovereign default is vexing to analysts, but it’s understandable from a political and market stability standpoint.
Overall, if the purpose of this test was to gauge the probability of a sudden bank collapse in the EU, than it misses the mark. We maintain the view that Europe’s problems are largely structural and thus no test will address these problems. The macroeconomic assumptions used in the adverse scenarios were not very difficult nor believable. Ireland’s GDP growing 1% is not an emergency scenario.
Markets will continue to watch LIBOR and credit-default swap spreads carefully as well as the equity markets’ reactions – especially to see which banks come under heavy selling pressure.
The Euro’s strength is limited as domestic growth prospects will diminish as the austerity measures kick in. Global growth is still decelerating and the credibility of the single currency has been damaged in recent years. In addition, we have our eye on the Swiss Franc to outperform across the board. The Swiss version of the stress test, released Friday prior to the EU test, was more rigorous and comprehensive. With the added scrutiny, market participants can be confident in Switzerland’s banking sector. We suspect capital will continue to flow from Europe, into Switzerland, as investors seek out a safe haven for their assets.
We are still very impressed with the UK growth figures released last Friday. Q2 GDP figures came in well ahead of expectations at 1.1% q/q and 1.6% y/y, ahead of the 0.6% q/q & 1.1% y/y expectations. While PMC member Posen has raised the question of further QE to prevent the UK’s economy from taking another dip, we are leaning more to the views of Sentence that inflationary pressure needs to be tackled now. We will be watching for the opportunity to go Long sterling, especially in the EURGBP.
Today’s final thought is on the Yen. There has been a noticeable lack of rhetoric surrounding its recent strength. The current government coalition believes that markets themselves should set prices, even though there has been no noticeable erosion in exports (June exports increased a whopping 27.7% y/y). This week’s June CPI will be in negative territory and we believe it’s only a matter of time until Japanese rhetoric begins and we see the Yen lose ground.
Today's Key Issues (time in GMT): 07:30 SEK Jun trade balance; last SEK2.7 bln surplus. 07:30 GBP Details of UK financial supervision reform. 14:00 USD Jun new home sales, 335k AR eyed; last 300k. 00:00 PLN Interest rate announcement, % 3.50 exp/prior
EurUsd Well, the European stress tests were just as underwhelming as expected, so for now EURUSD’s short-term uptrend remains intact and the markets look pretty directionless this Monday morning. Our gut instinct is that the medium-term direction for this pair will be lower, but in the short-term we would be willing to play this one either way depending on the outcome of a potential symmetrical triangle pattern now visible on the hourly chart. The lower edge of the triangle coincides with the short-term uptrend line, so a break below that support (currently 1.2825) would be the signal to go short with a target below around 1.2480. Given that target is some distance away, supports on the downside are a potential hazard at 1.2793 (Friday’s low),1.2733 (21 Jul low), 1.2683 (14 Jul low) and 1.2522 (13 Jul low). Should the bullish triangle scenario play out instead then we need a break above 1.2950 to trigger long entry, and eye a target above at 1.3300. Next resistance is expected at the 100-day moving average 1.2874, 1.3028 (20 Jul high) and 1.3093 (10 May high).
GbpUsd After the false break of the 6-week uptrend last week GBPUSD has bounced emphatically higher, and impressive UK GDP figures on Friday has catalysed the rally further to highs of 1.5501. In doing so, the pair has now surpassed the 15 Jul highs at 1.5472 and is now expected to make a move on the more significant 1.5525 (15 Apr high). Above there lies yet more technical resistance (namely the 200-day moving average 1.5558 and 23 Feb high 1.5575) which should stall the rally on the first visit, but beyond there the skies are clear for a run on 1.6000. Nearest support is back down around 1.5350 pivot level, with the lower edge of the 6-week uptrend now coming in below at 1.5280. Should the trend break lower once more then first stop on the downside will be 1.5125 (last Wednesday’s low), followed by 1.5080.
UsdJpy The bearish flag pattern we had been tracking last week has now decisively been dead and buried by the move back above 87.50, and if anything we look to be carving out a range between 86.25 –87.75. At current levels towards the upper end of the range, the most attractive strategy is to sell some and await a return to 86.50ish levels, but ensuring we keep a tight stop on the topside to keep the risk/reward ratio manageable. There is a possibility that from here, a break above that range ceiling (87.75) could indicate a double bottom chart pattern has been activated, and if so, we should be getting long there and aiming for a target above of 88.85.Sellers are expected to step in around 88.00 (former pivot), 89.15 (12 Jul high) and 89.50 (28-29 Jun high).
UsdChf Finally, someone told the bulls about the break of the 3-week downtrend channel and we managed to get a bullish engulfing candlestick pattern on the daily chart to finish the week; it only took about 3 days... The decisive burst higher on Friday afternoon hit a peak of 1.0564 but progress has been halted by resistance coinciding with the 19 Jul highs, so for now the pair is now consolidating above 1.0500. We see a potential bullish flag pattern on the hourly chart that suggests a break above 1.0560 should be taken as the signal to go long, with a target on the topside around 1.0715; however we think buying on a dip to 1.0500 (the lower edge of the flag) also represents decent value with 1.0450 likely to offer some protection below. Only resistance levels above to be wary of are the 14 Jul highs at 1.0618 and the 200-day moving average at 1.0640.
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 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.
Risk appetite was pared down during the Asian session as investors chose to focus on Fed Chairman Bernanke’s dovish comments. Bernanke's semiannual report to Congress basically reiterated the position reported in the FOMC minutes and policy speeches. However, the markets seemed to have latched on the words “we recognize that the economic outlook remains unusually uncertain. We will continue to carefully assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed." That statement sent a rush of capital back to recent safe havens in the US dollar, Swiss Franc and Japanese Yen. Just as USD, CHF and JPY all received their boost, US yields & equities dropped like a stone with 10y yields falling 10bp as the chairman spoke.
As Europeans sat down at their collective desks this morning, the merits of the stress test are now being hotly debated. The chasm emerging between proponents and opponents is considerable. On one side are EU officials who believe everything will be repaired by this magical report and on the other side is the real market, which remains overall skeptical and unconvinced. For those that have been reading our reports for the last two weeks, we firmly remain in the skeptical camp. One of the CNBC anchors summed up our opinion best when speaking to a Greek finance official declaring that “if Greek banks pass, the stress test fails.” The increased dialog surrounding this issue is obviously due to the proximity of the data release, further amplified by the Wall Street Journal’s report that EU officials are looking to publish the results before tomorrow’s European open rather than at its close.
This begs the question, if the regulators haven’t even cemented questions regarding the distribution of their report, how confident can we feel in their thoroughness in analyzing complex balance sheets? The uncertainty and debate still surrounding this report is caustically eroding confidence. We still hold that the stress test will not provide the transparency needed, will not build nor shore up confidence in the EU and will leave us with more questions than answers.
In the UK, BoE MPC minutes revealed a 7-1 vote in favor of an unchanged policy rate with Andrew Sentance being the lone dissenter…again. The committee further voted unanimously to hold the QE program unchanged at £200 bn. There was a discussion of increasing QE easing, however no member actually voted for the move. BoE Governor Mervyn King still believes that inflation will continue to ease as growth is expected to deteriorate a bit further. Given these developments, we suspect the sterling will continue to come under selling pressure as the risk is now skewed towards policymakers opting to hold rates steady longer than the market currently expects.
Over the past few days, CAD remains the relative outperformer in the FX market. Canadian retail sales and their Monetary Policy Report are due out today and we believe that growth expectations will continue to be adjusted to the upside - giving the CAD even further support.
Today's Key Issues (time in GMT): 08:30 GBP Jun retail sales, +0.5% m/m, +1.0% exp; last +0.6%, +2.2%. 09:00 EUR May ind new orders, unch m/m, +20.2% y/y exp; last +0.9%, +22.1%. 13:30 USD FOMC Chair Bernanke semi-annual House testimony 14:00 EUR Jul consumer confidence index; last -17. 14:00 USD Existing home sales, mn saar 5.20 exp 14:00 USD Leading indicators index, % m/m Jun -0.3 exp 15:00 ZAR South Africa: Interest rate announcement, % Jul 6.50% 14:30 CAD BoC Monetary Policy Report.
EurUsd As the credibility of the European bank stress tests is put up to increasing scrutiny, the bears continue to pile the pressure on EURUSD; and in the last 24 hours we have seen the 3-week uptrend channel break down, leading to a low of 1.2733. From here the risk-reward profile strongly favours short positions, so we would look to use the back side of that 3-week uptrend as a good entry level for shorts; that trendline resistance is seen at 1.2790 currently, so we’d be happy getting in around there and setting a stop just above 1.2830 (yesterday’s US session high). First destination on the downside will be the 14 Jul low 1.2683, although it’s worth noting that today that level coincides with a very short-term downtrend support so the pair will likely bounce off there on the first attempt. Ultimately we see this bearish trend eventually taking another look at 1.2522 (13 Jul low) and 1.2483 (2 & 6 Jul lows), and very possibly a further extension back towards 1.2000. Should the bears relent enough for the pair to break back within the uptrend channel at 1.2790, expect further selling interest to lie around 1.2840 (support-turned-resistance from earlier this week), the 100-day moving average 1.2887, and 1.2925.
GbpUsd After a choppy and indecisive few days trading, we feel GBPUSD is gathering momentum for a move lower –a view based on yesterday’s break below the significant 6-week uptrend and reinforced by a bearish engulfing candlestick on the daily chart over the last 2 days of this week. We now look to sell around 1.5200 levels –the back side of the 6-week downtrend seen at 1.5210 –and await a return to 1.5125 (yesterday’s low). Further downside is highly possible but likely to become laboured below 1.5125 as trendline support is currently seen around 1.5110 and a significant former pivot level remains at 1.5080.Should we managed to conquer those supports, there is a much clearer path towards the next downside targets of 1.4992 (100-day moving average), then the 12 Jul low 1.4949. The risk-reward profile does look a little edgy should we break back above the uptrend at 1.5210, with next resistance not seen until 1.5350 (19 Jul high), 1.5472 (last Thursday’s high), and 1.5525 (15 Apr high).
UsdJpy Yesterday we outlined the two possible scenarios in play for USDJPY –the first being a potentially bullish symmetrical triangle pattern with a target at 88.15, and the second one a larger bearish flag pattern which had not yet been activated. That latter pattern now looks to have become activated by the sell-off through trendline support at 87.00-05, and with that we now feel that the smaller symmetrical triangle pattern is as good as dead in the water. The classically defined target on the downside for this new flag pattern is 84.30 with supports ahead of there eyed at 86.27 (16 Jul low) and Nov 2009 lows of 84.83; but as we have mentioned a couple of times recently, down at those levels we would be playing Russian roulette with possible BoJ intervention so anything below 85.50 seems an ambitious enough take profit level for our fear/greed ratio. Any rallies from here are likely to meet fresh sellers around 87.15-20 (back side of the flag) where those who missed the break-out first time around will want to jump in, then further resistance seen at 87.57 (this week’s high from 20 Jul), 88.00 (former pivot), 89.15 (12 Jul high) and 89.50 (28-29 Jun high).
UsdChf The 3-week downtrend channel has been violated a number of times in the past 24 hours, but as of yet the bulls have failed to capitalize on the upside break and the pair is continuing to stutter around the trendline resistance. We are still short at 1.0530 from yesterday’s trade recommendation (taking the view that a lack of directional impetus from either the bulls or the bears made it a prime range-trading environment) and are looking at a first target of 1.0450 (Monday’s low), with 1.0400 (double bottom seen last week) as a possible extended target. Some bulls may favour buying on the dips towards, 1.0400, but should they be wrong the landscape below 1.0400 is only dotted with stale support levels at 1.0365, 1.0315 (trendline support), then 1.0230 –could be a nasty plunge with few buyers to slow the descent.
The highlight of Wednesday was testimony from Fed Chairman Ben Bernanke before the Senate Banking Committee on Capitol Hill.
The central banker had some downbeat words on the U.S. economic outlook: he told lawmakers that it “remains unusually uncertain”.
Bernanke was also far from sanguine on the U.S. labour market situation. He said that a “slow” recovery in domestic employment is inhibiting spending and expects only a “gradual decline in unemployment”.
As the hearing progressed, U.S. stock markets sold off. The S&P 500 eventually settled 1.3% lower at 1,070, its worst close since last Friday, when it ended the day at 1,065.
Riskier majors also felt the heat from Bernanke’s downbeat testimony. As the central banker testified, they declined to new session lows.
At the end of the day, the euro was the G10 underperformer, with the single currency also coming under pressure from a disappointing Portuguese government bond auction earlier on Wednesday.
EUR/USD fell below $1.2800USD for the first time since last Thursday, while EUR/JPY hit a one-week low.
The U.S. dollar advanced against every major on Wednesday apart from the yen and Swiss franc, both of which are safe haven currencies.
The yen outperformed as investors sought a hedge against risk, with the currency firming against the rest of the G10.
The news flow has been very light during Thursday’s Asia-Pacific session. No notable economic data or breaking news has been released.
Forex moves have been small, though the Australian and New Zealand dollars, two of the three main underperformers on Wednesday, have already exceeded their lows from that day. The other, the euro, has, however, slightly pared its losses.
The remainder of Thursday contains a barrage of economic events. The European session’s highlights include euro zone and German services and manufacturing sector PMIs, UK retail sales, and euro zone consumer confidence.
Meanwhile, North America will focus on more testimony from Bernanke, U.S. weekly jobless claims and existing home sales, Canadian retail sales and the Bank of Canada Monetary Policy Report.
The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2750 level and was capped around the $1.2910 level. The common currency came off after Federal Reserve Chairman Bernanke reported the economic outlook remains “unusually uncertain” in Senate testimony and reiterated the Fed’s plan to keep interest rates at very low levels for an “extended period.” Bernanke also noted the Fed is “prepared to take further policy actions as needed” to support the U.S. economic recovery but stopped short of noting what those actions may include. Bernanke drove home the point that the U.S. economy is likely to avert a double-dip recession but made it clear the Fed continues to view economic output as “fragile.” Some traders believe the Fed might reopen some of its emergency lending and stimulus programs if the economic situation worsens and economic growth is jeopardized. U.S. equities were higher before Bernanke spoke but lost momentum and sank given the uncertain outlook on the economy. Data released in the U.S. today saw MBA mortgage applications move higher by +7.6% in the latest week. Last week, the Fed released updated economic projections that evidenced forecasts for low growth, high unemployment, and muted inflation. Bernanke also provided support for the new financial regulatory legislation that President Obama signed into law today. In eurozone news, there were no major data released today. The big day for markets is Friday when the results from stress tests on up to 91 eurozone banks will be released. It has already been reported in the media that some banks have failed their stress tests. PMI data will be released in the eurozone tomorrow. Euro offers are cited around the US$ 1.2830 level.
¥/ CNY
The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥86.85 level and was capped around the ¥87.50 level. The pair continues to inch lower to levels where some traders believe the government may intervene, specifically around an ¥85 handle. An anonymous Bank of Japan source this week suggested the central bank may intervene around the ¥85 level if the pair depreciates to that area and continues to trade there. Japanese monetary authorities have not officially intervened for years but they will clearly not want the pair to risk a move below the ¥80 figure. The pair briefly traded below this level in 1995 before a massive dollar-buying intervention was implemented to boost the greenback. Data to be released in Japan overnight include all industry activity. The Nikkei 225 stock index lost 0.23% to close at ¥9,278.83. 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 ¥110.80 level and was capped around the ¥112.805 level. The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥131.70 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 6.7767 in the over-the-counter market, down from CNY 6.7783. Prime Minister Wen this week warned the Chinese property market may be in for difficult times. The Chinese government now accounts for about one-third of global economic growth and economists fear a crash in the housing sector there may result in significant problems for global output.
£
The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.5155 level and was capped around the US$ 1.5335 level. Sterling tracked the euro lower following Bernanke’s speech but the big news in the U.K. today was the release of the minutes from the July Bank of England Monetary Policy Committee meeting 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 £0.8505 level and was supported around the £0.8425 level.
The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2840 level and was capped around the $1.3025 level. The common currency traded above the psychologically-important US$ 1.3000 figure for the first time since 10 May before ceding intraday gains. Data released in the U.S. today saw June housing starts decline 5.0% m/m to an annualized 549,000 units while June building permits were up 2.1% m/m to an annualized 586,000 units. MBA mortgage appkications will be released tomorrow. Federal Reserve Chaiman Bernanke testifies this week following the Fed’s downward revisions to economic growth and inflation forecasts and its upward revision to its unemployment projections. In eurozone news, there was a report yesterday that Germany’s Hypo Real Estate Holding AG failed its bank stress test. Results from up to 91 European bank stress tests will be released on Friday and may impact the euro’s direction. Data released in Germany today saw June producer prices up 0.6% m/m and 1.7% y/y. French jobs data will be released later in the week. There is talk that the International Monetary Fund will seek to increase the amount of funds it can lend to US$ 1 trillion from the current level of US$ 750 billion. Euro offers are cited around the US$ 1.2830 level.
¥/ CNY
The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥87.20 level and was supported around the ¥86.65 level. Traders continue to speculate Bank of Japan may intervene to weaken the yen after the currency reached a seven-month high last week. An anonymous Bank of Japan source this week suggested the central bank may intervene around the ¥85 level if the pair depreciates to that area and continues to trade there. Japanese monetary authorities have not officially intervened for years but they will clearly not want the pair to risk a move below the ¥80 figure. Japanese financial markets were closed overnight and will reopen overnight. Data released in Japan overnight saw the May leading index tick lower to 98.6 while the May coincident index was unchanged at 101.2. Also, June convenience store sales were off 1.5% y/y. Traders await the release of Bank of Japan Policy Board meeting minutes in the Australasian session. The Nikkei 225 stock index on Friday lost 1.14% to close at ¥9,300.46. 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 ¥111.45 level and was capped around the ¥113.35 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥133.20 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥82.95 level. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.7783 in the over-the-counter market, down from CNY 6.7787. Prime Minister Wen warned the Chinese property market may be in for difficult times. Former People’s Bank of China adviser Yu Yongding reported China should reduce the amount of U.S. Dollar holdings in its portfolio. China’s foreign exchange reserves totaled US$ 2.454 trillion in the second quarter and in May, China reduced its U.S. Treasury holdings to US$ 867.7 billion. PBoC is expected to maintain a relatively loose monetary policy.
For the moment, anyways, the EUR continues to enjoy the spotlight while the market awaits the results of the recent stress tests. Risk appetite in the market has surged from a wave of optimism. A number of analysts have been concerned about the EUR's sudden surge, however, since there is little to support such movement. European debt concerns remain, growth continues to lag behind expectations, and the bank stress test results are due this Friday which may reveal just how bad off the region is financially. Economic News
USD - US Dollar under Pressure from Slow Growth The US Dollar continues its decline against the other major world currencies. Concerns have been raised these past few weeks that the US economy is not recovering as quickly as previously anticipated. The decrease in expectations has put a damper on US investments and brought the USD down somewhat.
Against its primary rival, the EUR, the greenback has experienced gradual declines to a current price level of 1.2900. Against the Japanese Yen, the greenback has actually fallen to a 7-month low near the 87.00 price mark. The buck doesn't appear to be fairing too well against the British Pound or Swiss Franc either.
Concerns about slowing economic growth may have increased with Tuesday's housing reports, but today is expected to be a light news day. So long as market events continue to be ineffective at changing trends, the USD will continue its slide against the other major currencies.
EUR - Is EUR Rising Too Quickly before Stress Test Results? The EUR has experienced irregular optimistic movements these past several weeks. Despite a string of negative news releases, the 16-nation single currency continues to make gains on rising risk appetite. Some of the largest gains have been made against the US Dollar and Japanese Yen. The EUR/USD has risen steadily in value and currently trades at 1.2900, while the EUR/GBP sits at a present value of 0.8445.
A number of analysts have been concerned about the EUR's sudden surge since there is little to support such movement. European debt concerns remain, growth continues to lag behind expectations, and the bank stress test results are due this Friday which may reveal just how bad off the region is financially.
For the moment, anyways, the EUR continues to enjoy the spotlight while the market awaits the results of the recent stress tests. Risk appetite in the market has surged from a wave of optimism. Since the EUR-Zone isn't expected to publish any news today there is very little chance of a reversal and traders are still taking the opportunity to join the uptrend before it comes crashing down.
JPY - Yen Trading at 7-Month High vs. US Dollar The Japanese Yen has gradually gained against the US Dollar in this week's trading. Asian stocks took a small hit last week, but they appear to be on the rebound as of yesterday. On the other hand, the JPY has been surging against the USD, with a current value near a seven-month low of 87.00.
Against other currencies, such as the EUR and British Pound, the Yen has experienced similar gains. The EUR/JPY currently trades near record lows of 112.50, while the GBP/JPY also sits just above its all-time low with a current price of 133.23. So long as news reports come out neutral and with few surprises, there may be a strong chance for the JPY's current trends to continue throughout the week. - Declining US Inventories Could Help Raise Oil Prices
The price of oil has been gradually rising this week as the US Dollar continues its decline. The volatility in the oil market appears to have subsided somewhat, following the successful capping of the gushing BP oil spill in the Gulf of Mexico. As long as the cap holds, speculators can take a more accurate gauge of market sentiment towards oil demand.
The American Crude Oil inventories report is expected later today at 14:30 GMT. Inventories have been in decline these past 2 months and if they continue to fall we could see a continued rise in price. A target near $80 this month may not be far off the mark.
Technical News
EUR/USD Yesterday's steep decline may have brought the pair back in range as most indicators seem to be floating in neutral territory at the moment. Looking at the daily chart, it is evident that there might still be room for a continuation of the downward trend as the RSI is still floating in the overbought territory. Waiting on a clearer direction for the pair may be advised for today.
GBP/USD The pair seems to be range trading at the moment, with most indicators floating in neutral territory. However, there is bearish cross evident on the Weekly chart's Slow Stochastic indicating a bearish correction might take place in the nearest future. Going short with tight stops appears to be preferable strategy.
USD/JPY The pair has been range-trading for a while now, with no specific direction. The Daily chart's Slow Stochastic providing us with mixed signals. The 4 hour charts do not provide a clear direction as well. Waiting for a clearer sign on the hourlies chart might be a good strategy today.
USD/CHF The typical range trading on the hourly chart continues. The daily chart RSI is floating in neutral territory. However, there is an impending bullish cross forming on the Weekly chart's Slow Stochastic indicating a bullish correction might take place in the nearest future. When the upwards breach occurs, going long with tight stops appears to be preferable strategy.
The Wild Card Silver Silver prices are once again dropping, and it is currently traded around $17.60 an ounce. And now, the 8-hour chart's RSI is giving bullish signals, indicating that silver prices might go up. This might give forex traders a great opportunity to enter a very popular trend.
The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2990 level and was supported around the $1.2870 level. The common currency stopped just short of testing the US$ 1.3000 figure during the European session and North American dealers knocked the pair lower. Federal Reserve Chaiman Bernanke testifies this week following the Fed’s downward revisions to economic growth and inflation forecasts and its upward revision to its unemployment projections. The common currency tracked U.S. equities higher today as traders responded to some positive U.S. earnings data and shook off a report British Petroleum’s well cap solution in the Gulf of Mexico may be leaking. Data released in the U.S. today saw the July NAHB housing market index decline to +14 from the revised prior reading of +16. Data to be released tomorrow include June housing starts and June building permits. In eurozone news, there was a report today that Germany’s Hypo Real Estate Holding AG failed its bank stress test. Results from up to 91 European bank stress tests will be released on Friday and may impact the euro’s direction. There is talk that the International Monetary Fund will seek to increase the amount of funds it can lend to US$ 1 trillion from the current level of US$ 750 billion. Data released in the eurozone today saw the EMU-16 May current account balance widen to –€$ 5.8 billion from the revised print of -€5.6 billion. Also, EMU-16 May construction output was off 1.0% m/m and 6.3% y/y. Euro offers are cited around the US$ 1.2830 level.
¥/ CNY
The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥87.20 level and was capped around the ¥86.50 level. An anonymous Bank of Japan source suggested the central bank may intervene around the ¥85 level if the pair depreciates to that area and continues to trade there. Japanese monetary authorities have not officially intervened for years but they will clearly not want the pair to risk a move below the ¥80 figure. Japanese financial markets were closed overnight and will reopen overnight. Data to be released in Japan overnight include the May leading index, May coincident index, and June convenience store sales. The Cabinet Office will release its monthly economic report on Wednesday. The Nikkei 225 stock index on Friday lost 2.86% to close at ¥9,408.36. 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 ¥113.05 level and was supported around the ¥111.40 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥133.40 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥83.10 level. In Chinese news, the U.S. dollar appreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.7787 in the over-the-counter market, up from CNY 6.7747. Former People’s Bank of China adviser Yu Yongding reported China should reduce the amount of U.S. Dollar holdings in its portfolio. China’s foreign exchange reserves totaled US$ 2.454 trillion in the second quarter and in May, China reduced its U.S. Treasury holdings to US$ 867.7 billion. PBoC is expected to maintain a relatively loose monetary policy.
£
The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.5235 level and was capped around the US$ 1.5350 level. Many data will be released in the U.K. tomorrow including June public finances, the June M4 money supply, June CBI total orders, and June CBI business optimism. Bank of England Monetary Policy Committee member Sentance reported a “gradual” increase in interest rates would be “helpful for the economic recovery.” 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 £0.8505 level and was supported around the £0.8425 level.
CHF
The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.0535 level and was supported around the CHF 1.0445 level. Data to be released in Switzerland tomorrow include the June trade balance followed by June money supply data on Wednesday. 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 1.3650 level while the British pound moved lower vis-à-vis the Swiss franc and tested bids around the CHF 1.6010 level.
What’s new: Euro Zone: Moody’s downgrades Ireland Euro Zone: talks for review of Hungary’s funding program suspended Equities: Asian indices mostly in the red this morning Swiss Franc: Finds support on back of renewed global concerns European Union: Upcoming sovereign debt issues throughout week to be eyed closely Today:
Rates in Asia and Indices: EURUSD: 1.2962 - 1.2871. USDCHF: 1.0509 - 1.0470. GBPUSD: 1.5342- 1.5269. EURJPY: 112.48 – 111.44. USDJPY: 86.79 – 86.48. DowJones: 10’097.90 -2.52% NASDAQ: 2'179.05 -3.11% S & P 500: 1'064.88 -2.88% Nikkei: 9’408.36 -2.86% Shanghai: 2'475.42 +2.11% Gold: $ 1'190.60 Crude Oil: $ 75.94
Comments: In a press release early this morning, Moody’s rating agency downgraded Ireland’s sovereign bond rating by one notch to Aa2. Loss of financial strength, weak growth prospects and problems from the banking system were cited.
The Euro was already suffering on news of a suspended review of Hungary’s funding program over the weekend, meaning that Hungary will not have access to remaining funds in its USD25.1 bln package. The IMF and EU said that Hungary must take tough action to meet targets for cutting its budget deficit.
Asian Equity indices were mostly down this morning, as last Friday’s US close was in negative territory – on the back of a weaker Michigan consumer sentiment reading, but also because of disappointing US corporate earnings.
Swiss Franc gained 0.38% against majors this morning due to these renewed concerns. Euro suffered reduced support on resurfacing sovereign debt problems.
Markets will be eyeing upcoming debt issuance in European area namely from; UK, France, Germany, Ireland, Greece and Netherlands throughout this week.
* US growth slower; retail trade and manufacturing sector weaker * Fed sees growth risks return, puts exit discussion on hold * Money market rates in eurozone climb further, liquidity withdrawal continues
US Growth Doubts Weigh on Dollar
This week the euro continued its rally against the US dollar and against most commodity and emerging market currencies. The majority of European currencies have managed to hold their ground versus the euro - some (such as the pound Sterling and the Scandinavian currencies) more than others (e.g. the Czech koruna, the Hungarian forint and the Swiss franc). The yen, like the latter, has slipped somewhat against the euro.
The euro gained over 3 cents versus the dollar and is currently approaching 1.30. Its sharp rebound is partly due to thin trading. The holiday season is starting to have an impact on sales volumes and exchange rate movements. The unwinding of short euro positions, which had been built up at the height of the debt crisis, also boosted the euro. The main reason for the euro's recovery, however, was probably a shift in market focus. For weeks on end, the spotlight had been solely on the credit risks of European countries and banks. The implementation of a rescue package for countries potentially at risk of default at the eurozone level and austerity packages at the national level has restored investors' confidence to some extent. Markets are now focusing more on the relative growth outlook for the major economies and monetary policy stance.
Thus the forex markets' reaction pattern is changing. Up till recently, the dollar has served as a safe haven currency, when equity markets, economic data or credit spreads have sent out crisis signals. The risk on/risk off mechanism seems to be becoming less significant, and the more traditional correlation between growth and interest rate differentials and the exchange rate is gaining importance. And here the US have fallen behind the eurozone.
Eurozone: Confidence is slowly returning
Compared to the crisis scenarios acted out in the markets over the last few weeks, the European economy is doing quite well so far. Second quarter data are expected to be strong, and according to the economic indicators, an end of the expansion is not yet in sight. The German economy, the eurozone's main growth driver, seems to be in quite good shape.
At the same time, money market rates in the eurozone are climbing. Even though the ECB claims not to have changed its monetary policy stance, the withdrawal of liquidity, which had started at the beginning of July when the €442bn one-year tender matured, is continuing. This week too, a good €15bn of central bank loans were not renewed. The Eonia overnight rate has now risen to almost 0.50%, the 3-month Euribor stands at 0.86%. The more liquidity the ECB drains from the system, the more money market rates are determined by the main refinancing rate, which, at 1%, is quite high compared to that of other countries. Simultaneously, 2-year Bund yields have risen from 0.55% at the beginning of the month to 0.80% currently.
USA: Hopes are dashed
The situation in the US is exactly the other way round: after production had picked up, employment had started to rise and even the housing market had shown signs of improvement, markets had begun to hope that the upswing was gathering pace. These hopes have been dashed, however, by the latest data. After the expiration of the homebuyer tax credit, the housing market plummeted; excluding temporary Census-related hiring, the number of new jobs created is so small that the unemployment rate is still almost at its peak. The latest economic data published this week were also disappointing: retails sales declined again in June; industrial production fell in June, and the first regional surveys show that the weak trend is set to continue in July; furthermore, the trade balance deteriorated again in June.
The Fed is more downbeat too. The minutes of the FOMC meeting of 23 June state that the economic outlook has deteriorated somewhat; a number of committee members see an increase of downside risks. The changes in the outlook are "relatively modest", however, and do not warrant any additional monetary policy accommodation.
That sounds relatively harmless at first, just like a confirmation of the present monetary policy stance. It should be borne in mind, however, that the discussions in the central bank have completely changed direction. Up until a few weeks ago, the debate had focused on identifying the right time to embark on an exit from the extremely expansive monetary policy. Now, all of a sudden, the question whether the central bank should implement further monetary easing measures, to prevent the recovery from faltering, has taken centre stage.
The change in discussion is reflected in the development of interest rates. On Thursday, 2-year T-note yields fell for a time to their lowest level ever, 0.58%, and now stand at 0.60% - the same level as at the beginning of the month. In a comparison between Treasury and Bund yields, within the space of a mere six weeks, spreads have altered from a significant interest rate advantage of around 30 points for the US bond to a disadvantage of 20 points.
We are expecting the situation responsible for these developments - weakness in the US, relatively robust economy with tendency for higher money market rates in the eurozone - to continue over the next few weeks. Against this backdrop, the euro should remain well supported. However, beyond 1.30, the air will get thinner for EURUSD.
The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2890 level and was capped around the $1.3005 level. Data released in the U.S. today saw the June headline consumer price index off 0.1% m/m and up 1.1% y/y while the ex-food and energy core component was up 0.2% m/m and 0.9% y/y. Additionally, May net long-term TIC flows came in at US$ 35.4 billion, down from the revised prior reading of US$ 81.5 billion, while May total net TIC flows moved higher to US$ 17.5 billion from the prior revised tally of US$ 13.0 billion. Finally, the mid-July University of Michigan consumer sentiment indicator fell sharply to 66.5 from the prior reading of 76.0. The July NAHB housing market index will be released on Monday. Yesterday, U.S. Senate passed key financial regulatory reform laws that will seek to strengthen oversight over systemically-important firms, increase some of the Federal Reserve’s powers, and seek to avert another major credit crisis like the one that unfolded three years ago. Critics of the new legislation suggest it does not address the massive imbalances caused by U.S. wholesale mortgage giants Fannie Mae and Freddie Mae. Former Federal Reserve Chairman Greenspan this week said the U.S. government should let the Bush tax cuts lapse this year to boost tax revenue and reduce the federal budget deficit. San Francisco Fed President Yellen testified this week in her Senate confirmation hearing to become the new Fed Vice Chairman and noted job creation remains a “high priority” to bring down “painfully high” umemployment. Minutes from the most recent Federal Open Market Committee meeting were released this week and indicated a growing concern over the economy. Fed Chairman Bernanke will deliver his semi-annual economic report to Congress next week. In eurozone news, the European Central Bank’s July monthly bulletin this week reported some eurozone jobs “will be permanently downsized.” Data released today saw the EMU-16 May trade balance decline to -€3.4 billion from the revised prior reading of €300 million. Data to be released on Monday include the May current account balance and May construction output. 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 ¥88.25 level and was capped around the ¥87.50 level. Data released in Japan overnight saw June nationwide department store sales decline 6.0% y/y while Tokyo-area department store sales were off 5.5% y/y. Bank of Japan maintained its economic assessment for the third consecutive month in July, reporting “Japan’s economy shows further signs of a moderate recovery, induced by an improvement in overseas economic conditions.” It added “Japan’s economy is likely to recover at a moderate pace.” As expected, Bank of Japan this week lifted its economic growth forecast for the fiscal year ending March 2011 to 2.6% from its April estimate of 1.8%. BoJ also reduced its forecast for the next fiscal year to 1.9% from 2.0%. Bank of Japan’s Policy Board this week kept its benchmark unsecured overnight call rate target unchanged at 0.1%. Dealers expect the government will increase its pressure on the central bank to ease monetary policy further, perhaps by expanding the number of Japanese government bonds it purchases. BoJ Governor Shirakawa reported the BoJ “already expected the pace of the economic recovery to slow down in coming months” following its “rapid” rebounds from late last year. The central bank is also now predicting consumer prices excluding fresh food will decline 0.4% this fiscal year, down from April’s -0.5% forecast. Notably, the central bank maintained its forecast that calls for a 0.1% increase in core inflation in the fiscal year starting April 2011. The Nikkei 225 stock index lost 2.86% to close at ¥9,408.36. 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 ¥111.50 level and was capped around the ¥113.35 level. The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥132.00 figure while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥82.00 figure. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.7747 in the over-the-counter market, down from CNY 6.7781. The slowdown in economic growth reported in China this week caused Chinese interest rate swaps to decline to one-year lows. Many data were released in China this week. First, second quarter real gross domestic product growth decelerated to +10.3% y/y from the prior reading of 11.9%. Gross domestic product is now up 11.1% y/y but most economists expect growth to decelerate further this year. Second, the June purchasing price index was up 10.8% y/y, down from +12.2% y/y. Third, the June producer price index and June consumer price index were up 6.4% y/y and 2.9% y/y, respectively. Fourth, June retail sales growth slowed to 18.3% y/y. Fifth, industrial production growth slowed to +13.7% y/y from the prior reading of +16.5%.
The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2955 level and was supported around the $1.2705 level. The common currency reached its strongest level since 10 May as traders were more inclined to add exposure to riskier assets. The pair surged in late North American trading on news that U.S. investment banking giant Goldman Sachs settled its ongoing charges with U.S. regulators for an estimated US$ 550 million. At the same time, the U.S. Senate passed key financial regulatory reform laws today that will seek to strengthen oversight over systemically-important firms, increase some of the Federal Reserve’s powers, and seek to avert another major credit crisis like the one that unfolded three years ago. Critics of the new legislation suggest it does not address the massive imbalances caused by U.S. wholesale mortgage giants Fannie Mae and Freddie Mac. Data released in the U.S. today saw June headline producer prices off 0.5% m/m and up 2.8% y/y while the ex-food and energy component was up 0.1% m/m and 1.1% y/y. Other data released in the U.S. today saw weekly initial jobless claims fall to 429,000 while continuing jobless claims increased to 4.681 million from the prior reading of 4.434 million. Additionally, the July Empire State manufacturing index fell sharply to 5.08 and the July Philadelphia Fed survey shrank to 5.1. Other data saw June industrial production growth decelerate to +0.1% while June capacity utilization moved lower to 74.1%. Many data will be released tomorrow including June CPI, May TICS capital flows, and July University of Michigan consumer sentiment. Former Federal Reserve Chairman Greenspan today said the U.S. government should let the Bush tax cuts lapse this year to boost tax revenue and reduce the federal budget deficit. San Francisco Fed President Yellen testified today in her Senate confirmation hearing to become the new Fed Vice Chairman and noted job creation remains a “high priority” to bring down “painfully high” umemployment. Minutes from the most recent Federal Open Market Committee meeting were released yesterday and indicated a growing concern over the economy. Fed Chairman Bernanke will deliver his semi-annual economic report to Congress next week. In eurozone news, the European Central Bank’s July monthly bulletin reported some eurozone jobs “will be permanently downsized.” 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 ¥87.20 level and was capped around the ¥88.50 level. As expected, Bank of Japan lifted its economic growth forecast for the fiscal year ending March 2011 to 2.6% from its April estimate of 1.8%. BoJ also reduced its forecast for the next fiscal year to 1.9% from 2.0%. Also as expected, Bank of Japan’s Policy Board kept its benchmark unsecured overnight call rate target unchanged at 0.1%. Dealers expect the government will increase its pressure on the central bank to ease monetary policy further, perhaps by expanding the number of Japanese government bonds it purchases. BoJ Governor Shirakawa reported the BoJ “already expected the pace of the economic recovery to slow down in coming months” following its “rapid” rebounds from late last year. The yen has appreciated more than 5% over the past three months. The central bank is also now predicting consumer prices excluding fresh food will decline 0.4% this fiscal year, down from April’s -0.5% forecast. Notably, the central bank maintained its forecast that calls for a 0.1% increase in core inflation in the fiscal year starting April 2011. Data released in Japan overnight saw June Tokyo-area condominium sales climb 66.6% y/y while June machine tool orders were up 143.8% y/y. Data to be released overnight include the May tertiary industry index, June nationwide department store sales, and June Tokyo-area department store sales. The Nikkei 225 stock index lost 1.12% to close at ¥9,685.53. 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 ¥111.80 level and was capped around the ¥113.35 level. The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥133.95 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥83.40 level. In Chinese news, the U.S. dollar appreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.7781 in the over-the-counter market, up from CNY 6.7748. Many data were released in China overnight. First, second quarter real gross domestic product growth decelerated to +10.3% y/y from the prior reading of 11.9%. Gross domestic product is now up 11.1% y/y but most economists expect growth to decelerate further this year. Second, the June purchasing price index was up 10.8% y/y, down from +12.2% y/y. Third, the June producer price index and June consumer price index were up 6.4% y/y and 2.9% y/y, respectively. Fourth, June retail sales growth slowed to 18.3% y/y. Fifth, industrial production growth slowed to +13.7% y/y from the prior reading of +16.5%. People’s Bank of China member Hu reiterated the yuan will be maintained at a “balanced and reasonable level.”
The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2680 level and was capped around the $1.2735 level. Data released in the U.S. today saw MBA mortgage applications reverse course and decline 2.9%, underscoring the lack of strength in the U.S. housing market. Also, the June import price index was off 1.3% m/m and up 4.5% y/y while June headline advance retal sales were off 0.5%, better than the revised prior print of -1.1%. Additionally, the ex-autos retail sales component was off 0.1%, as expected, and May business inventories weakened to +0.1% from the prior reading of +0.4%. The big news in the U.S. today involved the release of the Federal Open Market Committee meeting’s minutes from the most recent FOMC meeting. Fed officials reported they would have to “consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably.” The Fed’s risk to its economic outlook “shifted to the downside” and most Fed officials noted they preferred to defer asset sales for some time. Some Fed policymakers cited “some risks of deflation” while others suggested “inflation was unlikely to fall appreciably further given stability of expectations.” The economic outlook was noted to have “softened somewhat” and Fed officials also revised their economic forecasts. GDP growth projections were reduced, unemployment projections were raised, and inflation expectations were lowered. The Fed now sees 2010 real GDP growth between 3.0% to 3.5%, now sees the 2010 unemployment rate between 9.2% to 9.5%, and now sees the 2010 PCE price index between 1.0% and 1.1%. In eurozone news, data released in the eurozone today saw EMU-16 June consumer price inflation up 0.0% m/m and 1.4% y/y, as expected, while the core rate edged higher to 0.9% y/y, also as expected. Other data released today saw May industrial production up 0.9% m/m and 9.4% y/y, cooler-than-expected. Dealers eagerly await the results of stress tests on 91 European banks on 23 July. Euro offers are cited around the US$ 1.2830 level.
¥/ CNY
The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥88.25 level and was capped around the ¥89.10 level. Bank of Japan is expected to keep its overnight call rate target unchanged at 0.10% when its interest rate announcement is made tonight. The central bank may also raise its forecast for real economic growth in fiscal year 2010 to above 2% on account of stronger-than-expected increases in exports and production. Some economists are predicting the central bank may lift its forecast to as much as 2.5%. Traders are closely monitoring the newest political party in Japan, the “Your Party,” to see how it interacts with the ruling Democratic Party of Japan that recently lost an upper house election. The new party is seeking to revise the Bank of Japan law so the central bank can target an inflation rate of 2% within two to three years. The International Monetary Fund called on Japan to cap its public debt and said the yen is “broadly in line” with its long-term equilibrium value. The IMF also pressed the central bank for additional monetary easing. Some dealers believe the BoJ may be forced to purchase additional quantities of Japanese government bonds, a policy that some policymakers will resist. Data released in Japan yesterday 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 climbed 2.71% to close at ¥9,795.24. 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 offers around the ¥112.05 level and was capped around the ¥113.25 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥135.75 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥83.45 level. In Chinese news, the U.S. dollar appreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.7748 in the over-the-counter market, up from CNY 6.7725. Data to be released in China tonight 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 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.
