(Reuters) - There has been just an inkling in recent weeks that financial markets might start to take their lead from the 'real' economy again after three years of being tossed about by their own panics and periodic exuberance.
Since the finance industry flailed into its crisis of confidence, doubting its own practitioners and the governments who became over-dependent on them, it has been almost impossible for households and companies to work out what markets are trying to predict about production, employment and consumption.
The net result has been the tail wagging the dog.
Guess the ephemeral mood of global markets six months hence -- voracious risk appetite or bunker-seeking safety -- and you might just stand a chance of predicting where businesses, consumers and policymakers would be forced to follow.
And while PIMCO asset managers predict a post-crisis 'new normal' of years of sluggish growth and policy angst, many yearn for an 'old normal' where finance reflects, rather th7an dictates, what is happening in the real economy where people produce and consume goods and services.
A VERY FINANCIAL COUP
For some, the credit crisis and aftermath had been fomented for decades by a more than a doubling of financial services to some 7.5 percent of the U.S. economy in the 40 years to 2007.
"The 3 percent of GDP (gross domestic product) that was made up of financial services in 1965 was clearly sufficient to the task, the proof being that the decade was a strong candidate for the greatest economic decade of the 20th century," Jeremy Grantham, Chairman of Boston-based asset manager GMO, told clients this month.
Lauding this month's U.S. financial regulation bill, he added: "The extra 4.5 percent would seem to be without material value except to the recipients. Yet it is a form of tax on the remaining real economy and should reduce by 4.5 percent a year its ability to save and invest, both of which did slow down."
Former International Monetary Fund chief economist Simon Johnson's 2009 Atlantic magazine essay, "The Quiet Coup", took a more conspiratorial view of the same phenomenon in sketching the lobbying power of the financial industry over that period.
Johnson estimated U.S. financial sector profits, which had never topped 16 percent of overall corporate profits in the decade to 1985, soared to 41 percent by the noughties. Average financial sector compensation as a share of the average in other industries almost doubled to 181 percent.
There was a similar development in Britain, where financial services had reached 8.5 percent of total output just before the crisis.
Deregulation, privatization, trade globalization and demographic trends were all catalysts for this growth in finance and the current regulatory backlash against the banks is unlikely to return the sector to its 1960s size.
But if knocking the froth off finance allows a more even relationship between real economic trends and financial markets, there may be a chance of tempering the endless boom and busts.
CHANGE AFOOT?
Is there any sign of that happening right now? Well, just an inkling.
In the past three years, financial and investment flows have been violently herded in and out of "safe-haven" cash and liquid assets, correlations zoomed between all asset classes and geographic regions, and risk gauges -- largely volatility measures -- careened from historic lows to highs and back again.
This mass behavior had been building for 20 years. Computer trading strategies supercharged the effect over time.
Yet as this year's euro zone sovereign debt crisis ebbs into the second half of the year, the herd seems for now to have stopped stampeding from its own rifle shots and may be listening more carefully to the underlying economy again.
Mindful of near-zero interest rates in cash, an expected dash back to safe-haven money market funds never really materialized during the worst of the euro crisis in April and May and 2010 outflows from these funds are still close to half a trillion dollars.
Partly as a result, stresses evident in lock-step asset correlations have ebbed and investors seem easier with idiosyncratic trends in selected stocks and credits.
Equity volatility has halved from April/May peaks and quartered from post-Lehman Brothers highs in 2008 and is holding closer to 20-year averages just above 20 percent rather than returning to unrealistic pre-2007 levels in single digits.
Even the world's main exchange rates between the U.S. dollar and euro -- long captive to "risk on/risk off" swings -- are starting to reflect interest rate gaps more than stress.
For active and diversified investors, this is how it is supposed to be and allows them to do what it says on the tin.
To be sure, we've been here before. But there are rays of hope for some return to old normals.
(Graphic by Scott Barber; Editing by Ruth Pitchford)
After last week's MPC minutes, retail sales and GDP reports, the UK data calendar thins out considerably this week. The latest CBI Distributive Trades and housing/lending surveys provide the main focus in a week of second tier data. The CBI is expected to report that retail sentiment picked up slightly in July, boosted by the hot weather and sales of seasonal clothes lines. We expect the net balance of retailers reporting a rise in sales to have risen from -5% to +3% this month. In keeping with signs that the UK housing market may be starting to soften again, the Nationwide house price index is forecast to have dropped by 0.4% in July; mortgage lending and approvals in June are also expected to have softened.
By contrast, after Friday's EU bank 'stress tests', this week sees a variety of releases across the euro-zone, including euro M3 money supply, the latest European Commission surveys, preliminary July CPI data and July German unemployment figures. Euro area monetary statistics are of particular interest as financial market volatility has a direct bearing on bank funding costs. Surprisingly, bank lending growth to the euro-zone private sector picked up modestly in May, despite extreme market volatility. But it is not clear this trend will continue uninterrupted going forward. Meanwhile, we look for a modest improvement in the Commission's economic sentiment index to 99.0 from 98.7, amid continued healthy demand from emerging Asian economies for euro-zone exports. On inflation, the "flash" estimate of euro-zone annual CPI is predicted to register 1.7% in July, from 1.4% previously. At July's ECB press conference, Jean-Claude Trichet noted that some pick-up in price pressures was likely in the short term.
In the US, the advance estimate of Q2 GDP on Friday provides the data highlight of the week, although before then other more timely releases will also draw strong interest. We look for annualised GDP growth from 2.7% in Q1 to 2.8% in Q2, underpinned by rising business investment. This release will also contain annual revisions to GDP growth for the past three years. The Fed's Beige Book, on Thursday, is likely to underline the dovish tone of the June FOMC minutes and Fed chairman Bernanke's testimony last week. Together with a likely softer reading for July consumer confidence earlier in the week, it raises the possibility that GDP growth may remain relatively subdued in the current quarter. The economic slowdown appears to be weighing heavily on the housing market, although the latest data also reflect the expiration of key government initiatives. While we look for a small rise in June new home sales on Monday, this comes after a record 33% drop to an alltime low of 300,000 in May. In other events, the Treasury will auction $104bn of notes this week.
Elsewhere, key Australian price data are out this week. CPI inflation is forecast to rise from 2.9% to 3.3% in Q2, largely reflecting a 25% increase in tobacco excise taxes, as well as higher interest rates and health costs. While this is likely to take inflation above the upper end of the RBA's 2-0%-3.0% target range, the detail of the inflation report, rather than the headline number, is likely be more influential in determining whether the RBA follow up with a rate rise at its next meeting in August.
Elsewhere in the region, the South Korean economy is expected to have expanded by a strong 1.2%q/q in Q2, a rise of 6.8% on the year. Although slightly slower than the 2.1% quarterly growth registered in Q1, this would still represent a strong outturn and justify interest rate increases to contain building inflationary pressures.
* Bernanke expecting slow recovery, but also preparing for double dip * Ifo improves markedly in July, growth in Germany set to remain robust in Q3 * Inflation rates pick up in eurozone
German Economy in a Party Mood
After flirting with 1.30 at the beginning of the week, EUR-USD weakened somewhat as the week progressed. The US reporting season delivered a mixed bag of disappointing results and (for the most part) positive surprises, causing some volatility in equity and currency markets.
Fed chairman Ben Bernanke's monetary policy testimony before the respective committees of the Senate and the House of Representatives confirmed the more cautious monetary policy stance, thus echoing the minutes of the last FOMC meeting. Mr Bernanke told the members of Congress that, in the event of a significant slowdown in the recovery, the Fed was basically prepared to take further policy actions to boost the economy. However, the Fed continues to see the US economy expanding at a moderate pace.
Speculation about the possibility of the Fed implementing further easing measures was probably one reason why US Treasury yields hit new lows. During the course of the week, the yield on 2- year Treasuries fell to an all-time low of 0.55%, and the yield on 10-year T-notes dropped to just under 3%. In the forex market, however, the Fed's dovish rhetoric helped to strengthen the dollar. The dollar's rebound could also reflect fears of a global economic slowdown, as even though the short end of the US curve is still extremely firm, the interest rate advantage of 2-year Bunds over the equivalent US bonds narrowed by nearly 10 to 15 basis points during the course of the week.
This continued until Friday, when the preliminary ifo business climate results were released. They revealed a further significant improvement in the business climate in Germany in July; the index rose from 101.8 to 106.2 - its biggest increase since German reunification. At 106.8, the current assessment is now nearing its top level; only during reunification and the boom of 2006- 2008 has it been higher. It is also remarkable that, despite this positive assessment, the business expectations for the next six months have risen by a further three points to 105.5. What is more, all sectors - manufacturing, wholesaling, retailing and construction - are unanimous in their positive assessment of the business situation.
The business climate data are the first concrete signal that German and European robust economic growth will continue in the third quarter. At around 1.5% quarter-on-quarter, Q2 German GDP growth is set to overstate the trend. However, the business climate bodes well for Q3 too - in spite of the sovereign debt crisis in southern Europe and the austerity measures.
In the short to medium term, the majority of economic data from Europe are likely to be upbeat. In addition to the purchasing managers indices and the ifo business climate, Q2 GDP figures from the UK - with a sharper-than-expected quarter-on-quarter increase of 1.1% - give a foretaste of what is to come.
This could also ease the sovereign debt problem to some extent. At this point of time, we cannot say what risks the European banking stress tests, which are due to be published on Friday evening, will reveal. In our view, however, the fact that the risks are now more transparent will have a soothing impact. Any problem cases which may emerge will doubtless be taken in hand by the relevant regulatory authorities.
Against this backdrop, ECB policymakers are not likely to contemplate further easing measures as the Fed has done. Given the consumer price developments in the eurozone, the ECB could even strike a more hawkish tone. The inflation rate will probably rise by about half a percentage point to 1.9% in July - the flash estimate will be published on Friday. The inflation rate is set to remain at around this level for the rest of 2010. All in all, therefore, we are assuming that the ECB has welcomed the return of liquidity in the money market and the subsequent increase in money market rates. In view of this and the relatively favourable economic environment, the interest rate advantage on the European side could well widen.
From a European perspective, therefore, there are several factors in the euro's favour at present. However, uncertainty on the US side is halting this momentum. During the next few weeks, a series of important US indicators are on the agenda, including GDP data for the second quarter and, in the first week of August, the ISM indices and the labour market report. The FOMC meeting will then be held on 10 August. Should the data turn out to be worse than expected, the euro's chances would diminish significantly.
The euro rose today after the European supervising agency released its report on the stress test results of 91 banking institutions on 16:00 GMT. Though, the impact of the release wasn’t very strong.
The euro rose against the U.S. dollar after the release was made available to the public. Having fallen earlier today, the Eurozone currency began to rise about 2 hours before the report, then went through an hour of strong market volatility and then ended up in a rather sound bullish trend wave. It failed to go up against the British pound as the latter was experiencing a very prominent trading session today.
The Committee of European Banking Supervisors reported on the strength of the of the EU banking sector today. A 55-page summary of the report mentions 7 banks that failed the test (majority of them comes from Spain). But it looks like the report didn’t impress the market participants as there wasn’t any definite unidirectional movement after the release.
EUR/USD rose from 1.2887 to 1.2918 as of 19:29 GMT today after falling to as low as 1.2793 earlier. EUR/JPY increased from 112.16 to 112.97.
The British Pound extended the rally from the previous day and rallied to a fresh weekly high of 1.5412 during the European trade as the advanced 2Q GDP report for the U.K. reinforced an improved outlook for future growth, and the GBP/USD is likely to maintain the upward trending channel from the June low (1.4346) as the recovery gathers pace.
Talking Points • Japanese Yen: Weighed by Risk Appetite • Pound: 2Q GDP Exceeds Forecast • Euro: German Businesses Confidence Unexpectedly Improves • U.S. Dollar: European Bank Stress Test on Tap
However, a report by the British Bankers’ Association showed loans for home purchases unexpectedly slumped to 34.8K in June from a revised 36.4K in the previous month to mark the lowest reading since February, and the slack within the real economy may lead the Bank of England to maintain a dovish policy stance over the coming months as it aims to balance the downside risks for the region.
Economic activity in Britain expanded 1.1% in the second quarter, which exceeded forecasts for a 0.6% rise, while the growth rate increased an annualized pace of 1.6% to mark the first positive reading since 2008, and the larger-than-expected rise in economic activity could give the BoE scope to normalize monetary policy going into the following year as price growth continues to hold above the government’s 3% limit for inflation. The breakdown of the report showed manufacturing increased at the fastest pace in over a decade, with construction surging 6.6% to mark the largest advance since 1963, while service-based activity, which accounts for more than two-thirds of the economy, expanded 0.9% from the first three-months of 2010. However, as the new coalition in the U.K. targets the budget deficit and tightens fiscal policy, the central bank may look to support the economy throughout the remainder of the year as the outlook for future growth remains clouded with uncertainties.
The Euro crossed back above the 100-Day SMA (1.2878) and surged to a high of 1.2965 following an unexpected rise in business confidence, and the single-currency is likely to face increased volatility later today as the European Central Bank is scheduled to release the results of the commercial bank stress test at 16:00 GMT. The German IFO business confidence survey increased to 106.2 in July from 101.8 amid forecasts for a decline to 101.5, with the gauge for future expectations advancing to 105.5 from a revised 102.5 in June, and businesses may turn increasingly optimistic going forward as the region benefits from the rebound in global trade. Nevertheless, as the stress test takes center stage, dismal results is likely to weigh on the exchange rate, which could stoke a sharp selloff in the euro-dollar, but even a lackluster outcome may keep the single-currency above the 100-Day SMA as the economic outlook improves.
U.S. dollar price action was mixed overnight, while the USD/JPY advancing to a high of 87.22 as the Japanese Yen weakened against most of its major counterparts, and the reserve currency is likely to face increased volatility later today following the results of the European stress test as investors weigh the outlook for the global financial system. However, the major currencies could face choppy price action as market liquidity thins ahead of the weekend, but the rise in risk appetite is likely to dictate price action going into the North American trade as equity futures foreshadow a higher open for the U.S. market.
How Will The European Bank Stress Test Affect The Exchange Rate? Join us in the Forum
Related Articles:
US Dollar to Rise Against Yen, Decline vs Pound and Euro
To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com
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 U.S. dollar was rising as the European crisis increased the demand for the safe currencies, but recently began to decline as the focus of the concerns turned to the U.S. themselves. While at the end of this week the greenback rebounded against some other major currencies, the future of the U.S. currency looks uncertain.
The dollar will likely weaken in the near future unless some good news from the U.S. prove the strength of the currency. The lower number of the jobless claims may spark some optimism, but other than that there is nothing to be hopeful about. In case the speculations that the European economy is stronger than it looks would prove true, the greenback will certainly fall further.
The moves of the EUR/USD currency pair can be expected to be volatile, as the sentiment shifts according to the news from Europe and the U.S. For now the shared European currency shows trend to rebound as there are more bad news from the U.S. than from Europe. On the other hand, the gains of the euro can be restrained by the uncertainty, brought to the global markets by the weakness of the U.S. economy. GBP/USD may experience some volatility too as the traders are uncertain yet what influence the budget cuts will have on Britain’s economy, so we should wait until picture becomes clear here to predict where the currency pair will go. The Japanese yen are likely to profit from the concerns about the U.S. and global economies and continue its rally against the greenback.
The dollar is nowhere near parity with the euro. It’s unlikely that greenback will go above 1.20 per euro in the near term. For now it hasn’t fallen far beyond 1.30 per euro level, but we should wait to determine if this would be the support level. Against the sterling the greenback wouldn’t probably weaken beyond 1.5475 per pound level and might trade near 1.5150 per pound. The dollar will likely be traded near the current level against the Aussie, while against the loonie it may rise to 1.0675 before dropping again.
(Reuters) - Oil climbed to $77 on Tuesday as forecasts for a fourth consecutive weekly drop in U.S. crude inventories bolstered the positive influence of rising stock markets in most of Asia.
Shares of resource firms and banks clawed back some of their recent losses, helping to boost U.S. crude for August by 47 cents to $77.01 a barrel at 0644 GMT (2:44 a.m. EDT) for a second straight day of gains.
The August contract expires on Tuesday, while the more liquid September future was trading up 40 cents at $77.30.
ICE Brent crude added 34 cents to $75.96.
Prices have been stuck in a range between $71 and $80 for more than six weeks as volatility related to the European debt crisis dwindled, while a tighter crude market has offset weaker U.S. macroeconomic indicators signaling a slower global recovery.
"I'm pretty sure you will see an increase in demand over the next few weeks and inventories have been in decline," said Peter McGuire, managing director at CWA Global Markets in Sydney, adding prices could top $80 in the first week of August.
U.S. crude inventories likely fell 1 million barrels on average last week, a Reuters survey showed on Monday, while stockpiles of distillate fuel including heating oil and diesel, probably rose 1.6 million barrels, extending the buildup to the eighth straight week.
For gasoline, stocks could have risen 1.1 million barrels on average, the poll showed. That would be the fourth week of gains.
Industry group the American Petroleum Institute will release its inventory report for the week to July 16 on Tuesday at 2030 GMT, followed by government statistics on Wednesday at 1430 GMT.
STORM WATCH
Adding some more support for oil, a tropical wave centered around Puerto Rico had a 20 percent chance of becoming the next tropical cyclone of the Atlantic hurricane season in the next two days, the U.S. National Hurricane Center said late on Monday. The season lasts from June through November.
The Hurricane Center has forecast this year's Atlantic storm season may be the most intense since 2005, when hurricanes Katrina and Rita nearly paralyzed the Gulf of Mexico U.S. oil industry for weeks, helping oil prices to gain.
"We are talking about one of the worst hurricane seasons, and if it's going to start, it's going to start shortly," McGuire said.
China overtook the United States last year to become the world's largest energy user, the Financial Times reported on Monday, citing the International Energy Agency. China's rise to the top ranking was faster than had been expected in part because the U.S. has outpaced China in improving energy efficiency measures over the past decade.
But a senior Chinese official on Tuesday questioned the IEA's conclusion that China had overtaken the U.S.
The IEA has had a relatively high estimate of China's energy consumption and carbon dioxide emissions, said Zhou Xian, spokesperson for China's top energy agency, declining to give alternative estimates.
Over the year, oil prices have stayed within a $23 range, hitting a 19-month peak above $87 and a trough below $65, both in May.
Wall Street gains on Monday were limited by a drop in U.S. housing data showing cracks in the recovery of the world's largest economy as well as disappointing results from Texas Instruments and International Business Machines, which dragged equities lower in after-hours trade.
(Reuters) - Oil slid for a third day on Friday toward $76 as stock markets in Asia fell after disappointing U.S. economic indicators, while a potential Atlantic storm provided some support to prices.
Japan's Nikkei average shed almost 3 percent on Friday, after reports showing U.S. industrial production slowed sharply last month and manufacturing output snapped a three-month streak of increases capped Wall Street gains on Thursday.
But there was some positive economic news as U.S. claims for jobless benefits tumbled to a near two-year low last week.
An oceanic weather system in the central Caribbean had a 10 percent chance of strengthening into a tropical cyclone over the next two days, the U.S. National Hurricane Center said. It was days away from potentially entering the oil-rich Gulf of Mexico.
"Given that the economic outlook is mixed, the key will be the weather as we head into the hurricane season," said Jonathan Barratt, managing director at Commodity Broking Services in Sydney, adding that prices could reach $80 as soon as next week.
U.S. crude for August fell 14 cents to $76.48 a barrel by 0701 GMT (3:01 a.m. EDT), extending Thursday's slide of more than 0.5 percent. The contract was heading for its second consecutive weekly increase, trading a few cents higher than last Friday's close.
Prices have traded in a range between $71 and $80 for almost six weeks as volatility related to the European debt crisis dwindled. Over the year, they have stayed within a $23 range, hitting a 19-month peak above $87 and a trough below $65, both in May.
The market's attention will be on U.S. consumer prices and the Reuters-University of Michigan sentiment index due out later on Friday.
CONTANGO RETURNS
ICE Brent for September, the front-month contract after August expired on Thursday, fell 17 cents to $75.92. As August went off the board, the Brent market returned to a contango structure.
Brent futures earlier this week had flipped into backwardation, largely reflecting a drop in supply of North Sea crude grades in August because of oilfield maintenance, analysts said, rather than a tightening of the global market.
Oil fell on Thursday after China, which is leading global demand growth as the world's second-largest oil consumer, said annual gross domestic product growth moderated to 10.3 percent in the second quarter from 11.9 percent in the first quarter.
"The slowdown in China's economy would have been the telltale sign for the price to move lower, but the market has absorbed it," Barratt said. "Given the state of the economy, inventories will continue to be drawn."
U.S. crude inventories fell about 5 million barrels for the second week in a row last week, government statistics showed two days ago. <EIA/S>
But Energy industry data provider Genscape on Thursday said crude stockpiles at the key U.S. Cushing, Oklahoma oil hub, the pricing point for crude trading on the New York Mercantile Exchange (NYMEX), rose in the week to July 13 to 39.93 million barrels.
BP Plc (BP.L) (BP.N) said on Thursday it stopped the flow of oil into the Gulf of Mexico from its deep-sea well for the first time since it ruptured in April, prompting hope that the leak can be plugged for good.
The U.S. Congress on Thursday approved the broadest overhaul of financial rules since the Great Depression and sent it to President Barack Obama to sign into law.
The U.S. Core CPI is the primary publication today that is set to determine the level of the dollar when the report is released at 12:30 GMT. The other main releases that are set to dominate forex trading, especially for currencies such as the dollar and euro is the publication of the U.S. TIC Long Term Purchases and Prelim Consumer Sentiment at 13:00 GMT and 13:55 GMT respectively. Traders may find good opportunities to enter the market following these vital announcements.
Economic News
USD - USD Falls on Negative Economic Data The dollar fell broadly against most of its major currency pairs on Thursday, as soft inflation and manufacturing data added to concerns about the strength of the U.S. economy. By yesterday's close, the dollar fell around 1.5% against the EUR to 1.2940, a 2-month low. The dollar experienced similar behavior against the GBP and closed at 1.5455.
U.S. producer prices declined for a third straight month. The data came just a day after minutes of the Federal Reserve's latest meeting revealed that policy makers think they may need to do more to boost the economy if a sputtering recovery slows any further. The news helped push the EUR to its highest against the dollar since May.
Another leading indicator released yesterday was U.S. Unemployment Claims. This number handedly beat last week's result but failed to provide strength to the dollar as investors may be waiting for key data due to be released today to implement their trading strategies.
As for today, data releases are expected from the U.S. economy. These figures are expected to set the tone for the USD's pairs and crosses. Special attention should be given to the Core CPI which is expected to be unchanged from its previous reading. Traders pay close attention to this figure as it has a strong correlation with the value of the U.S. dollar. Also today, the Prelim UoM Consumer Sentiment is scheduled and should also have an impact on the market because if it delivers unfavorable figures it will validate a problematic U.S. economy, and the USD is likely to weaken as a result.
EUR - EUR/USD Hits 2-Month High The EUR strengthened against most of its major counterparts yesterday, continuing to prove for the time being that this is a solid currency that traders can rely on to provide them with steady profits. The 16 nation currency extended gains versus the USD on Thursday, nearing 1.2940 for the first time in 2 months after the Philadelphia Federal Reserve's business conditions index fell sharply in July. The EUR experienced similar behavior against the
JPY and closed up at 113.10. Weakness in the Philadelphia's Fed's mid-Atlatnic district added to concern about the U.S. economy, which has been heightened in recent days by a clutch of disappointing inflation, manufacturing and retail sales data.
The single currency, which slid below $1.19 in June on euro-zone debt trouble, has since risen by more than 8% after smooth government debt auctions in Greece, Portugal and Spain eased concerns.
JPY - Yen Experiences Mixed Results against Major Currencies The yen completed yesterday's trading session with mixed results versus the other major currencies. The JPY was broadly unchanged versus the CHF yesterday and closed its trading session around the 83.85 level. The JPY also saw bullishness against the USD and closed at 87.50.
The JPY's trends will be affected by the rallies of its primary currency pairs today. It seems that the USD and EUR are expected to continue a volatile trading session today, especially against the Japanese currency. Traders should keep a close look on the news coming from the U.S. and Europe as these economies will be the deciding factors in the JPY's movement today, especially the U.S Core CPI at 12:30 GMT. It is also advisable for traders to follow any unexpected comments coming from key Japanese governmental figures, as this is also likely to lead to further JPY volatility.
OIL - Oil Prices Fall Based on Weak U.S. Data Oil fell below $77 a barrel on Thursday after disappointing U.S. economic data curbed expectations for future demand growth. Oil prices fell as low as $75.80 before it rebounded again and closed at $77.35
Oil has traded between $70 and $80 this month as investors ponder how much a pullback of government stimulus spending could undermine global economic growth and crude demand in the second half.
However, Crude oil prices were supported by the weekly inventories report from the Energy Department's Energy Information Administration on Wednesday, which showed crude supplies shrank more than analysts had forecasted, a sign demand may be improving.
Technical News
EUR/USD Bullishness in the pair continues as the price breached and closed above the upper channel line that the pair has been trading in since early June. The close was also above the 100-day simple moving average line. The 10-day RSI is sloping sharply higher, indicating that the momentum is to the upside. Near term resistance for the pair rests just below 1.3100.
GBP/USD The pound was a strong mover in yesterday's trading as the cable closed above the 23.6% Fibonacci retracement level for the long term downward trend, as well as a close above the long term downward sloping trend line that began in July of 2008. Traders should be long on the pair with a minimum target at the resistance level of 1.5520.
USD/JPY A significant drop in the value of the pair was registered yesterday as the pair fell as low as the support level at 87, the year to date low. The downward momentum looks to continue as an absence of technical resistance on the charts could move the pair as low as 84.80, the November 2009 low.
USD/CHF Yesterday the pair breached below the near term resistance levels of 1.0480 and 1.0430, ending the short term consolidation that the pair had experienced. The next target for the pair will be the 74.6% Fibonacci retracement level from the previous bullish trend at a price of 1.0350.
The Wild Card Oil The daily chart shows two candlestick patterns that hint to a slowdown of the recent bullishness of spot crude oil. Wednesday's trading ended slightly higher but formed a doji candlestick, signaling potential short term weakness. Yesterday's trading was more volatile with the pair falling as low as the support level of 75.80 and rising as high as 78.06, forming a long legged doji candlestick. This shows indecisiveness on the part of traders and signals wavering support for the bullish move. CFD traders may want to tighten their stops on any long positions they may have in spot crude oil.
Risk taking took over the marketplace yesterday, as the euro hit a two-month high against the U.S. dollar. A solid day for the global stock market as well as a successful bill auction in Greece, were the main factors causing investors to dump their safe-haven assets in favor of more volatile currencies and commodities.
Economic News
USD - USD Continues to Fall Against Its European Counterparts Following the most recent return to risk taking among investors, the dollar fell against most of its main currency rivals, including the U.K. pound and euro. While an increase in the stock market is being cited as the main reason for the dollar's decline, it is also worth noting that the U.S. Trade Balance figure came in below expectations yesterday. Furthermore, strong U.K. CPI and German Economic Sentiment figures helped bring the greenback lower.
GBP/USD has shot up around 200 pips in the last 24-hours. Although a moderate correction has taken place, the pair appears to be holding around the 1.5200 level going into today's trading. EUR/USD hit a 2-month high in trading yesterday. The pair has risen around 175 pips over the last day, and is currently at the 1.2720 level.
Today, USD traders will want to watch out for several U.S. economic indicators that are likely to create market volatility. The Core Retail Sales, as well as the Retail Sales reports are set to be released at 12:30 GMT. Both are forecasted to show negative figures and could negatively impact the dollar. At the same time, should either figure unexpectedly come in above 0%, the greenback may receive a boost in afternoon trading. At 18:00 GMT, the Federal Open Market Committee is scheduled to release its latest meeting minutes. This usually provides investors with a solid indication about where the U.S. economy currently stands. USD could experience some volatility depending on the statement.
EUR - Euro Continues to Gain on Safe-Haven Dollar and Yen Following a significant jump in the global stock market yesterday, the euro made substantial gains on most of its main currency rivals. EUR/USD hit a 2-month high before making a slight downward correction. Currently the pair is trading around the 1.2720 level. Against the yen, the euro moved up well over 200 pips during the last 24 hours. Currently EUR/JPY is trading steadily around the 113.10 level.
Today, traders will want to pay attention a number of U.S. news events, as well as several European ones. Euro-zone CPI and Industrial Production figures, set to be released at 09:00 GMT, are forecasted to come in above last month's levels. If this is indeed the case, investor confidence in the global economic recovery is likely to increase further. This would likely elevate the euro against the dollar, yen and British pound. Furthermore, several U.S. economic indicators are predicted to come in below last month's figures. Should the American economy show further signs of deterioration, the dollar will likely continue to suffer against the euro as a result.
JPY - Yen Tumbles Following Gains in the Stock Market JPY fell against virtually all of its major rivals throughout the day yesterday, and in overnight trading. The USD/JPY has gone up some 80 pips over the last day, while GBP/JPY rose an astonishing 270 pips during the past 24-hours. The reason behind the Japanese currency's drop is largely the gains made on the global stock market. As investor confidence in the global economic recovery increases, safe-haven currencies like the dollar and yen typically drop as a result. As long as the stock market continues to see gains, traders can expect the yen to drop against more volatile currencies.
Today, the JPY value will largely be determined by U.K. and euro-zone economic indicators. Traders will want to pay attention the U.K. Claimant Count Change as well as European industrial production figures. Both are forecasted to show improvement over the previous month's results. If analysts' predictions are true, investor confidence will likely continue to rise. In this case, traders can expect the yen to drop further.
OIL - Oil Prices Shoot Up as Investor Confidence Rises As investor confidence has risen over the last few days, oil prices continue to go up. The price of crude has shot up some 265 pips over the last 24-hours, ahead of today's U.S. inventory report. The weekly report is forecasted to show that U.S. inventories have increased over the last week. Typically this means that demand is low and prices fall as a result.
That being said, oil has seen substantial gains due to the rise in stocks over the last several days. Should indices continue to move up today, traders can expect oil prices to rise as well. Attention should be given to both European and U.S. economic indicators to see where investor sentiment stands throughout the day. Positive data out of Europe will likely lead to higher oil prices.
Technical News
EUR/USD Yesterday's appreciation in the pair has allowed for a breach of the daily chart's long term downward sloping trend line that began in December of 2009. Supporting the shift in the trend is the positive sloping 20-day and 50-day simple moving average. This signals a shift to the upside for the trend. As such, traders should be trading with the trend and going long.
GBP/USD A false breakout has been displayed on the daily chart as the pair previously breached below the rising channel lines beginning on June 8th. Yesterday the pair broke higher to the resistance level of 1.5240 which brings the pair back into the channel to confirm the false breakout. The pair could target the next resistance levels of 1.5380 and 1.5520 respectively.
USD/JPY The pair is testing the 89.15 resistance level and is showing strong momentum to the upside as the Relative Strength Index (14) is sloping sharply higher. A breach above the resistance level could take the pair higher to 89.75 where a reversal to the downside may be possible.
USD/CHF The sharp downward trend that began in early June is seeing some consolidation near the 61.8% Fibonacci retracement level from the downtrend's peak. The pullback to this level makes for a good entry back into the downtrend as today's daily high ran into resistance at the 10-day simple moving average line. The next price target is the lows from this week at 1.0480.
The Wild Card Oil Spot crude oil prices continue to rise following the buy signal displayed on the daily chart. A cross of the 5-day simple moving average above the 20-day simple moving average could signal the beginning of a new bullish trend. CFD traders may want to enter long with a target of $80 in the near term.
The Australian dollar fell against the Japanese yen and experienced the volatility versus the U.S. currency today on the concerns for the global economic growth; the kiwi outperformed the euro as the New Zealand economy might be in a better shape than Europe’s one.
Bill English, the Minister of Finance of New Zealand, voiced hope that the nation’s budget would return to the surplus before 2016 as New Zealand shows fiscal discipline. The budget deficit already reported to be less than previously estimated by the experts. The currency was also bolstered by the forecast that the report would show the increase of the consumer prices.
The economists expect that the annual inflation would post a value of 1.9 percent, in line with the central bank’s target of one to three percent average annual inflation in the medium term. The investors bet that the Reserve Bank of New Zealand would raise the interest rates by 130 basis points.
NZD/USD traded at 0.7106 as of 20:12 GMT today after it opened at 0.7105. EUR/NZD traded at about 1.7714 down from the opening price of 1.7776. NZD/JPY traded near 62.96.
(Reuters) - The U.S. stock market landed at a technical crossroads following its best week in a year, yet the potential for positive earnings surprises beginning this week could give an edge to the bulls.
Analysts turned increasingly bearish before the start of earnings season. Sentiment stands at its lowest since May 2009, according to a Bespoke Investment Group note that said analysts have lowered estimates for 572 companies in the S&P 1500 in the last four weeks, while they raised expectations for 396.
At the same time, bullish investor sentiment as measured by the American Association of Individual Investors fell to just 21 percent, the lowest since early March 2009 -- right at the market's bottom.
Equity funds worldwide saw more than $11 billion in net outflows in the first week of July, while money market funds attracted the biggest inflows in 18 months, fund tracker EPFR Global said.
"Expectations are low going into the results, so we could have some positive surprises there and the big test will be if we can get back above 1,100 (on the S&P 500)," said Paul Hickey, a co-founder of Bespoke, based in Harrison, New York.
The Standard & Poor's 500 Index .SPX ended slightly higher on Friday at 1,077.95. For the holiday-shortened week last week, the three indexes rose more than 5 percent.
Even with signs of dwindling sentiment, analysts still expect 27 percent growth in earnings on the S&P 500 for the second quarter according to Thomson Reuters data. That is up from previous readings in the past three quarters, which hovered around 22 percent.
To be sure, beating top and bottom line expectations could still prove a Pyrrhic victory. Chief executives must also provide outlooks that convince investors the U.S. economy does not face a double-dip recession or the European credit crisis will not damage future earnings.
"Everybody's concerned about the economy and the market has reflected these concerns," said Cleveland Rueckert, equity strategist at Birinyi Associates in Stamford, Connecticut.
"Right now the market has priced in a slowdown in earnings, so we're going to see a lot of focus not only on the reports but also the guidance," he said.
TECHNICALS: HALF FULL, OR HALF EMPTY?
After regaining the key 1,040 level last week, the S&P 500 also generated a 'buy' signal in its moving average convergence-divergence, or MACD chart. But its 50-day simple moving average is still below the 200-day moving average. This so-called death cross is seen as a signal of further downward pressure.
The index also stands at its 20-day moving average, which leaves it right in the middle line of its Bollinger bands, meaning it technically has space to move in any direction, and leaves it susceptible to volatility.
"We're seeing a tug of war between technical indicators," said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin.
"You're going to see people migrating toward one end of the camp or the other depending on how the earnings season plays out."
Amid the lack of technical guidance, options traders seem to be hedging themselves for some volatility. On Friday, the most active trades on the SPDR S&P 500 fund (SPY.P) were the July $107 calls and the July $107 puts.
"The volume is nearly the same for calls and puts, so these just look like bets on volatility next week instead of a direction," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research in Cincinnati, Ohio.
BUSY EARNINGS WEEK
Big names like Google Inc (GOOG.O), Intel Corp (INTC.O), JPMorgan Chase & Co (JPM.N) and Bank of America Corp (BAC.N) will post their quarterly scorecards in a busy week that will see Alcoa Inc (AA.N) start the season after the market's close on Monday.
JPMorgan will be in focus as many investors expect financials to lead or take part in a stocks comeback. But the bank is expected to post earnings of 67.9 cents per share according to StarMine's SmartEstimate, which weights estimates according to analysts' accuracy, versus the mean of 72 cents a share.
If JPMorgan does miss median expectations, it could threaten this nascent stocks rally.
More than a few Dow components posting earnings could overshadow the economic data, but the minutes of the latest Federal Open Market Committee meeting, expected Wednesday, will be closely watched as they will provide a window into the Fed's take on the extent of the effect of the European credit crisis in U.S. growth.
Other data high points include business inventories Wednesday, the Producer Price Index and initial applications for unemployment benefits on Thursday and the Reuters/University of Michigan survey of consumers on Friday.
Overseas data includes Chinese gross domestic product due on Thursday and expected to show a slowdown to 10.5 percent year-on-year growth from 11.9 percent.
"If people see a higher number they might think China is going to really rein in their economic growth, which could then put downward pressure on commodity (and U.S. equity) prices," Wells Fargo's Jacobsen said.
(Reporting by Rodrigo Campos; Additional reporting by Angela Moon; Editing by Kenneth Barry)
The EUR/USD pair continued last week rally during Tuesday trading session, which was the first trading day in the U.S. during this short trading week. The strength of the Euro came along with the Non Manufacturing Purchasing Manager's index which came lower than expected at 53.8. This figure was released after an array of disappointing data, adding to concern about U.S. continual growth. The EUR/USD pair traded higher through the day but paired some of its gains due to analysts warning about the Euro.
Economic News
USD - ISM Non Manufacturing Came Lower Than Expected The dollar fell against most of its major counterparts Tuesday after data showed Non- Manufacturing PMI fell in June, raising doubts about the U.S. economy and causing investors to reduce exposure to risk. Analysts are concerned the U.S. would not grow in 2010 as anticipated earlier in spite of fiscal packages introduced during 2009-2010. These concerns are turning the U.S. Dollar weaker against its major counterparts.
The EUR/USD cross is actually currently trading higher by 60 pips today at 1.2600 levels. Against the Yen, the Dollar is trading lower by 30 pips at around 87.50 which served as a significant support line. The AUD and CAD were among the biggest gainers yesterday and closed trading at $0.8488 and 1.0560 respectively.
Today is a quiet news day for the U.S., as there are no economic data releases on the calendar today. However, Japan and Euro-zone appear to be releasing the bulk of today's news, which means we may see a day of trading with low liquidity and therefore increased volatility. Day-traders can take advantage of these intense trading days by swinging within the larger-than-normal price fluctuations.
EUR - Rally Continued Due to Weak U.S. Disappointing PMI figures The Euro continued its rally against the U.S. Dollar. The rally was supported by an array of weak economic data since last week. The latest figure, Non Manufacturing Purchasing Manager's index, released yesterday came less than expected. The EUR traded much higher against the USD during yesterday's trading session as it reached $1.2661. Thereafter it paired some of it gains, while analysts raised concerns about the EUR. The rally thus far is seen more as a correction as traders locked recent profits from betting against the EUR. The Euro is also supported by the speculation that China is buying the Euro to keep the European currency high and support local export to Europe.
The EUR also staged a rally versus the British Pound; EUR/GBP is currently trading at 0.8330, two weeks high, after hitting 19-month lows at a 0.8065.
Looking ahead to today, the most important economic indicator scheduled to be released from the Euro-Zone is the German Factory Orders at 10:00 GMT. Analysts are forecasting this figure to decrease from its previous reading. Traders will be paying close attention to today's announcement as a stronger than expected result may continue to boost the EUR in the short-term.
JPY - Remained a Safe Heaven Currency The JPY strengthen slightly against the U.S. Dollar as investors expressed their concerns about the U.S. economy by selling the U.S. Dollar and buying the Japanese yen. The Yen traded mixed yesterday against its major counterparts. It strengthened against the British pound, but was weaker against AUD and the EUR.
Looking ahead to today traders should pay attention to the 87.33 support line, crossing down may take the USD/JPY even lower. Some analysts estimate that the yen should rebound its recent rally against the USD.
Crude Oil - Worries about Double Dip Hit Crude Oil price Crude Oil price was slightly higher yesterday after recovery concerns sent the price lower by more than 8% during last week trading session. It is expected to remain flat today or little change, due to low volume of economic news released. However, price might decline further in the short term even toward $65 if economic figures continue to deteriorate. Investors are worried about a possible double dip, or a renewed recession. Crude Oil is trading at 72.15, during early trading hours.
Gold prices have dropped significantly during early trading hours today, after reaching record high levels last week. Gold is considered a safe haven when expectations are for high inflation. Recent data indicating a possible deflation is sending investors away from holding Gold. Gold price decline trend is expected to continue if more U.S. figures indicate global recovery is slowing. Gold price is trading at 1189.15 during early trading hours. Technical News
EUR/USD The bullish trend is loosing its steam and the pair seems to consolidate around the 1.2585 level. The daily chart's Slow Stochastic is showing a fresh bearish cross suggesting that downwards correction might take place in the nearest time frame. When the downwards breach occurs, going short with tight stops appears to be preferable strategy.
GBP/USD 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. All oscillators on the 4 hour chart do not provide a clear direction as well. Waiting for a clearer sign on the hourlies might be a good strategy today.
USD/JPY The cross has been dropping for the past month now, as it now stands at the 87.50 level. However, the daily Chart's RSI is already floating in the oversold territory indicating that a bullish correction might take place in the nearest future. Going long with tight stops may turn out to be the right choice today.
USD/CHF The pair has recorded much bearish behavior in the past several days. However, the technical data indicates that this trend may reverse anytime soon. For example, the daily chart's Stochastic Slow signals that a bullish reversal is imminent. An upward trend today is also supported by the RSI. Going long with tight stops may turn out to pay off today.
The Wild Card Gold Gold prices have dropped significantly yesterday and peaked at $1189.15 an ounce. However, on the daily chart RSI is floating in an oversold territory suggests that a bullish correction is impending. This might be a great opportunity for forex traders to enter the trend at a very early stage.
MORNING BRIEFING: How to verify the strength of European banks?!
What’s new: United States: Effects of the crisis still present according to Geithner Spain: Successful issue of 6 billion Euros of 10-Year bonds Euro zone: Disclosure of method for testing banks France: Return of black funds China: New record IPO Japan: Uncertainty in elections to cause volatility in Yen?
Today:
Overnight Rates & Indices: EURUSD: 1.2634 - 1.2576. USDCHF: 1.0636- 1.0585. GBPUSD: 1.5160 - 1.5113. EURJPY: 110.69 – 109.88. USDJPY: 87.67 – 87.36. DowJones: 9'743.62 +0.59% NASDAQ: 2'093.88 +0.10% S & P 500: 1'028.06 +0.54% Nikkei: 9'243.71 -1.01% Shanghai: 2'401.56 -0.33% Gold: $ 1'188.95 Crude Oil: $ 71.49 Comment: US Treasury Secretary Tim Geithner acknowledged in an interview that the recovery was slowing even though he still felt confident in it.
Spain sold 6 billion Euros of 10-year bonds on Tuesday. The issue was highly subscribed to as investors were drawn to its 4.85% coupon, as the Spanish financial system passed a key test of its ability to raise longer-dated debt in a wary market.
The European Committee of the Banking Controllers should make public (publish) today the benchmarks used to test the strength of over a hundred banks in the Eurozone and the rest of Europe. The tests have been distributed yesterday and should be made by the 15th July. The market's confidence in the EU banking system could suffer from an inspection too light (weak) and / or not sufficiently extended to the banking institutions, and thus reduce the volatility of the euro.
New allegations of cash rebates for French politicians to fund their political campaigns, that French law prohibits, could embarrass the president Sarkozy and force it to reshuffle the government. A new record has been set in China with the largest initial public offering (IPO) by the Agricultural Bank of China, an estimated 22 billion Dollars.
The elections set for Sunday in Japan seem to leave some uncertainty over the majority in the upper house of the Prime Minister, which could make the implementation of its austerity policy more difficult and bring back certain distrust in the JPY.
Markets Await Central Bank Monetary Policy Meetings
With several key releases and a number of secondary ones, it is set to be a busy week in the UK. On Thursday, the Monetary Policy Committee is expected to announce that it is leaving both the Bank Rate and the size of its Asset Purchase programme unchanged. The MPC minutes from the meeting in June, which showed one member, Andrew Sentance, voting for a rate hike, clearly surprised the markets, but comments by other MPC members since suggest that, for now, his views lack wider support. As such, the real test will come in August, when the MPC will make its decision in light of the Bank's new Inflation Report forecasts. In terms of hard economic data, the industrial production numbers on Thursday are expected to show further growth in the month of May, while trade numbers on Friday are forecast to indicate some narrowing in the goods deficit. In aggregate, these and other recent releases suggest that economic growth accelerated in Q2. Looking further ahead, however, another decline in the services PMI (out Monday) is expected to confirm some loss of momentum as we head into the second half of the year.
Broadly speaking, financial markets welcomed last week's news of softer-than-expected demand (€131.9bn) for funds in the ECB's three-month lending facility. The latter was designed to fill the gap in liquidity for euro-zone banks prompted by the maturing ECB one year facility, where €442bn was borrowed last July. However, the fact that 171 banks did make use of the new facility underscores the idea that the euro-zone banking system continues to face significant challenges. This, together with the possibility that China gives up some ground as the key driver of the global recovery is contributing to volatility in euro area financial markets. This week's main event is the ECB's monetary policy meeting, where we look for the key refinancing rate to stay on hold at 1%. In terms of economic data releases, we get the final estimate of euro-zone Q1 GDP, where we envisage an unrevised quarter-on-quarter expansion of 0.2%. Elsewhere, the final estimates of the June PMI surveys are published, along with industrial production data in Germany, France and Italy.
After last week's busy - albeit disappointing data results, the US calendar is very quiet this week. Following a public holiday on Monday, the ISM non-manufacturing report is forecast to deteriorate modestly in June, having largely trended sideways since February. After increasing to 472k last week, we predict that initial jobless claims will fall by 7k to 465k. Looking through the weekly volatility, jobless claims have recently ticked up, suggesting that labour market conditions remain fragile. In key events this week, Federal Reserve member Kocherlakota will be speaking on Wednesday in Montreal.
In emerging markets, a number of June inflation results will be released. Lower oil prices and food prices are expected to see consumer prices ease in Turkey, Russia and Brazil. We forecast Brazil inflation to ease slightly to 5.1% year-on-year compared to 5.2% in May. However, building inflationary pressures are expected to result in the Brazilian central bank raising its benchmark interest rate by 75 basis points at its meeting at the end of July.
In contrast, the RBA is forecast to keep rates unchanged at 4.5% on Tuesday for the second consecutive month. Moreover, we are not expecting rates to be raised until after the Q2 CPI release in early August. In other news, labour market conditions in Australia are expected to have remained firm, with employment increasing by 22k in June and the unemployment rate unchanged at 5.2%.
The U.S. dollar strengthened modestly against its major rivals early Monday, rebounding somewhat from Friday's disappointing U.S. jobs data.
The ICE Dollar Index, which tracks the performance of the greenback against a trade-weighted basket of currencies, was at 84.597, from 84.478.
The disappointing U.S. jobs report for June, released Friday, did little to allay those fears.
U.S. nonfarm payrolls fell by 125,000 in June, as 225,000 government workers that were hired for the 2010 census in recent months lost their temporary jobs, the U.S. Labor Department said. Only 83,000 private-sector jobs were added last month.
In the European foreign exchanges, the dollar steadied after its recent losses. At 1055 GMT, the euro was trading at USD1.2527, down from USD1.2559 in late New York trade Friday. The dollar was at JPY87.73, from JPY87.70, while the euro was at JPY109.89, from JPY109.96. The U.K. pound was at USD1.5136 from USD1.5185. The dollar was at CHF1.0645, from CHF1.0648.
Market expectation
Currency market volatility is likely to continue as investors shift their focus from one small probability high loss outcome to another, argues Monday's Money Talks column. Last year it was sterling, until a few weeks ago it was the euro, now it's the dollar, tomorrow it might be the yen or the Swiss franc. The merry-go-round will continue for some time yet.
U.S. markets reopen on Tuesday, with nonmanufacturing Institute for Supply Management data for June on the calendar.
Equity market weakness and bond market strength combines to keep USDJPY subdued in a downtrend says analysts. The spot is managing to hold above Fibonacci support at JPY87.00, however in the absence of a recovery above JPY89.00 the traders assumes the downtrend is not over and looks for an eventual break below JPY86.95 to target the JPY84.75.
Currency markets are relatively quiet at the start of the week; US desks are likely to remain empty as the Independence Day holiday is observed, and the morning’s data releases already done and dusted which leaves us predominantly at the whim of headline risk and equity market moves. This morning’s Swiss retail sales posted an extremely robust 3.8% YoY increase (albeit in a volatile series) compared to consensus estimates looking for 1.8% (and a prior month print of 1.3%. Of course a good number like this release can only bolster our view that the Swiss economy is going to be one of the strongest in Europe in the coming year, but more important this week for CHF-watchers will be tomorrow’s CPI reading. One of the key developments in the past month that has allowed the CHF to strengthen so impressively is the removal of SNB rhetoric warning about the potential for deflation – and thereby the tacit understanding that the central bank is stepping aside from currency intervention for the time being. From a fundamental perspective, the relative strength of the Swiss economy (which should bode well from the franc in periods of risk appetite), coupled with the perception of the currency as a safe-haven (which should also insulate and perhaps boost it during times of risk-aversion), means we believe that EURCHF can extend its journey to 1.25 levels in the remainder of the year without much difficulty. This however, is acutely reliant on inflation remaining stable; and if tomorrow’s reading suggests another lurch lower in inflation is on the cards then there is little doubt the SNB will step in to counter these CHF gains with force.
EurUsd EURUSD continues to benefit from the liquidation of short positions, managing to top out at 1.2611 on Friday after the US non-farm payrolls release – an impressive level considering that the pair had languished below 1.2200 just a day prior. Rather than considering this a near-term top, we actually believe further topside gains may be attainable given the bullish flag pattern that has been activated on the hourly chart. We have gone long around 1.2540, setting a stop at 1.2500, and eye a first target above at 1.2650 (to take off half our position). Admittedly, using the traditional method for inferring flag targets, we should really be aiming for 1.2860 above, but given our expectation that decent sellers are lurking around 1.2675-85 (13 & 21 May highs) and 1.2750 (11 May high) – added to the belief that July tends to lead to slower, sideways markets, we feel that taking half the position off early may give us the opportunity to reload a second time later on. Supports expected 1.2456068 (50-day moving average and former resistance from 20 Jun), 1.2400, then 1.2300.
GbpUsd GBPUSD largely consolidated on Friday after Thursday’s thundering rally higher, and for the time being the pair remains locked between 1.5150 support and 1.5210 resistance. From a broader perspective, the 4-week uptrend looks extremely healthy (in spite of last week’s false break), and the pair is presently meandering roughly in the middle of that channel. Should the squeeze out of short-risk positions continue, the next levels of supply anticipated on the topside are the 1.5229 highs seen Friday, followed by the upper edge of the 4-week uptrend at 1.5320, followed by the 30 April high 1.5390 and 15 April high 1.5525. Buyers are likely to step in on dips back towards the 1.5150 level, the 100-day moving average 1.5012 (also the neckline of our old head and shoulders pattern), and the major support at 1.4855 remains intact.
UsdJpy Despite the USD sell-off post-payrolls, USDJPY managed to stabilize on Friday, and thus far, 86.97 (seen last Thursday) remains the low watermark in this downtrend. The doji candlestick carved out on the daily chart on Friday could suggest that the overwhelming bearishness that has driven the market for the past couple of weeks may be due for an imminent correction, however we prefer to wait for further confirmation before attempting a long. The most obvious place to find that confirmation seems to be the potential symmetrical triangle pattern on the hourly chart which estimates an upside target of 89.50 should we get a break above the upper trendline around 88.00. If the inverse scenario plays out, we would also be willing to go short on a break below 87.70, in which case the bearish target of the triangle lies around 86.20. Potential stumbling blocks of resistance on the topside still remain at 88.35 (back side of 3-month downtrend), 88.95 (20 May low and recent pivot), then 89.50 (28-29 Jun high), while on the downside the technical levels are far more disparate; 87 33 is the reaction low seen post-payrolls, 86.97 Thursday’s low, then the 2009 low of 84.82.
UsdChf This is another pair that has been trading sideways since the end of last week, and this in spite of weekend comments from the SNB’s Hildebrand about the franc’s volatility of late. We still think this pair goes lower in the short-medium term so eye supports at 1.0600, Thursday’s low of 1.0578, then 1.0500. The potential threats to this scenario in the short term however include the inverted hammer candlestick on the daily chart which may be the signal to bulls that a near-term reversal of the downtrend is brewing. Should this be the case, there is a good likelihood of sellers expected at 1.0685 coinciding with the 4-week downtrend, 1.0700 (psychological level and Friday highs), then 1.0800.
Weekly Focus: Fear of a Major Slowdown is Mounting
Market Movers ahead
* ECB meeting on Thursday - questions are expected to centre around additional liquidity measures and the ECB's asset purchases. * Developments in Euroland bond markets and news out of southern Europe. * US non-manufacturing ISM - will it hold up better than its manufacturing sibling? * Monetary policy meeting at the Bank of England is not expected to bring any changes. * Swedish industrial data and the government's net borrowing needs. * Norwegian CPI.
Global Update
* Global PMI's have fallen - fundamentals suggest a slowdown, but the European debt crisis has likely accelerated the decline. * The Riksbank hiked rates by 25bp, as expected, and the repo path was revised slightly higher in 2010 and 2011, but lower in 2012-13. * The expiry of the one-year LTRO has brought the duration of Euroland money market liquidity lower, which has put upward pressure on short-term rates. * The G-20 summit highlighted the change in policy focus from coordinated global growth support to a more diverse agenda. In Europe, focus is on public finances and in Asia attention has turned to inflation fighting.
Focus
* The combination of general pressure on the euro and the SNB ceasing to intervene in the FX market has opened the door to the downside in EUR/CHF. * We see a high probability of further support for the Swiss franc in the coming months. However, if the market's faith in the euro improves, profit-taking could lead to a sharp upward correction in EUR/CHF - a key risk to our forecast.
Market movers ahead
Global
The only major event coming up next week is the ECB meeting on Thursday. Until then, markets will digest the US employment report and be driven by overall risk appetite. Developments in Euroland bond markets and news out of Southern Europe will be important to watch.
In the US the coming week should be relatively quiet at least in terms of data and speeches. US markets are closed on Monday to observe Independence Day (4 July). The ISM non-manufacturing index will be the primary release and we look for a decline to 54.4 given the recent weakness in housing and equity markets. The weekly release of jobless claims could also attract attention given the recent increased uncertainty about the state of the US labour market. After a stream of Fed speeches this week, which have in general left an impression of the FOMC moving in a slightly more dovish direction, there is only one speech scheduled for next week. Minneapolis Fed President Kocherlakota (non-voter) will deliver a speech on policy and regulation on Wednesday.
In the euro area next week's key event will be the ECB meeting on Thursday. It will be yet another interesting meeting, and there are many relevant topics to discuss at the Q&A session. On 30 June the one-year covered bond purchase programme was completed. The ECB has bought EUR60bn as planned, which it now aims to hold to maturity. Mr Trichet is likely to be questioned about whether the programme could be reopened. Questions will also address the effect from the expiry of the one-year Longterm refinancing operation (LTRO) on 1 July. Two new ECB operations have been introduced to finance the EUR442bn that matures with the 1Y LTRO. Fifty four per cent of the expiring liquidity was rolled, which was in line with expectations, and excess liquidity has thus declined. The ECB could be asked whether it plans to introduce new liquidity facilities. There has been speculation about a new six-month tender, which could explain the large roll in the six-day fine-tuning auction. Further, Mr Trichet could be asked about the Securities Market Programme (SMP), which covers the ECB's government bond purchases, and why the ECB is not doing more to keep sovereign spreads in PIIGS against Germany lower. Mr Trichet is however not likely to get specific on the SMP, which we saw at the meeting last month. Besides the ECB meeting, we look out for German factory orders.
In the UK focus will be on Thursday's publication of May industrial production numbers and the BoE monetary policy meeting. While the June PMI and recent orders data indicate a loss of momentum, the underlying trend remains for higher manufacturing output. The BoE is not expected to bring any changes to the monetary policy setting, despite the recent tight budget, as Sentance is expected to remain the sole advocate for a tighter policy.
In Switzerland attention will focus on the June inflation numbers due out on Tuesday. We expect the inflation rate to decline from 1.1% in May to 0.8% in June, once again underlining that inflationary pressures do not necessitate early rate hikes. It is also worth keeping an eye on Monday's retail sales data for May and the June unemployment numbers due out on Thursday.
Next week's calendar is extremely light in Asia. In China there will be no major releases this week and in Japan the only major release will be machinery orders for May, which should confirm that business investments in Japan have bottomed out.
Global Update
Everyone for themselves
The G-20 summit in Canada last week showed that the G-20 countries ambitions from last year for coordinated macroeconomic support for the global economy and changes in financial sector regulation are falling apart. Particularly, it has proved difficult to maintain focus only on supporting growth. In Europe consolidation of public finances has now become major priority. In Asia - particularly in China - focus has gradually shifted to containing inflation and China cannot be expected to be as strong a growth engine for the global economy as it has been since early-2008. And now there are signs that the global recovery in manufacturing is starting to lose some steam. The big question is to what degree this is just a temporary mid-term crisis or the prelude to a more severe slowdown?
Euroland survives the expiry of one-year refinancing operation
The key event in the euro area this week has certainly been the expiry of the ECB oneyear long-term refinancing operation (LTRO) worth EUR442bn. European money markets were nervous ahead of expiry. The accumulated roll of the LTRO was 54% (EUR243bn) - in line with expectations. Read more here: Strategy: ECB - Duration on liquidity falls significantly
On the data front, the week kicked off with the ECB report on monetary developments. The report showed a decline in M3 growth to minus 0.2% y/y, which partly could be explained by technical factors. On a positive note, the monetary data indicates that the shrinking of bank credit may indeed have come to an end. For instance, loans to households continue to improve. The June unemployment report from the German Bundesbank showed that the German unemployment rate remained at 7.7% in June. In month-on-month terms, however, unemployment fell by 21,000, bringing the accumulated drop in unemployment since the beginning of the year to 182,000. German employment growth was positive during May. Final manufacturing PMI in German was revised 0.3 points higher, and is thus unchanged at 58.4 in June compared to May. Overall PMIs seems to have peaked a few months ago. The latest volatility in commodity prices lowered inflation in the euro area to 1.4% in June from 1.6% in May. There are currently very limited inflationary pressures in the euro area, and unless commodity prices spike we should expect inflation to remain relatively subdued.
Another round of weak US data
This week's round of data (excluding the employment report which was not yet released at the time of writing) did nothing to ease market fears of a significant slowdown in economic activity in the second half of the year.
The manufacturing ISM took an unusually large decline of 3.5 points with the new orders indices hit hard, see Flash Comment - US: manufacturing slowdown fast-forwarded by debt crisis. Fundamentals had been pointing to a slowdown in the manufacturing production over H2, but the deterioration in financial markets has likely accelerated that decline. While there is a direct negative impact from the decline in equity markets and deterioration in credit markets there has likely also been a "sentiment effect" where increased uncertainty has depressed demand. Consumers are also starting to react to the deterioration and general rise in uncertainty. The conference board's measure of consumer confidence fell back to its March level after two months of strong increases.
Furthermore, housing data is currently looking very weak. Pending home sales suffered a significant decline of 30% in May which brings the index below the lows in 2008 and 2009. The level reflects the dynamics from the expiration of the first time home buyer credit. The tax credit boosted sales during the spring, but this effect is now reversing as home buyers have been moving forward the purchases of homes. While the tax credit has made it very difficult to assess the underlying trend in the housing market, fundamentals for home sales are relatively positive, as mortgage rates are close to an all time low and household incomes are improving.
The recent weakness has also had an impact on the thinking of at least some FOMC members. The tone in the Fed speeches over the recent week has in general been tilted in a more dovish direction. Several speakers have mentioned the risks to the US economy from the deterioration in financial market conditions induced by the European debt crisis. This implies that the monetary policy normalisation process is effectively on standby but so far, there is nothing that points to the Fed considering more QE.
Growth appears to be slowing in Asia
Data released in Asia during the past week suggests that growth is slowing. On balance it still looks it should be regarded as growth moderation from exceptionally strong growth in the previous quarters rather than a more severe slowdown. That said down side risk on our growth forecast is increasing. Both China's two manufacturing PMI's declined in June, see Flash Comment - China: Growth appears to be slowing. The manufacturing PMIs suggests GDP growth is poised to slow to around 9% AR in H2 2010 from currently about 12% q/q AR. On the positive the risk of overheating in China is now declining fast. In that sense, China is now building the foundation for a soft landing of the economy. On the policy front, the risk of aggressive monetary tightening from the People's Bank of China (PBoC) is declining, although we still expect the PBoC to hike its leading interest rate in Q3.
In Japan the Tankan business survey for Q2 came in stronger than expected and suggests that growth has remained very strong in Q2, but is poised to slow in the coming quarters, Flash Comment - Japan: Recovery on track according to Tankan. On the other hand, May data in general has been disappointing with industrial production declining marginally 0.1% m/m and the unemployment rate unexpectedly increasing to 5.1% from 5.0% in the previous month. Overall these data are still consistent with GDP growth of close to 4% q/q AR in Q2 and slowing to around 2% q/q AR in H2 10.
(Reuters) - The dollar steadied on Friday after steep losses the previous day on growing concerns about the U.S. economy, with key U.S. non-farm payrolls data looming.
The greenback hit its lowest this year against the yen below 87 yen on Thursday as market players covered short cross yen positions.
The dollar index .DXY, a gauge of its performance against six other major currencies, hovered above a two-month low after it shed 1.6 percent on Thursday.
The index was slightly lower on the day at 84.59, having broken through its 55-day moving average at around 85.
Economists forecast a loss of 110,000 U.S. jobs in June compared with an increase of 431,00 jobs in May, partly skewed by a drop off in temporary workers hired in May to complete the census.
Private payrolls are seen up 112,000 from +41,000 in May with the unemployment rate at 9.8 percent from 9.7 the previous month.
Opinion was divided as to the market reaction to expectations for a weak reading.
"The prospective reaction is not clear-cut. Yesterday's sharp sell-off in the dollar may provide the most up-to-date clue, but there are less fraught channels to play the pessimism," said Daragh Maher, deputy head of FX strategy at Credit Agricole CIB.
"AUD/JPY and NZD/JPY are obvious choices as shorts, while the Swiss franc will also likely reap the benefits."
Others say if the data at 1230 GMT show even more U.S. jobs are lost than forecast, the dollar could re-test 86 yen to the dollar.
A decline in U.S. Treasury yields may also keep pressure on the dollar.
EURO PESSIMISM EASES
The greenback was up 0.4 percent at 88.00 yen after hitting a seven-month low of 86.96 yen. Japanese exporter offers were likely to emerge in the low 88 yen range, a dealer at a Japanese bank said.
One-month implied volatility for dollar/yen pulled back to around 12.75/13.25 from around 14 percent on Thursday as the dollar fell to 7 month lows against the yen. Option triggers were seen below 85 yen, traders said.
The euro surged more than 2 percent to $1.2541 in its biggest one-day advance since mid-March last year, and on Friday it was holding around $1.2518.
Easing concerns about euro zone liquidity problems after a lower take-up of ECB money and successful bond auctions prompted players to cover short euro positions
"It seems as if investors braced for the worst from the euro zone risk events are now relieved that the worst didn't come to pass," analysts at UBS said in a note.
However, they and others expect banking sector problems will continue to plague the euro zone.
The euro faces near-term resistance at $1.2570, a 38.2 percent retracement of its decline from $1.3692 in April to $1.1876 in early June. Resistance could also come in at its 55-day moving average around $1.2550.
The euro was steady at 1.3272 Swiss francs after hitting a record low 1.3073 on Thursday.
The Australian dollar rose versus the greenback and yen after Australia's government announced a watered-down version of a proposed mining tax, easing concerns it could hurt business investment and share prices.
(Additional reporting by Charlotte Cooper, editing by Mike Peacock)
