Market is expect to be open today (27/08/2012)

USDINR- Will open down

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Forex Exchange Morning Report (24/06/2012)

Risk assets soured overnight despite fresh hopes for another round of Fed easing and slightly stronger than expected US and Eurozone data. The S&P500 fell 0.7% with the earlier weak HSBC China PMI cited as a more important catalyst as well as comments from an EC spokesperson that no negotiations were taking place with Spain for a sovereign aid program. Comments from St. Louis Fed President Bullard (hawkish, non-voter) that yesterday's FOMC minutes, 'are a bit stale' was also reportedly behind today's weakness, even as Evans (Chicago Fed, dovish) called for more easing in earlier Asian trading.

AUD and NZD tracked US equities lower, AUD shedding 0.6% while NZD fell 0.4%. AUD is trading at 1.0445 into the close while NZD is at 0.8135. AUD/ NZD fell to 5 week lows of 1.2835. EUR/USD bucked the trend overnight, grinding higher from 1.2530 to 1.2565

Economic wrap

US new home sales rose 3.6% in July, reversing June's 3.5% fall. With revisions the 3.6% gain saw an annualised sales pace of 372k, just a whisker away from our 371k forecast. A clear sales uptrend is now in place since August last year when sales were running a 292k pace. A separate report from the FHFA showed house prices up 0.7% in June, the fifth straight gain.

US initial jobless claims rose 4k to 372k, just above our high end 370k forecast. At this level, claims are in the middle of the recent 352k-392k range that has prevailed since April.

Euro zone composite PMI advance edges up from 46.5 to 46.6 in August. The German services PMI weaker (lowest since mid 2009) but the factory was higher; French services was higher but factory about flat. That saw the Euro zone factory PMI rise from 44.0 to 45.3 in Aug while the services PMI slowed from 47.9 to 47.5. The composite has been below 50 for 11 of the past 12 months, consistent with the mild recession in Europe since then.

Euro zone consumer confidence drops from –21.5 to –24.6 in Aug advance report, much weaker than any forecast and back at post-Lehman Bros collapse levels in late 2008.

German GDP unrevised at 0.3% in Q2; exports were the driver, up 2.5%.

UK CBI retail survey for Aug showed reported sales dropping from 11 to –3, suggesting Olympics buzz did not extend to the high street. Separately, the BBA reported 28.4k new mortgages in July, reversing much but not all of the dip from 30.0k in May. June was weighed down by the Jubilee bank holidays

Market is expected to be open today (24/08/2012)

USDINR- will open down
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Forex Exchange Morning Report (17/08/2012)

Sentiment was buoyed by hopes for Spain. An influential advisory report claiming Spain was willing to accept fiscal reforms in exchange for heavy ECB intervention in its bond markets was cited as a major catalyst for the rally in equities and currencies last night. German Chancellor Merkel added that the ECB's vow to do whatever was necessary to defend the Eurozone was consistent with the views of European leaders. European equities closed 1.1% higher and the S&P500 is currently up 0.8%. The CRB commodities index is up 0.2%, with oil +0.6%, copper +1.0%, and gold 0.8%. US 10yr treasury yields were volatile, falling from 1.86% to 1.78% in London and then fully rebounding after the NY open. US data was mildly disappointing but had little market impact. The Spanish 10yr yield fell 12 bp to 6.52% - a one month low.

The US dollar index (DXY) fell by 0.7% overnight. EUR rose throughout the evening from 1.2256 to 1.2373. USD/JPY maintained Asian session gains in a 79.10-79.40 range, recent strength perhaps due to higher US interest rates. AUD turned upwards near the Sydney close at 1.0475 and continued to 1.0526, most of the gain coming after the advisory report on Spain. NZD similarly rose from 0.8055 to 0.8119. AUD/NZD fell from 1.3005 to 1.2960, the past few days' price action suggestive of a major reversal lower towards 1.2600.

Economic wrap

US Philadelphia Fed factory survey up 5.8pts to –7.1 in Aug, its fourth straight month of contraction. Orders, shipments and jobs all remained firmly in contractionary territory. So, NY, Philly, Richmond and Dallas Fed factory surveys are all slumping mid year as they did last year - the question now is do they recover sharply like in late 2011 or is the upside from here more subdued this time around?

US housing starts down 1.1% in July. A 12.4% jump in multiples offset a 6.5% fall in single family starts, the first decline in that sector in five months, and wiping out half of the 12% rise in single starts between March-June. Housing permits rose 6.8% with single family permits up 4.5%, their fourth straight gain. With permits (singles) running a 513k annualised pace in July vs starts on 502k, starts might recover somewhat later in Q3.

US initial jobless claims rose 2k to 366k in the week ended 11/8, suggesting that claims are stabilising back around their Feb-Mar lows just above 360k per week, after annual auto plant shutdown distortions in the July data. On this measure, the job market has improved somewhat relative to April-June when claims reached 390k+ per week.

Euroland core CPI edges up to 1.7% yr in July, its highest since 2009, but headline rate unrevised at 2.4% yr.

UK retail sales rose 0.3% in July, and June's 0.1% gain was revised up to 0.8%. July's annual sales volume growth rate of 2.8% yr is the third highest since 2008, surpassed only by temporary spikes in growth due to VAT changes or unusual weather disruption. The detail showed clothing and household goods sales fall, while other storetypes posted gains, but ex fuel there was no growth in the month. Changed public holiday arrangements in June, unseasonal weather swings and the Olympics are all factors that make this report difficult to interpret. It is clear, however, that heavy price discounting in clothing last month and fuel this month was behind the sharp monthly swings in those sectors. The retail deflator rose just 0.2% yr, its lowest since 2009, also a function of discounting

Forex Exchange Morning Report (16/08/2012)

Risk sentiment appeared to improve slightly last night, although the movement in proxies such as US equities has been miniscule for eight days in a row – perhaps reflecting dwindling conviction that QE3 will be signalled at Jackson Hole. That conviction was bolstered slightly last night with the release of weaker inflation and NY manufacturing reports, the S&P500 rallying in response to be up 0.2% currently. Commodities are mixed, the CRB index +0.5%, oil +1.9%, copper -0.3%, and gold +0.4%. US 10yr treasury yields rose from 1.72% to 1.81% - a three-month high.

The US dollar index (DXY) rose by around 0.4% in London. EUR fell from 1.2386 to 1.2264 in the day’s underperformance. Possibly hurting it was a report Greece is seeking a two year extension to its deficit deadline which implies an additional funding need of EUR20bn. USD/JPY is little changed at 78.90 but has a sharp fall from 79.05 to 78.59 after the first of the US data releases. AUD firmed from 1.0455 to 1.0515, most of the gain coming after the weak US data releases (raising the chances of QE3). NZD rose from 0.8039 to 0.8075. AUD/NZD was rangebound between 1.3000 and 1.3025.

Economic wrap

US CPI flat in July, its fourth month running without a rise, with food up just 0.1% and energy 0.3% following much steeper falls through Q2. With high weighted OER (rent), which makes up almost a quarter of the CPI, up 0.2%, the remainder of the core components were very soft including apparel below trend on 0.2%, auto prices lower and airfares down sharply again. Headline inflation fell to 1.4% yr, its lowest since late 2010 and the core annual pace slipped to 2.1% yr (lowest this year so far) so current inflation is certainly no impediment to further policy stimulus if/when the FOMC takes the plunge again.

US NY Fed factory index down 13 pts to –6 in Aug, its weakest reading since 2011’s mid-year slump in this index (and lower than the only sub zero forecast in the 56-strong survey, Westpac’s –2). NY Fed has now caught up with recent weakness in Philly, Richmond and Dallas Fed factory indices, so only Kansas City Fed remains above 0 at 5 in July. The NY detail showed orders falling faster (down 3 to –5.5), shipments growth (down 6 to 4) and jobs growth (down 2 to 16.5) both slowing. None of these outcomes justified the headline plunge so NY bosses may be feeling a little less buzzy about their own company’s performance but these respondents are now much more worried about general business conditions.

US industrial production rose 0.6% in July, exactly in line with our forecast, as a 3.3% surge in autos due to changed summer plant shutdown arrangements saw factories churn out a 0.5% increase (0.2% ex autos); a 1.3% rise in utilities boosted the IP bottom line.

US NAHB housing market index rose 2 pts to 37 in Aug, a new post 2007 high.

US total net TIC flows slowed from $121bn to $17bn in June; net long term flows slowed from $55.9bn to $9.3bn, perhaps somewhat less safe haven flow into dollar assets from European concerns than expected.

Canadian existing home sales flat in Jul after a 1.3% June decline. New series with no back data available to us.

UK employment grew 201k in Q2, up from 128k in Q1 and 83k in Q4 last year. Accelerating jobs growth has thus coincided with the deepening recession, and too early it seems for any temporary Olympics boost. When the economy last grew in Q3 2011, jobs shrank 161k. That implies some unfavourable productivity outcomes of late. The jobless rate eased further to 8.0% in Q2 and in July, benefit claimant count joblessness fell 6k after a similar sized rise in the previous two months. Meanwhile, the Aug BoE MPC minutes showed a unanimous steady rates/unchanged asset purchase target decision.

Forex Exchange Morning Report (14/08/2012)

Cracks appear. The euphoria following the ECB's stimulus proposals announced on 2 August has waned and is slowly being replaced by concerns regarding the timing of and detail behind the signalled stimulus. Helping confirm those concerns last night was news that a fresh lawsuit against the ESM bailout fund was filed in the German constitutional court, potentially delaying the use of the fund and in turn, ECB action. Also hurting sentiment was an increase in London Clearing House margins on Spanish and Italian bonds, plus a Handelsblatt report that Germany will veto EFSF payments to Greece if the country doesn't comply with its fiscal obligations. The S&P500 fell 0.7% on the above but recovered in NY to be -0.2% currently. Commodities were weaker, the CRB index down -0.9% and copper -1.2% but Brent oil up 0.6%. US 10yr treasury yields were confined to a sideways 1.62%-1.67% range.

The US dollar index (DXY) is little changed. EUR initially rose from 1.2275 to 1.2373 but sagged in NY to 1.2325. USD/JPY continued to consolidate between 78.16 and 78.37. AUD followed the equities slump from 1.0574 to 1.0497 and settled in NY to 1.0520. NZD fell from 0.8128 to 0.8077 before settling to 0.8090. AUD/NZD was directionless between 1.2995 and 1.3015.

Economic wrap

Greek GDP contracts at -6.2% yr annual pace in Q2. While still painting a devastatingly weak picture, the pace of meltdown of the Greek economy was not quite as steep as the few economists who try to forecast the data expected; Q2 saw the economy shrink at the second slowest annual pace in nearly two years. But with the Statistics office short staffed and no longer publishing seasonally adjusted data, the precise numbers are not the issue, it's that the economy has not posted material economic growth since 2007. Austerity fiscal measures and the uncertainties about euro membership, the ongoing bailout, the banks and politics show no real sign of diminished crushing pressure on the economy and the Greek people.

Forex Exchange Morning Report (09/08/2012)

Markets are little changed. Some soggy production data from Germany and downgraded BOE growth forecasts weighed on markets during the London morning but stronger US data (productivity, labour costs) helped the recovery. Also helping may have been a MNI story alleging the ECB is aiming to intervene in the bond markets after the German court ruling on the ESM (12 Sep) and is lobbying for an ESM banking license. European equities closed down 0.3% and the S&P500 is currently unchanged. Commodities were similarly contained, the CRB index up 0.2%, oil unchanged, copper -0.8% and gold +0.1%. US 10yr treasury yields are 2bp higher at 1.65%. The 10yr auction fared poorly, the awarded yield 2.5bp above market yield and the 2.5 bid-cover ratio the lowest since August 2009.

The US dollar index (DXY) ranged sideways overnight. EUR fell from 1.2392 to 1.2327 during the London morning but recovered to 1.2376 in NY. USD/JPY bounced from 78.24 to 78.52. AUD ground higher from 1.0535 to 1.0582 before slipping to 1.0560. NZD similarly firmed from 0.8121 to 0.8164. AUD/NZD slipped from yesterday's 1.2985 minor peak to 1.2950

Economic wrap

US productivity growth was 1.6% in Q2 compared to -0.5% in Q1. Although growth slowed, hours worked slowed even faster implying greater productivity and also pulling unit labour costs down from 5.6% to 1.7% annualised growth.

Fedspeak: adequate stimulus in place, according to Dallas Fed's Fisher, contrasting to his Colleague Rosengren yesterday, who wanted more.

German industrial production fell 0.9% in June, reversing part of May's 1.7% bounce, to be down 0.3% yr, the same annual pace of contraction as in May. Meanwhile, German exports fell 1.5% in June, reversing some of their 4.2% May bounce.

Bank of England inflation report. Inflation is 'a little more likely to be below' the 2% target in late 2013 and 2014 but risks are balanced by the end of the forecast period in 2015, although that view is based on market pricing of a further rate cut and the asset purchase program being held at £375bn, so it implies some further easing could yet be justified. The Governor's notes on the economy make gloomy reading. 'The economy will continue to face headwinds over the forecast period, from the fiscal consolidation and tight credit conditions at home, as well as from the difficulties in the euro area and a broader slowing in the world economy. The recession in the euro area is damaging demand for our exports; a black cloud of uncertainty is hanging over investment; and the weakening euro is a further obstacle to the adjustment we need to make in our net trade position. Our efforts to bring about a rebalancing of the UK economy will require patience.'

Forex Exchange Morning Report (08/08/2012)

Sentiment remained positive with no significant news to drive markets, although AUD and NZD underperformed. Fed Chairman Bernanke spoke about education and largely avoided monetary policy, while Fed dove Rosengren and hawk Fisher reaffirmed their respectively extreme positions. Eurogroup president Juncker said a Greek exit is undesirable but manageable, while an EU source reportedly said Spain won't request further aid if there are more fiscal strings attached. ECB council member Hanson affirmed its conditional plan to intervene in bond markets. Italy's posted a fourth consecutive GDP contraction. European equities closed 1.7% higher and the S&P500 is currently up 0.6%. The CRB commodities index is up 0.7%, Brent crude oil up 2.1% and copper up 1.3%. US 10yr treasury yields are 6bp higher at 1.63%. A 3yr auction was weak, awarded at 0.5bp above market yield.

The US dollar index (DXY) was unchanged overnight. EUR rose from 1.2376 to 1.2442 during the London morning but reversed to 1.2402 during the afternoon. USD/JPY rose from 78.24 to 78.74. AUD made a fresh five-month high of 1.0604 early London but then slumped to 1.0550. NZD also probed the recent high but failed at 0.8221 and slumped to 0.8149 in the underperformance of the day. AUD/NZD accordingly rose from 1.2880 to 1.2945, a firmly on-hold RBA perhaps causing a paring of speculative short positions

Economic wrap

Fedspeak. Boston Fed President Rosengren said the central bank should pursue an “open-ended” quantitative easing program of “substantial magnitude”, with policy guidance based on desired economic outcomes and the focus of purchases shifted to mortgage backed securities.

Canadian Ivey PMI jumps from 49.0 to 62.8 in Jul, continuing the recent pattern of up and down swings of 10 points or more, making it difficult to interpret the underlying economic and business conditions respondents are experiencing. In June, building permits fell 2.5% as a 4.2% rise in the residential component was more than offset by a 12% drop in non-residential permits.

German factory orders fell 1.7% in June, and are now running –7.8% yr, the annual pace of decline seen just prior to the collapse in global trade in late 2008. Orders from elsewhere in Europe were down almost 20% yr, although other foreign and domestic orders were also in decline, by 2% yr and 5% yr respectively. Germany is no longer the engine room of Europe, which we expect GDP data next week to confirm.

Italian GDP contracted 0.7% in Q2, down for the fourth quarter running, for a –2.5% yr annual pace of decline.

UK industrial production fell 2.5% in June, not as weak as expected given that the weather was very poor and the Queen's Jubilee meant that there were two extra public holidays in the month, and one fewer in May. Indeed the statistician noted that 0.07ppts will be added to the second estimate of Q2 GDP. The first estimate was initially reported at -0.7%. A separate report from the BRC showed 0.1% yr growth in July retail sales, supported by an Olympics boost to food and drink sales late in the month, although big ticket item sales were “struggling”.

Market is expected to open as on 06/08/2012

USDINR- Will Open Down

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GBPINR- Will Open Flat or UP

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Forex Exchange Morning Report (06/08/2012)

Risk sentiment rebounded after Thursday's ECB disappointment. US jobs growth beat expectations, and there may have been some reassessment of the chances of near-term ECB bond intervention. Spanish 10yr bond yields initially rose from 7.17% to 7.44% but reversed sharply down to 6.85% on rumours Spain would officially request a bailout (in turn paving the way for greater ECB involvement). The Spanish PM later confirmed a rescue was under consideration. Also supporting ECB expectations were signals from Germany's coalition partners they would not object to the ECB's bond purchase plans. European equities closed 4.8% higher and the S&P500 closed up 1.9% at a three-month high. The CRB commodities index closed up 2.1%. US 10yr treasury yields rose from 1.47% to 1.59%, the initial 5bp selloff driven by the Spain/ECB rumours and the remainder by the US payrolls surprise.

The US dollar index (DXY) fell by around 1.2%. EUR rose from 1.2180 to 1.2293 on the Spain/ECB rumours, and then from 1.2220 to 1.2392 on the US payrolls result. It opened at 1.2280 this morning. USD/JPY rose from 78.20 to 78.77. AUD followed EUR's lead, rising from 1.0475 to 1.0571. NZD rose from 0.8130 to 0.8199. AUD/NZD consolidated between 1.2880 and 1.2930

Economic wrap

US non-farm payrolls rise 163k in Jul. That is the fastest gain since February and followed gains averaging just 73k per months in Q2. That said, 3 month average payrolls growth of 105k in May-Jul was still down from 157k in Feb-Apr, so the overall impression is still one of a slower job market relative to earlier this year. The separate household survey reinforces that message: in July its jobs count was down 195k after rising 550k in May-June and that pushed the jobless rate back up to 8.3% from 8.2% in June and the April low of 8.1%. In the four months since the start of Q2, household survey employment growth averaged 47k per month, compared to 355k per month in the previous four months (or 190k average in Dec, Jan and Feb excluding Jan's 847k gain which was partly due to a break in the survey related to a new population count). Hours worked and earnings growth in July were both soft at 0.1%. By industry, construction jobs continued to trend lower (but were down just 1k in July), while manufacturing jobs jumped 25k (up to 13k of that is related to the shorter summer auto factory shutdown this year and should drop out in Aug) and every other industry sector posted gains, except for ongoing public sector job losses (down 9k in July).

US ISM non-manufacturing rises from 52.0 to 52.6 in Jul. That is still the second weakest reading for the year so far and indeed June-July together are the lowest back to back readings since Q1 2010. The July detail showed business activity rising 5.5 pts to 57.2 (highest since March); orders rose 1 pt to 54.3; but jobs fell 3 pts to 49.3, their first contraction (ie sub 50 reading) for the year.

Euroland retail sales rose 0.1% in June, and with May up 0.8% that is the first back to back gain in retail since June-July last year. The annual pace of sales volumes growth continued to contract, at –1.2% yr. Separately, an upward revision to the July services PMI from 47.6 to 47.9 meant the Euroland composite PMI was revised from 46.4 to 46.5, still broadly in line with the average 46.4 reading in Q2 and down from 49.6 in Q1.

UK services PMI slips from 51.3 to 51.0 in July, its lowest reading since the previous recession in 2009 apart from the Dec 2010 drop to 49.7 due to snow disruption that promptly reversed the next month. The gradual decline in the services PMI in recent months, seemingly unaffected by weather and public holiday distortions, is further evidence that while Q2 GDP overstated the underlying weakness in the economy, the UK economy is at best stalled and more likely still in mild recession.

Market opening expected today (03/08/2012)

USDINR- will open gap up

EURINR- will open flat

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Forex Exchange Morning Report (03/08/2012)

Markets were disappointed by the ECB. European equities closed 3.0% lower, while the S&P500 is currently down 1.1%. While there were notable steps towards proper quantitative easing (future bond purchases may be unsterilised and see the ECB relinquish its seniority status), hopes for immediate action were dashed. Moreover, the possibility of future bond purchases was conditional on Eurozone countries doing more to resolve the crisis. Overall, there was probably enough to reduce the risk of a Eurogeddon but not enough to satisfy buyers of risky assets. The CRB commodities index is down 1.6%, Brent oil -0.2% (WTI oil -2.1%), copper -2.3%, and gold -0.7%. US 10yr treasury yields reversed sharply on the ECB comments from 1.57% to 1.44%. Peripheral EZ bonds were damaged, Spain's 10yr yield up 43bp to 7.17%, Italy's up 40bp.

The US dollar index (DXY) is higher. EUR initially spiked from 1.2255 to 1.2405 on the ECB statement but Draghi's comments afterwards dampened the market mood and it fell to 1.2134. USD/JPY fell well before the ECB from 78.50 to 78.20 and consolidated around there. AUD firmed in the run-up to the ECB, spiking from 1.0520 to 1.0580 immediately and then slumping to 1.0489 during the press conference. NZD similarly spiked to 0.8172 and then slumped to 0.8076. AUD/NZD was heavy throughout, falling from 1.2960 to 1.2915

Economic wrap

US factory goods orders down 0.5% in June. Non-durables were down 2.0%, offsetting a 1.3% rise in durables (revised down from 1.6%).

US initial jobless claims rose 8k to 365k, but the recent distortion due to seasonal adjustment difficulties related to summer auto plant shutdowns has not yet passed according to the Labor Dept; the spokesman added that next week's figures should private a clearer guide to the jobs market. In related news, corporate layoff announcements were down 44.5% yr, but these figures can also be volatile in the summer months. In other US news, the little-watched NY ISM rose from 49.7 to 55.2 in July.

The ECB left rates unchanged and warned that 'a further intensification of financial market tensions has the potential to affect the balance of risks for both growth and inflation on the downside'. The press statement sounded promising: the Governing Council 'may undertake outright open market operations of a size adequate to reach its objective.' and that it 'may consider undertaking further non-standard monetary policy measures according to what is required to repair monetary policy transmission.'

But in the Q&A, it became apparent that these outright open market ops would only involve short-term debt of sovereigns with excessive risk premia who had applied to the EFSF/ESM rescue fund and accepted strict conditions. Draghi was being necessarily vague about some of the detail such as sterilisation and its creditor seniority status because legal and other issues have yet to be decided. However he reiterated that the measures will be adequate to ensure the effective transmission of monetary policy. Markets were disappointed with the lack of immediate action and lack of detail (and only the barest hint of a big bazooka). That said, Draghi has delivered in the past and he implied he would again in a matter of weeks.

Forex Exchange Morning Report- (02/08/2012)

Markets disappointed by the Fed. The US central bank did not signal any further accommodation, and disappointed those expecting at least an extension of the lowrate period to 2015. It did, however, leave the door open to further measures, saying it 'will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed'. There was an immediate negative reaction in most risky markets but they settled after about 20 minutes. Indeed, the S&P500 rebounded to be unchanged on the day. The CRB commodities index is also unchanged, oil +0.7%, copper -1.77% and gold -0.8%. US 10yr treasury yields, which had drifted down to 1.49% ahead of the FOMC, rose to 1.54% afterwards. Earlier US data releases (manufacturing activity disappointed but private sector payrolls surprised) had little market impact.

Currencies were more responsive to the FOMC, the US dollar index (DXY) rising by around 0.6%. EUR fell from 1.2300 to 1.2222 in response. USD/JPY jumped from 78.06 to 78.50. AUD peaked during the London morning at 1.0543, and fell from 1.0527 to 1.0448 after the FOMC. NZD similarly peaked earlier at 0.8144 and fell to 0.8079. Milk prices rose at the fortnightly international auction. AUD/NZD fell from midday London's 1.2965 to 1.2930, AUD the higher beta on the day.

Economic wrap

US FOMC statement more forceful re further policy action, saying it 'will provide additional accommodation as needed' this replaced 'is prepared to take further action as appropriate' in the June statement. The economic assessment was downgraded from 'the economy has been expanding moderately this year' in June to 'economic activity decelerated somewhat over the first half of this year' in today's statement. The exceptionally low rates to end 2014 conditional commitment remained in place.

US ISM factory index edges up a tick to 49.8 in Jul. For the second month running the composite headline points to a stalled industrial sector, after readings in the 52.5- 55.0 range in the first five months of the year. The detail showed a slight acceleration in production to 51.3, ongoing contraction in orders (48.0) and slower growth in jobs (52.0).

US ADP private payrolls rise 163k in July. That compares to a 138k monthly average through Q2 and 205k in Q1 this year. So on this measure the slowdown in jobs growth recorded in April-May has been partially reversed since then. US construction spending rose 0.4% in June, with residential construction posting its third consecutive solid gain, but the non-residential component stalling.

Euroland PMI manufacturing revised down a tick to 44.0 in final July reading.

UK PMI factory drops from 48.4 to 45.4 in Jul, its third sub-50 reading in a row, and the lowest reading in over three years. Other July surveys showed a 1.0% yr rise in the BRC shop price index, its weakest since late 2009 and an indication that the CPI will continue to decelerate; and a 0.7% fall in house prices, pulling the annual pace of decline for the Nationwide index to –2.6% yr, also its lowest since 2009

Market opening expected today (01/08/2012)

USDINR- will open gap up

EURINR- will open up

GBPINR- will open up

JPYINR- will open up

Market opening expected today (31/07/2012)

USDINR- Will open down

EURINR- Will open flat or down

GBPINR- Will open flat or down

JPYINR- Will open down

Forex Exchange Morning Report (31/07/2012)

Markets were largely stable overnight. Adopting a wait-and-see posture ahead of the key US and EZ central bank meetings on Wednesday and Thursday, the S&P500 drifted sideways and is currently unchanged from the previous close. Weaker data had no material impact, Eurozone confidence surveys and Dallas regional manufacturing activity lower than expected. Of curiosity interest was the launch of an investigation into whether ECB-chief Draghi's simultaneous membership of the G30 group constitutes a conflict of interest, according to Der Spiegel. Commodities were mixed, the CRB index up 1.0% but oil down 0.4%, copper down 0.2%, and corn up 2.9%. US 10yr treasuries pared the previous day's losses, yields falling from 1.57% to 1.49%. Spain's 10yr yield fell 13bp but Italy's rose 7bp.

The US dollar index (DXY) was steady around 82.80. EUR initially slipped from 1.2298 to 1.2225 but recovered during the London afternoon to 1.2264. USD/JPY slipped from 78.40 to 78.12. AUD rose from 1.0455 to 1.0508 - a three month high - in London. NZD failed to follow suit, only firming to 0.8100 which was below its domestic session peak of 0.8113. AUD/NZD consequently rose from 1.2940 to 1.2990

Economic wrap

US Dallas Fed factory index drops from 6 to -13 in July. That was well below Westpac's bottom of the range -2 forecast (we had the only sub 0 forecast) and reflected respondent concern about the economy rather than their own activity levels, which were lower but still positive for production, orders, shipments and jobs.

Euroland business surveys fall sharply. The business climate index dipped from -0.95 to -1.27 in July, the same level it fell to in October 2008, after the Lehmans collapse six weeks earlier. The economic confidence index which combines consumer and business surveys fell from 89.9 to 87.9 in July, which is midway between the Sep and Oct 2008 readings - clearly these surveys are sensing something calamitous is afoot. These surveys would not reflect the last few days' change of mood of course, since the Draghi et al pledges to do whatever it takes to preserve the euro. Today Draghi was reportedly meeting with the Bundesbank chief (trying to change his anti bond buying stance) and the US Treasury Secretary (for tips on how to deal with political leaders who can't make decisions except when they make the wrong ones).

UK housing/credit/retail data weak across the board. Hometrack reported their first monthly house price decline for the year in July. The fall was just 0.1% but it left the annual pace at -0.5% yr. New mortgage approvals dropped from 51k to 44k in June - the two public holidays for the Jubilee may have been a factor but on the other hand May did not benefit from one less holiday than usual. Mortgage outstandings fell £355mn in June, their first decline in a year, and May's gain was revised down by £300mn. But consumer credit grew by £600mn in June, down on May's £800mn perhaps because of the bad weather which also afflicted April. Meanwhile M4 money supply growth slowed to -5.2% yr, its slowest on record. And back to the consumer, the CBI retail survey for July had reported sales drop from 42 to 11, with the July survey catching a lot of the recent bad weather and June boosted by the Jubilee holidays

Morning report (30/07/2012)

GDP figure from the US on Friday was better than expected, but nevertheless a minor decline from the previous quarter from 2.0% to 1.5%. Trading on Friday indicates that the market is increasingly discounting QE3. The question is whether QE3 will be launched on Wednesday. We do not think so. It appears more obvious to wait until September so that the Fed committee will have another two employment reports to use as a basis for its decision and that the announcement is made at a monetary-policy meeting with subsequent press conference (at the end of August Mr Bernanke is scheduled to speak at Jackson Hole – an event which has served as a stage for the Fed's QE in recent years).

Market sentiment: indications are that the euphoria following comments by Mr Draghi and Mr Nowotny is slowly losing steam. The rise of the EUR/USD and EUR/JPY rates has stopped while US equity futures are in negative territory. There are plenty of economic indicators this week, which makes it difficult to have confidence in technical levels. Currently, the market is in an uptrend (up for equities and risky assets) and the budding signs last week of a breach of the trend were quickly stopped by comments by Mr Nowotny and later Mr Draghi.

Forex Exchange Morning Report (27/07/2012)

Markets were boosted by comments from the ECB.Its president, Mario Draghi, said it would do whatever was needed to preserve the EUR, fuelling speculation the ESM will get a banking license or the ECB's bond buying program (SMP) will be restarted. Eurozone peripheral bond yields plunged on the news, Spain's 10yr falling 45bp to 6.93%, and Italy's 10yr falling 39bp to 6.06%. European equities closed 4.3% higher, while the S&P500 is currently up 1.5%. Commodities reacted less impressively, oil up 1.0% and copper up 0.4%. US 10yr treasury yields are 3bp higher at 1.43%. A 7yr auction saw average demand but did set a record auction low of 0.954%.

The US dollar index (DXY) fell by around 1.3% following the ECB comments. EUR rose from 1.2120 to 1.2330 and then stabilised around 1.2285 in NY. USD/JPY remained rangebound between 78.05 and 78.30. AUD was sitting around 1.0320 before the Draghi comments, surging to a NY peak of 1.0423 in response. NZD similarly rose from 0.7905 to 0.8030, outperforming the AUD following an RBNZ statement which was less dovish than expected. Long AUD/NZD positions were accordingly unwound, pushing the cross down from 1.3050 to 1.2960.

Economic wrap

US pending home sales fall 1.4% in June. Not as weak as new home sales yesterday but the downward revisions and decline in June pending sales add to the weaker tone of housing data of late after a string of mostly positive outcomes over the first half of the year. US durable goods orders rose 1.6% in June, supported by aircraft orders but ex transport orders were down 1.1% and core capital goods orders down 1.4% in June, their 3rd fall in 4 months. In quarterly annualised terms core orders were down 3.1% in Q2 vs a rise of 0.4% in Q1. Shipments of same were not weak though, the pace moderating slightly from 5.6% to 5.2% in Q2. US initial jobless claims down 35k to 353k in week ended 21/7. Claims always swing wildly in July, of no use as guide to jobs market until early-mid August, due to seasonal adjustment issues related to the weeks when auto factories are shut down for new model retooling. US Kansas City Fed index rose from 3 to 5 in June, recovering some of June's 6 pt loss.

Euroland M3 money supply growth edges up to 3.2% yr in Jun. But lending to the private non-bank sector slowed further to –0.2% yr in June.

German consumer confidence edged up from 5.8 to 5.9 in the Aug GfK survey conducted in early July.

Draghi and the ECB to the rescue? Speaking in London the ECB chief Mario Draghi said the ECB was 'ready to do whatever it takes' to save the euro... 'believe me, it will be enough'. The ECB would be acting within its mandate if high sovereign bond yields impaired the monetary policy transmission mechanism, he said. At face value, coming a day after pro QE/ESM bank Nowotny's comments, this could be an early hint that the ECB might use its balance sheet to restore calm to sovereign bond markets. It may or may not be significant that German Chancellor Merkel went on holiday today and Draghi was not in the eurozone at the time he made the comments. But it was only 2 months ago that Draghi said almost the opposite... From May 16: While the bank's 'strong preference' is that Greece stays in the euro area, 'the ECB will continue to comply with the mandate of keeping price stability over the medium term in line with treaty provisions and preserving the integrity of our balance sheet.' Since the euro's founding treaty does not envisage a member state leaving the monetary union, 'this is not a matter for the Governing Council to decide,' Draghi said. So the stakes are higher now that it is not just Greece in the firing line, it seems.

Market opening expected today (26/07/2012)

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Forex Exchange Morning Report (26/07/2012)

Markets rebounded last night on expectations of central bank stimulus. There was residual effect from the WSJ Hilsenrath's opinion yesterday that the Fed is moving closer to action, and a fresh catalyst from ECB Council member Nowotny who said the ESM rescue fund should be granted a banking license (indirectly allowing the ECB to fund European countries). A downgrade of Italy by minor agency Egan Jones from B+ to CCC+ had little impact. The S&P500 is currently up 0.3% as is the CRB commodities index (oil +1.0%, copper +1.1%). The US 10yr treasury yield ranged between its record low of 1.38% and 1.43%, little changed at 1.40%. A 5yr auction saw only average demand but still made a record auction low of 0.58%. Spain's 10yr made a fresh decade high yield of 7.75% before reversing to 7.38%.

The US dollar index (DXY) fell by around 0.7% during the London morning. EUR rose from 1.2055 to 1.2171 before consolidating in NY. GBP underperformed following its GDP disappointment. USD/JPY held a tight 78.08-78.30 range, an advisory firm's report the BOJ will defend the 77.00 level restraining yen bulls. AUD rose from 1.0220 to 1.0337, outperforming all the majors yesterday following a less-weak CPI print than feared. NZD followed the AUD from 0.7823 to 0.7917. AUD/NZD held a tight, elevated range of 1.3055-1.3080.

Economic wrap

US new home sales down 8.4% in June. Although sales fell sharply, extensive back revisions still leave in place a moderate uptrend since Q3 2011, when sales were running an annualised pace of 298k. June's sales pace was 350k and in Q2 it averaged 363k. That compares to a peak sales pace of almost 1400k in mid 2005.

German Ifo business climate index down from 105.2 to 103.2. This was at the weaker end of consensus with both expectations and current conditions making new cycle lows. The expectations index over the past 6 months looks similar in steepness of decline to that which occurred in the first half of 2008, when the German economy previously slipped into recession.

ESM to have a banking licence? Not a new idea, but a potential way to boost the rescue fund's firepower, because as a bank it could borrow from the ECB, getting around the issues the ECB itself has buying the bonds of troubled sovereigns. But it was Austrian CB chief Nowotny who acknowledged there were arguments in favour of the idea, and he is of course on the ECB Council. Recall that back in January he would not exclude the possibility of quantitative easing by the ECB should deflationary risks emerge.

UK GDP contracts 0.7% in Q2. This is the third quarter of decline in a row, the fifth quarter of the last seven to have a negative sign, and the steepest decline since the depths of the recession in early 2009. The limited breakdown showed a 1.4% fall in manufacturing, a 5.2% slump in construction and a modest 0.1% fall for services. The annual pace of contraction steepened from -0.2% yr to -0.8% yr. Q2's -0.7% does include an estimate for the Diamond Jubilee effect based on previous similar events in the 70s and 90s. The statistician notes there is uncertainty about the number but “the underlying performance of the economy was probably somewhat better then the headline would suggest” (the Jubilee involved an extra public holiday). The rain in April and June will also have dampened the data but no estimate of that impact was provided, like was given in Jan 2011 when Q4 2010 activity was impacted by snow (by around 0.4-0.5 ppts).

UK CBI industrial trends survey. The quarterly confidence indicator fell from 22 in April to -6 in July, while the monthly survey showed total orders contracting at a slower pace in July than in June (-6 vs -11).

Market opening expected today (25/07/2012)

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Forex Exchange Morning Report (25/07/2012)

Risk aversion continued overnight. EU officials said Greece is unlikely to meet its debt obligations and further restructuring is likely, according to Reuters which quoted one official as saying Greece is hugely off track'. This update, on the heels of earlier news Moody's had downgraded the outlooks for AAA Germany, Netherlands and Luxembourg, kept markets on a defensive footing. US data disappointments (PMI, Richmond Fed manufacturing) also contributed. The S&P500 is currently down 1.4%. Yesterday's decent China PMI report constrained commodities' losses, the CRB index down 0.8%, oil +0.1%, and copper -0.6%. The US 10yr treasury yield made a fresh record low at 1.39% in NY following a London squeeze to 1.46%. A 2yr auction went at a record low 0.22%. Spain's 10yr yield rose 12bp to a fresh decade high of 7.64%, while Italy's rose 26bp, Greece up 46bp.

The US dollar index (DXY) made a fresh two year high. EUR fell from 1.2130 to 1.2043 - a two year low. USD/JPY was quiet, contained between 78.10 and 78.30. AUD peaked at 1.0316 around midday London and then sank with the EU comments to 1.0215. NZD similarly peaked at 0.7923 and sank to 0.7840. AUD/NZD again tested major resistance at 1.3030 without success.

Economic wrap

US Richmond Fed factory index plunges from -3 to -17, its lowest reading since April 2009 when the economy was still in recession. Shipments and orders were especially weak at -23 and -25 respectively; jobs were down 7 pts but held positive at 1. This index is clearly more in line with the recent weak readings on the Philly Fed index than the NY Fed index which bounced in July. US house prices rose 0.8% in May according to the FHFA, the fourth gain since prices last fell in January.

Moody's questions ratings of the European AAAs. Angela Merkel insisted Germany will remain a safe haven within Europe and the risks Moody's cited when cutting the AAA sovereign's rating outlook from stable to negative were 'nothing new'. Yes, but those risks are crystallising. The Netherlands and Luxembourg also had their outlooks lowered, leaving just Finland as AAA with stable outlook.

Greek PM Samaras fears a 7% contraction in the Greek economy this year and no growth before 2014. The troika of IMF, ECB and EU officials arrived in Athens to determine whether fresh 'political decisions' will be needed by Greece's euro partners (could those be about easier budget deficit reduction targets ... another debt restructure... or something more abrupt?).

Spain not seeking a bailout and not getting one according to various Spanish and EU officials but 'in such difficult times as we are in, one has to be ready to act at any moment'. One wonders if the ECB might be considering that advice with respect to expanding its bond purchase program. Spanish 10yr bonds were trading at above 7.5% for much of today, with the Italian paper at 6.5%.

Euroland composite PMI steady at 46.4 in July, again weaker than any reading prior to September 2008. The French services PMI for July edged back above 50 but the factory PMI fell further and the services and factory PMIs in Germany are both falling.

UK mortgage approvals fell from almost 30k in May to 26k in June. The Jubilee public holidays and wet weather dampened the market according to the BBA but May had great weather and an extra business day and its figure was almost the lowest in three years, so those June distortions may be masking an underlying slowdown in the market

Market opening expected today (2407/2012)

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Forex Exchange Morning Report (24/07/2012)

The negative momentum from Friday's sessionpersisted during the London session. Another Spanish region confirmed it needed rescuing, and there are five others expected to follow. A Der Spiegel report that the IMF may cut further lending to Greece gained traction throughout the day. The S&P500 is currently 1.1% lower following a 0.7% rebound in NY. Spanish equities only fell 1.1% thanks to the reinstatement of a short selling ban (Italy also), but Greek equities fell 7.1%. Commodities fell sharply, the CRB index down 1.9%, oil -3.4%, copper -2.1%, and overbought wheat -3.2%. US 10yr treasury yields gapped to a fresh record low at 1.40% before recovering to 1.44%. Eurozone peripheral bonds all suffered losses, the Greek 10yr yield up 199bp, Spain's up 30bp to a decade high of 7.57%, and Italy up 26bp to 6.43%.

The US dollar index (DXY) gapped to a fresh two year high. EUR conversely made a fresh two year low of 1.2067 before rebound from midday London to 1.2145. USD/ JPY bounced from early London's 0.7794 to 0.7846. AUD followed the global theme, extending domestic session losses from 1.0320 to 1.0244 before rebounding in NY to 1.0285. AUD/NZD continued its month-long rally to reach 1.3030 where major resistance can be expected

Economic wrap

US Chicago Fed national activity index rose from -0.48 to -0.15 in June. This 'survey of surveys' indicates that the overall tone of June economic activity data was not as weak as it was back in May.

Euroland consumer confidence drops from -19.8 to -21.6 in July, its steepest fall since last year and its lowest level since the recession of 2008-2009.

Spanish 10 yr bond yields hit 7.5%, equities down 10% in two days. On top of Friday's developments, another five Spanish regional administrations may be seeking bailouts from the national government, further undermining investor confidence in the sovereign. Meanwhile government officials continue to urge the European Central Bank to use its firepower to support the bond market, to no avail so far. The ECB's SMP has not been active for some months now but when used late last year Spanish (and Italian) bond yields fell back from around 7% to the 5-6% range. Later in the session Spain (and Italy) reinstated short selling bans and intraday losses of up to 5% were pared back to 1%. But the earlier price action was indicative of increasing doubts about sovereign solvency, European leadership, policy-maker courage and indeed the framework of the euro itself. Separately, the Greek PM Samaras described the situation in Greece as equivalent to the great depression in the US in the early 1930s. Greece wants an extra 2 years to meet her budget commitments and more bailout assistance (maybe €40-60bn on top of the €240bn already committed); the IMF was reportedly considering holding back on its next bailout tranche, which would see Greece insolvent by August and in default by September, were no other benefactor to step up to the plate. However the IMF issued a denial of sorts, saying it was working with Greek authorities to bring the budget program back on track.

Market opening expected today (23/07/2012)

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Forex Exchange Morning Report (23/07/2012)

Eurozone issues resurfaced after a multi-week hiatus. A Bloomberg report on a EUR 12bn funding gap in Spain to cover regional governments may have sparked the 28bp selloff in Spanish 10yr government bonds which reached 7.28% - matching the decade high set on 18 June. Spain's stockmarket fell 5.8%. Some regions have declared funding difficulties, Valencia requesting a EUR 2bn bailout and Catalonia considering one according to El Pais. Contributing to the mood, minor rating agency Egan Jones cut Spain's sovereign rating from CCC+ to CC+, and the ECB declared Greek debt as ineligible for collateral in it operations. The S&P500 closed down 1.0%, while commodities were moderately lower (CRB index -0.1%, oil -0.9%, copper -2.4%, although foods continue to rally). US 10yr treasury yields fell from 1.50% to 1.45% - just above the 1.44% record low.

The US dollar index (DXY) rose by around 0.8% on the risk averse mood. EUR fell from 1.2280 to 1.2144 – a two year low - by the NY open and drifted sideways until the close. USD/JPY ground slightly lower from 78.60 to 78.45. AUD fell from 1.0425 to 1.0363 before partly recovering during the NY afternoon to close at 1.0378. It opened this morning at 1.0360. NZD similarly fell from 0.8055 to 0.7980, and opened this morning at 0.7990. AUD/NZD rose from 1.2965 to 1.2995 where it met strong resistance.

Economic wrap

Canadian CPI accelerates to 1.5% yr in June from 1.2% in May, and the BoC core rate rises 0.2 ppts to the 2.0% target. Some energy prices, especially natural gas and gasoline, were constraining factors, while electricity and auto prices picked up.

German producer prices decelerate to 1.6% yr in June, their lowest since mid 2010 and the pace they were running in nearly 2009 when the global economy was slumping.

UK budget deficit was £14.4bn in June up from £13.9bn a year earlier. This was wider than expected and increases the prospect that the full year deficit target of £120bn will be exceeded.

Spanish 10 yr bond yields hit 7.2%, equities down 5%. This followed confirmation by the Eurogroup finance ministers: Spain will receive up to €100bn to recapitalise the banks, with the EFSF setting aside €30bn initially and the final amount being determined once the audit of the banks is completed, probably in September. When up and running, the ESM will provide the balance of the funds. The loans, of up to 15yrs tenure, will be made to the FROB which is an agent of the Spanish govt, which will retain the full liability for the assistance. One takeaway from this is that we can disregard what EU leaders claim to have agreed at their next summit; to find out what the truth is, just look at Ms Merkel's face. Meanwhile, Spain has found €15bn to bailout regional administrations like Catalonia and Valencia that have lost access to markets but claims it won't impact published debt raising plans. Investors don't like it; they are losing faith in Spain's ability to finance herself and can no longer trust what the political leaders across Europe say

Market opening expected today (20/07/2012)

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The positive tone persisted despite a clean sweep of US data disappointments. Continuing expectations Fed Chairman Bernanke may soon hint at QE3 appear to be supporting asset prices. US jobless claims, Philadelphia regional manufacturing, homes sales and leading indicators were all sub-consensus, causing a 0.7% decline in the S&P500. A recovery later has it up 0.3% currently. Helping the bounce may have been the German parliament's approval of Spain's EUR100bn banking sector bailout, although that result was largely expected by analysts. Less supportive was the German Finance Minister's reiteration that Spanish bank aid must be channelled through the Spanish government, thereby impacting its fiscal position. Commodities extended a month-long rally, the CRB index gapping 2.0% higher (oil +2.4%, copper 1.8%, wheat +3.1% and now overbought). US 10yr treasury yields are 2bp higher at 1.51%.

The US dollar index (DXY) consolidated around the week's low. EUR fluctuated between 1.2230 and 1.2325, settling around the middle in NY. USD/JPY extended July's decline to 78.43. AUD extended the week's rally from 1.0390 to 1.0444 before consolidating in NY around 1.0420. NZD similarly pushed higher to 0.8055 and settled around 0.8030. AUD/NZD ground higher towards the previous day's peak of 1.2990.

Economic wrap

US Philadelphia Fed factory survey rose 3.7 pts to –12.9 in July. The June-July slump below zero more or less mirrors the mid-year collapse in the regional business activity assessment that took place in Aug-Sep last year, which subsequently reversed. The big issue is how enduring will the loss of momentum be this time? The July detail showed less negative readings for orders (–6.9) and shipments (–8.6) but jobs fell from +1.2 to –8.4.

US existing home sales fell 5.4% in June to their slowest sales pace for the year so far, at 4.37mn annualised. Pending home sales (contracts not yet completed) were up 6.3% in May compared to the end of 2011, whereas closings (today's data) are down slightly. That could mean more contracts are falling through before completion, or it could be a reflection of the 5.5% fall in pending home sales in April, which reversed in May. So the jury is still out on this one - a temporary dip in an emerging uptrend, or evidence that the housing stabilisation/recovery story might be losing altitude? US initial jobless claims rise 34k to 386k in week ended 14/7. Seasonal summer auto plant shutdowns were cited again for the sharp rise in claims, which are best ignored in July: the recent rise tells you nothing about the state of the labour market, but quite a bit about how difficult it is to seasonally adjust weekly data.

European developments: The Spanish government successfully auctioned 2, 5, and 7 year debt, but yields made new euro era records at 5.20%, 6.46% and 6.70% respectively, and 10 yr bonds yields rose back above 7% after the auction. Meanwhile the German parliament appeared set to back the Spanish bank recapitalisation on the basis of assurance from Fin-Min Schaeuble that the Spanish sovereign would remain liable for the bailout loans, rather than the banks themselves (which had been the commitment announced by EU leaders including a grumpy Merkel just a few weeks ago).

UK retail sales rose 0.1% in June after surging 1.5% in May. Weather and changed public holiday arrangements for the Diamond Jubilee have explained much of the volatility in retailing this year, although the annual pace of sales volume growth remains positive at 1.6% yr. Falling food and petrol sales offset a 1.2% rise in other retailing.

Market opening expected today (19/07/2012)

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Sentiment improved modestly. During a day when there was little data of note, lingering expectations the Fed would eventually do more to stimulate the economy helped push the S&P500 to a fresh 2 ½ month high (up 0.5% on the day so far). Goldman Sachs, for example, yesterday forecast QE3 would occur after the November elections in the US. The Beige Book of regional US economic conditions had no market impact, reporting modest-to-moderate growth (less downbeat than Bernanke's assessment the previous day).The IMF's latest report on the Eurozone urged the ECB to cut rates further and consider QE. Commodities are firmer, the CRB index +1.2%, oil +1.1%, copper +0.6%, but gold -0.5%. US 10yr treasury yields remained defensive, slipping from 1.50% to 1.47% and back to 1.49% near the close. Among Eurozone yields, Spain underperformed (10yr yield up 14bp).

The US dollar index (DXY) saw little net change overnight. EUR fell from 1.2290 to 1.2217 in London and rebounded to 1.2278 in NY. USD/JPY slipped from 79.10 to 78.77, markets continuing to focus on the narrowing interest rate spread. AUD tracked sideways until early NY when it surged with US equities from 1.0292 to 1.0365. NZD drifted lower until that surge helped it from 0.7925 to 0.8006. AUD/NZD continued to extend higher, reaching 1.2990 before settling back at 1.2950

Economic wrap

US housing starts rise 6.9% in Jun but permits fall 3.7%. Multiples added to starts by rising 12.8% and detracted from permits by falling 10.9%. Single family starts rose for the fourth month running by 4.7% and single family permits rose 0.6%, their third rise in a row. More evidence here that the housing market may have bottomed out albeit at a very low level of activity.

Fed chair Bernanke repeated his policy testimony in the House today. Treasury Secretary Geithner acknowledged the economy is “definitely slower” but denied it was heading back into recession.

Bank of England MPC voted 7:2 in favour of this month's £50bn asset purchase plan extension. The two dissenters thought the special measures announced at the Mansion House (cheap funding for banks to lend to households and businesses) would be sufficient for the time being. The minutes also showed some discussion about whether these measures might make a further bank rate cut (from 0.5% currently) feasible.

UK employment rose 181k in three months to May after a 53k rise in Dec-Feb. This jobs growth occurred when GDP was contracting. Mar and May weather was unseasonally warm (though April was horrible). That may explain some of this jobs strength. And there are other distortions this year such as changed public holiday arrangements and the Olympics but it is not clear how much they would be impacting these data already. Effectively the question is - what is the better guide to the economy: weak GDP and business surveys OR solid jobs growth? The report also showed the jobless rate edging down from 8.2% to 8.1% in May (the peak was 8.4% in Jan). Benefit claimant count unemployment rose 6k in June after a 7k May gain

Market opening expected today (18/07/2012)

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Forex Exchange Morning Report (18/07/2012)

USD

The dollar strengthened on Tuesday following Fed Chairman Ben Bernanke's testimony to the Senate, in which he restated his 'stimulus-if-required' stance to monetary policy as well as underscoring the need for 'fiscal balance' from lawmakers. This upset expectations for more stimulus and led to a rise in the dollar. On the data front, CPI in June remained at 1.7% yoy when it had been expected to moderate to 1.6% whilst CPI Ex Food & Energy showed a basis point fall in line with expectations. Industrial Production in June rose by 0.4% which was just above the 0.3% expected. Demand for U.S securities showed a rise with Net Long-Term TIC Flows in May beating expectations to rise to $55.0bn compared to $41.3bn expected and $27.2bn previous. Total Net TIC flows showed a $101.7bn surplus compared to the -$8.2bn previously.

EUR

The euro fell after Bernanke's testimony to Senate in which he reiterated a 'wait-and-see' stance upsetting expectations that he would announce further QE. The euro fell rapidly despite strengthening in the first half of the day when yields on Spanish short-term bills fell at auction. The yield on the 12-month fell from just over 5% to 3.92% previous and to 4.24% vs 5.11% on the 18-month bill. Longer-dated debt however didn't fare as well as the yield on the 10-year Spanish bond rose to 6.79% - up 5.7bps whilst the Italian 10-year rose to 6.01% up 1.8pbs. On the data front, the ZEW Sentiment survey fell, but not as deeply as expected. The German version of the ZEW in July fell to -19.6 when it had been expected to fall to -20.0 and was -16.9 previously. The Euro-zone version showed an even more dramatic fall in Economic Sentiment to -22.3 versus -20.1 previously. The German Current Situation survey fell to 21.1 versus 30.0 expected and 33.2 previous.

GBP

The pound fell after the release of softer-than-expected inflationary data on Tuesday increased the possibility the BOE might use more stimulus to boost growth. Overall the stats indicated a fall in inflation with CPI dropping to 2.4% in June yoy versus 2.8% expected and 2.8% previous. Core CPI fell to 2.1% versus an expected rise of 4pbs. Mom CPI fell by -0.4% compared to -0.1% expected and -0.1% previous. RPI fell to 2.8% versus 3.0% expected and 3.1% previous. Sterling fell against the dollar after the Chairman of the Fed Ben Bernanke made a speech to the Senate in which he maintained his wait-and-see stance despite a more doveish tone having been expected. The absence of any hints of more QE led to a rise in the dollar. The pound was stronger versus the euro, however, and briefly hit a three and a half year high following comments from the Italian PM Mario Monti about the dire economic problems in Sicily.

JPY

The yen traded mixed at the time of writing on Tuesday, rising against the riskier currencies like the euro and the pound but falling to the dollar which strengthened after expectations of more easing were dealt a blow by Fed Chairman Bernanke who failed to hint at more QE in his testimony to Senate, an outcome which surprised many investors expecting the opposite. There was no economic data for the yen but there was commentary from the Finance Minister Jen Azumi who threatened to weaken the yen if speculators continued to push it higher. It is possible the currency may moderate at its current position as a result of the threat, however, the currency remains vulnerable to safe-haven flows as a result of investor fears over contagion from the crisis hit euro-zone and there does not seem to be any sign that the problems in that region are close to a solution yet, which leaves the outlook for the yen still quite bullish overall.

Market will open today (17/07/2012)

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Forex Exchange Morning Report(17/07/2012)

Sentiment was initially hurt by European news and US data but rebounded late NY. The WSJ revealed a hardline shift in stance by the ECB where it advocated investor losses on impaired Spanish bank bonds at the 9 July Eurogroup meeting (ultimately rejected by politicians), and the German court is unlikely to decide on the ESM until 12 September. US retail sales disappointed but business inventory and NY regional manufacturing reports softened the blow, and indeed, the former was seen as supportive of QE3. Later on, expectations of Bernanke, extending to chatter in the blogosphere that the Fed could consider BOE-style targeted lending or eventually cut rates to below zero, helped sentiment. The S&P500 recovered by around 0.5% to be currently unchanged. The CRB commodities index is up 0.7% (oil +1.1%, copper and gold unchanged). US 10yr treasury yields fell from 1.48% to 1.44% (matching the record low) before rebounding to 1.47% late NY.

The US dollar index (DXY) fell 0.7% in NY. EUR fell to 1.2176 during the London morning but then bounced to 1.2290. USD/JPY fell from 79.10 to 78.70 on QE3 hopes following the retail sales report but stabilised in NY to 78.85. AUD made a midday London low of 1.0202 and then rose to 1.0260. NZD similarly fell to 0.7937 before rallying to 0.7988. AUD/NZD remained rangebound, between 1.2830 and 1.2860.

Economic wrap

US retail sales fall 0.5% in June, even weaker than Westpac's well below consensus –0.2% forecast. The detail included a 0.6% fall in auto sales and a 1.8% fall in gasoline which would be due to lower prices. Core retail sales excluding those two components fell 0.2%, their third monthly decline; the last time we saw core retail sales down three months running was in the dark days of Q4 2008. Furniture, electronics, building materials, health and personal care, sporting goods, department stores and restaurants all recorded June declines. In all cases the falls were either large enough to more than wipe out the prior month's gain or followed declines in May. With back revisions (especially steep in April) the quarterly annualised sales pace in Q2 was –0.2% for the core, down from 6.6% in Q1 and the first fall since Q2 2009. That represents only part of the broader private consumption component of GDP, but is consistent with our forecast that consumption growth slows from over 2% annualised in Q4 and Q1 to just 0.9% in Q2.

US NY Fed factory index rises from 2.3 to 7.4 in July, reversing part of the 15 pt drop it recorded in June, and contrasting with the neighbouring Philly and Richmond Fed factory indices which both dipped below 0 back in June. The NY detail showed orders down 4 pts to –2.7 (first negative for the year) but shipments and jobs both jumped around 6 pts to 10.3 and 18.5 respectively. US business inventories rose 0.3% in May, with a retail stocks surge of 1.0% offsetting a (previously reported) fall in factory stocks and modest 0.3% gain at wholesalers.

Euroland core inflation steady at 1.6% yr in June, indeed it has been steady at 1.5-1.6% since September last year. The headline rate was unrevised from the flash estimate of 2.4% yr. Meanwhile the trade surplus rose from €4.5bn to €6.3bn in May as exports edged up 0.3% (after falling 1.4% in April) but imports continued to decline, down 0.9% on top of April's 1.5% fall.

UK house prices fell 1.7% in July but were up 2.3% yr, according to Rightmove's survey of asking prices (note that most indices of selling prices are flat or slightly lower in annual terms).

IMF leaves global growth forecast unchanged at 3.5% yr in 2012 but next year's forecast was cut from April's 4.1% to 3.9%. Those forecasts compare to our 2.8% and 3.8% for this year and next. The IMF did lower the forward growth trajectory reflecting the moderating US recovery and the impact of European weakness on emerging economies but Q1 data for Germany and Japan were stronger than they had assumed leaving the full year 2012 forecast pace unchanged after rounding. Also their numbers assume (optimistically) that appropriate policies are put in place to prevent risks such as aggressive fiscal tightening in the US and ongoing/deepening sovereign debt market tensions from crystallising.

Forex Exchange Morning Report(16/07/2012)

Markets closed the week on an optimistic note, shrugging off Friday's weaker China data and Italy downgrade. Possible catalysts were JP Morgan's Q2 earnings (a positive surprise, even after its US$5.8b trading loss), significant buying of EUR by Austrian banks, an advisory firm's report expecting the ECB to cut the deposit rate to below zero and engage in quantitative easing, higher than expected US PPI and Fed centrist Lockhart's dovish comments (although that has been his bias recently). US consumer confidence disappointed but was ignored. The S&P500 closed 1.7% higher. The CRB commodities index closed 1.3% higher (oil +1.3%, copper +2.6%, gold +1.1%). US 10yr treasury yields rose from 1.46% to 1.52% during the London session and closed at 1.49%. Eurozone peripherals were only modestly changed apart from Italy which gained 15bp.

The US dollar index (DXY) fell sharply around midday London. That was mainly due to a sharp rise in EUR, from 1.2163 to 1.2257, although it was directionless during the NY session. USD/JPY was directionless throughout, stuck between 79.07 and 79.33. AUD followed equities and the EUR higher, from 1.0148 to 1.0230. NZD rose from 0.7904 to 0.7966. Both AUD and NZD speculative futures positioning increased last week, according to the latest CFTC report. AUD/NZD rose from 1.2825 to 1.2870

Economic wrap

US PPI rises 0.1% in June. Possibly due to survey timing, the PPI output did not capture last month's decline in energy prices to anywhere near the extent we expected. Crude energy prices fell 5.1%, but finished energy prices were down just 0.9% (and gasoline up 1.9% after falling 12% in the previous three months). That was offset by food up 0.5% (due to higher meat prices, and next month's data may see drought impact on fresh fruit and veg) and the core rate as expected up 0.2%. Within the core, car prices fell 0.2% but ever volatile light truck prices jumped 1.4%. The headline PPI annual rate was unchanged at 0.7% yr, its lowest since the 2008-2009 recession, and the core rate slowed to 2.6% yr from the cycle high of 3.1% in January this year.

US consumer sentiment fell to 72.0 in the preliminary July University of Michigan report, exactly in line with our low end of the range forecast. That is the most pessimistic reading for the year so far, and reflected a 3 pt drop in the outlook index which offset a 1.7 pt rise in current conditions. One year ahead inflation expectations also fell, down 0.3 pt to 2.8%, the lowest since late 2010.