Market will open today (17/07/2012)

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EURINR- Will open up


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JPYINR- Will open down

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.