Market opening expected today (26/07/2012)

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EURINR- will open down

GBPINR- will open down

JPYINR- will open down

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).