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”.