Currencies traded heavy for most of the North American session on the heels of weaker U.S. economic data and reports of lackluster growth across the nation. Having bucked the trend yesterday, the U.S. dollar slipped against the Japanese Yen and rose against other currencies as risk appetite retreated. However it is still too early to declare the rally in the euro and pound over particularly since these two currencies did not fall aggressively and only consolidated near their recent highs. The British pound for example rose to a 5 month high against the U.S. dollar before ending the day virtually unchanged. A move below 1.55 for the GBP/USD and 1.2850 for the EUR/USD would be needed to negate the uptrend. Although no U.S. economic data is scheduled for release tomorrow except for the weekly jobless claims report, the prospect of weaker U.S. data in general should continue to exert pressure on USD/JPY.
There were no surprises in the Fed’s Beige Book report and no major reaction in the U.S. dollar because the details basically confirmed what we already know. If the Beige Book had reported an improvement in growth and economic activity, that would have been a big surprise, but instead the 12 Fed Districts reported very modest growth with retail sales edging slightly higher while housing and construction activity remained weak. Cleveland and Kansas City said economic activity was basically unchanged from the previous report while Atlanta and Chicago reported slower economic activity. The Atlanta district which covers the Gulf States noted concerns about decreased leisure travel. Tight credit is a persistent problem that has seen no signs of improvement. On the bright side, manufacturing activity continued to expand in most districts along with labor market conditions. The Beige Book report is important because the Fed uses the information to make their monetary policy decisions. Although the latest release was not nearly as bearish as Bernanke’s comments last week, it is still subdued and shows that the recovery in the U.S. economy is uneven. The Beige Book does not speculate on future economic activity which leaves us only with Bernanke’s warning of unusual uncertainty.
Meanwhile durable goods orders dropped 1.0 percent in the month of June against a forecast for a rise of 1.0 percent. Although transportation orders contributed to the drop, demand still fell 0.6 percent which indicates that in general, orders for products made to last for a more than 5 years has weakened. In particular, orders for nondefense aircrafts fell 25.6 percent while orders for computers and electronics dropped 4.1 percent. Durable goods orders can be very volatile because of its sensitivity to demand for big ticket items. This morning, Boeing announced that second quarter profit fell 21 percent due to lower aircraft deliveries. Their backlog is also down 0.4 percent which is in line with today's weaker report on durable goods orders. However Boeing is expected to make up deliveries throughout the year and double its full year profit which suggests that durable goods orders could rebound n the coming months.
EUR: PROSPECT OF A SUSTAINED BREAK ABOVE 1.30
The countdown continues - for the fifth time this month, the euro has tested and failed at the 1.30 level. We believe that the euro will break 1.30 eventually and it could happen sooner than you think. German unemployment numbers are scheduled for release tomorrow and it is one of those pieces of economic data that could have a big impact on the currency. The number of Germans receiving unemployment benefits is expected to fall for the 13 th month in a row, which would bring the unemployment rate down to 7.6 percent, the lowest level since November 2008. Not only has business confidence improved which could have led to additional hiring but consumer confidence also hit the highest level since November. If the labor market deteriorated, sentiment probably would not have improved as much as it did. Additionally, the flash PMI numbers for July showed increased levels of employment in both the manufacturing and service sectors. Markit, which is the agency that releases the report said, “Broad-based staff hiring contributed to a solid rise in private sector workforce numbers and the most marked overall rate of expansion since June 2008.” Strong U.K. economic data pushed the GBP/USD above its 1.55 resistance level and kept it there. The EUR/USD is waiting for the same catalyst, which we believe could come in the form of tomorrow’s employment report. Meanwhile the uptick in producer prices in Germany was not followed by an uptick in consumer prices. CPI grew by only 0.2 percent in the month of July compared to a 0.3 percent forecast. With inflation running at an annualized rate of 1.1 percent, price pressures in Germany remains nonexistent, particularly when compared to the 3.2 percent annualized CPI rate in the U.K. For the first time after four trading days, the Swiss franc strengthened against the euro. Given the recent improvement in Swiss economic data and the lack of desire by the Swiss National Bank to intervene in their currency, we could see additional strength in the Franc.
GBP: HOUSING DATA COULD WEIGH ON POUND
The British pound rose above 1.56 to a fresh 5 month high against the U.S. dollar at the start of the NY trading session. Stronger economic data provided continued support for the currency but the pound did not manage to hold onto its gains. This week has been a quiet one in the U.K. with no major economic releases on the calendar. Thankfully the positive sentiment from last week’s strong GDP and retail sales report kept the currency bid for most of the week. Tomorrow is the only day with any meaningful U.K. economic data. Nationwide house prices, consumer credit, lending securities on dwellings and mortgage approvals are scheduled for release. The focus will be on housing and recent reports from various agencies including Rightmove and RICS have reported decline in house prices while the British Bankers’ Association reported a 4.4 percent decrease in mortgage approvals in the month of June. In their testimony to the Treasury Select Committee, members of the U.K. central bank revealed little new information. Bank of England Governor King said Q2 GDP growth was encouraging but we “shouldn’t read too much into” the data. Although they are less worried about the negative impact of the austerity budget on growth, they believe that the change in the value added tax will keep inflation above target. Balancing CPI risks is one of the central bank’s greatest challenges because as much as they think that the rise in inflation will be temporary, so far, it is stickier than they would like. As a result, King said the BoE is ready to move in “either direction.” Both Fisher and Miles indicated their own frustration in inflation while Sentance continued to champion for a rate hike. The central bank did provide clues into their exit strategy with King saying they will unwind Quantitative Easing through pre-announced asset sales and Fisher saying that policy tightening will start with interest rates.
NZD: 25BP RATE HIKE EXPECTED
The Australian, New Zealand and Canadian dollars weakened against the greenback on the heels of risk aversion flows. The Reserve of Bank of New Zealand is expected to raise interest rates for the second time in a row this evening. Of the 14 economists surveyed by Bloomberg, every single one of them is calling for a 25bp rate hike to 3 percent by the central bank. Back to back tightening is not all that unusual after similar moves by the Bank of Canada and previously by the Reserve Bank of Australia. Despite softer economic data including a drop in business confidence that was reported last evening and a drop in consumer confidence, the RBNZ believes that inflationary pressures will increase substantially and as a result, they will have preempt it by normalizing monetary policy now. Annualized consumer price growth slowed in the second quarter (from 2.0 to 1.8 percent), but Bollard expects prices to rise by 5.3 percent in the year ending June 30, 2011. Incoming economic data does not necessarily support additional tightening by the RBNZ, but their fear of ongoing inflation is driving their desire to raise interest rates and for these reasons we don’t expect Bollard’s comments to be exceptionally hawkish. Meanwhile, rate hike expectations for Australia were dashed by the weaker consumer price report. As we warned yesterday, the risk was for a softer CPI release which would in turn drive the AUD/USD below 90 cents. As reported by our colleague Boris Schlossberg, “Australian CPI printed at 0.6% versus 1.0% eyed, disappointing investors and sending Aussie below the .9000 level in Asian session trade. On a yearly basis, prices rose at 3.1% pace versus forecasts of 3.4%. The key trimmed inflation measure was even more subdued printing at 2.7% - coming in handily below the RBA 3% target rate. The news that price levels have stabilized despite impressive Australian economic growth suggests that the RBA will remain stationary for the time being. The Australian monetary authorities will most certainly keep rates on hold in August but given the subdued inflation gauges may now pause in September as well.”
JPY: STRONGER SMALL BUSINESS CONFIDENCE
The Japanese Yen strengthened against all major currencies today as fears grew of the global economic recovery losing steam, prompting investors to unwind their risk positions for the safe-haven currency. Disappointing economic data released by the United States added to risk aversion and led the Yen higher against the Dollar, with a fall in June Durable Goods Orders and with the Federal Reserve reporting softer economic conditions. The Nikkei 225 Stock Average rallied 2.7 percent or 256.42 points to 9,753.27, its highest intraday gain and close in two weeks. Japanese Small Business Confidence was reported to have strengthened in July but remained under 50, indicating that pessimists continue to outnumber the optimists. Small business confidence has now improved for the seventh month in a row, which means that it is moving in the right direction. Over the course of the past two weeks, speculation has increased of potential intervention by the Bank of Japan if the Yen hovers around the 85 mark against the dollar for one or two months. The latest in this wave of comments comes from central bank board member Hidetoshi Kamezaki, who told reporters today “we need to recognize the impact of the weaker Euro and stronger Yen on the competitiveness of exporters and the impact of instability of financial markets on companies’ fund raising activities as downside risks to the economy.” A stronger Yen leads to increased costs to exporters, which lowers their profits, and also decreases the nation’s cost of imports, adding to already high deflation. In regards to deflation, Kamezaki said “we want to make utmost efforts proactively to escape from deflation and return to a sustainable growth path under price stability.” Although Kamezaki acknowledged the threats of a stronger currency, he reiterated the central bank’s stance that economy is on its path to a moderate recovery citing upside risks such as faster growth and improving economic conditions overseas. Over the next 24 hours, we expect June Retail Sales figures. After a sharp decline in May, consumer spending is expected to rebound.
EUR/USD: Currency in Play for Next 24 Hours
The EUR/USD will be the currency pair in play for the next 24 hours. From the Euro-Zone, we expect an array of economic data including the German Unemployment Change at 4:55 ET or 7:55 GMT, followed by Euro-Zone Economic Confidence and Consumer Confidence figures at 5:00 ET or 9:00 GMT. The United States is set to release its Continuing Claims and Initial Jobless Claims figures at 8:30 ET or 12:30 GMT.
For the fifth consecutive day, the EUR/USD is trading within the Buy Zone, which we determined through the Bollinger Bands. The pair channeled upward after hitting its lowest point in five years, paused for a short while and is currently in another upward channel. This recent rally can be seen as a minor correction to the major decline from earlier this year. The most significant near-term support level is at 1.2885, which held for the most part over the past two weeks and at which previous highs and lows were established. If this level is broken, the pair could see support at its 20-Day Simple Moving Average of 1.2772. For the past two weeks, the 1.3000 level has provided strong resistance. If the pair holds above the psychologically important 1.3000 level, further resistance can be expected at the 38.2% Fibonacci Retracement of 1.3124, drawn from the November high of 1.5143 to the June low of 1.1876, which coincides with the Upper Two-Standard Deviation Bollinger Band.
