Traders watch EU inflation & events in the Ukraine

Market Brief

FX markets shifted into safe-haven positioning as Russia – Ukraine worries reappear. Regional equity indices fell as the Nikkei dropped -0.23% and the Hang Seng slipped -0.17%. However, in contrast China stayed positive further entrenching its unique defensive characteristics. Ukraine President Petro Poroshenko has charged Russia of sending its troops over the border. NATO also released satellite images for Russian military forces inside the Ukraine sovereign border. The Shanghai composite rose 0.55% and Shenzhen increased 0.50%. We see EURUSD rallies as an opportunity to reload short EURUSD positions based on geopolitical concerns and divergent monetary policy. In FX, USD was marginally stronger against the majors. EURUSD is ready to retest the week lows at 1.3150 while USDJPY traded in a tight range between 103.70 and 103.85 as 10yr US treasury yields were unchanged at 2.33%. In a whipsaw session, NZDUSD dropped nearly 0.20% to 0.8359 on the back of a weaker NZ business sentiment survey before sharply reversing to 0.8379. Asia EM FX, were basically unchanged, as the PBoC fixed USDCNY slightly higher to 6.1647. With a heavy scheduled economic calendar in the European and US session plus growing geopolitical concerns traders are holding current positions rather than build anything meaningful.

Weak data points to BoJ easing

Overnight, weak data in Japan further suggests to us that the BoJ will have to move forward to support the fading economic recovery. Japan’s industrial production increased 0.2% m/m in July, below 1.0% expectations. This weak read follows a prior fall of 3.4%. Total household spending decelerated -5.9% y/y on the month is following a -3.0% y/y drop in June (illustrating the VAT build up effect). Retail sales fell -0.5% in July, softer than the 0.3% m/m gain expected. Concerning still is the fall in vehicle production by -1.7% from 6.6% potentially indicating a further slowdown in exports. Japan’s inflation lessened to 3.4% y/y in July from 3.6% in June, in line with consensus. Core inflation ex-food remained unchanged at 3.3%. We are unsure of the exact nature and timing of the next BoJ action yet we are confident they will move forward. Given this expectations we remain significantly bearish on JPY and positive on Japanese equities (despite stretch valuations).

NZ activity slows

From New Zealand, ANZ business confidence dropped 24.4 in August (sixth consecutive month of declines) verse prior reading of 39.7 in July. Activity outlook fell to 36.6 in August from 45.1 in July illustrating a clear tern of slowing pace of growth. In other news NZ building permits rose slightly by 0.1% m/m in July, but below expectations of an increase of 1.0%. Finally in Asia, our constructive view on Asian growth recovery continues as South Korea’s industrial production accelerated 3.4% y/y in July, above growth expectations of 2.3%.

EU inflation is key

In the European session, traders will be keen to see how EA HICP inflation prints due to ECB Draghi comments linking stimulus measures with a sudden changed in data. Inflation is expected to dip to fall from 0.3% y/y in July to 0.2% y/y in August with slim risks to the upside. We expected QE to be launched early 2015 and remain bearish on EUR verse the USD. UK Gfk consumer confidence anticipated to rise to -1 in August, verse a July reading of -2. Swiss KoF leading indicator is expected to fall to 97.8 in August, from 98.1 print in July. Market will be watching the evolution of EURCHF as it grinds lower to 1.200 SNB threshold, in light of geopolitical concerns and expectations for ECB easing.