RBA minutes less dovish
UK inflation data due this morning
Ben Bernankes testimony the focus
FX Market Overview
After a quiet day for Europe yesterday events in the United States took centre stage with disappointing data forming the catalyst for some sustained dollar weakness. The July Empire manufacturing survey indicated that manufacturing activity expanded only modestly over the month. The index actually climbed by 5 points however the new orders component contracted for the first time since November 2011. Perhaps more importantly US Retail sales for fell 0.5% in June. The American consumer is vital to the health of the global economy and this is the third month in a row that they have cut their spending, this has not happened since Autumn 2008 which was the height of the financial crisis. It is hardly surprising that consumers are more cautious with the economy stuttering and unemployment hovering above 8.0%. Ben Bernanke’s testimony cannot come at a more opportune time and investors will certainly be looking for any clues as the chance or timing of further quantitative easing to kick start the US economy.
Risk appetite was hindered after the IMF downgraded its forecast for global growth again. One of the biggest revisions was to the UK, which may grow only 1.4% in 2012, down from 2%. The IMF also said that the Euro area will remain in a precarious situation unless leaders take further action to avoid the sovereign debt crisis from escalating and Europe also needs to be committed towards forging a complete monetary integration by pursuing banking and fiscal union. Quite how this sits in Germany where Angela Merkel stated at the weekend that there would be no chance of her government writing a blank cheque without a significant transfer of sovereignty to Berlin, only time will tell. It would seem that we are at an impasse and it will be interesting to see if there are any positive developments at this weeks Eurogroup summit due to start on Friday.
Overnight The Australian dollar strengthened after minutes from the latest Reserve bank of Australia ( RBA) meeting suggested growing confidence in the economy. Although the data has been mixed of late with consumer confidence rising and retail sales increasing. Unemployment is on the up and home loan approvals have sunk. Australia has grown at the fastest pace in the developed world in the first quarter of 2012 and with Chinese growth not quite as disappointing as expected the RBA decided t keep their powder dry for the time being. They are naturally keeping an eye on developments in Europe and would be ready to act if the situation deteriorates.
The early focus today will certainly be inflation data due at 9.30. Consumer Price Inflation (CPI) has been falling over the last few months and policy makers will be hoping this continues. Expectations are for a rise of around 2.7% in June. With petrol prices lower another fall in CPI would be welcome and give further justification for the recent £50Bln worth of extra Quantitative easing from the Bank of England. An uptick in inflation would be a worry and will support the Pound.
US Consumer price inflation ( CPI) and industrial production precede the main event of the day which is Ben Bernanke’s ( Chairman of the Federal Reserve) testimony to congress. The chances of a surprise are pretty high given the downside bias of the Feds economic forecast. The market will look to the language within the testimony and will pay attention as to whether “further deterioration” in the data is needed for QE3 to be launched or if the “continuation of current weakness” will be a sufficient trigger. I doubt Mr Bernanke will make any firm commitments and will leave the door open to take action if necessary. The Chairman’s policy stance is well known as he is happy to throw money at the problem, the only issue is whether there is a need/room for more QE this side of the election or , more probably, in the new year. The dollar is already weakening in anticipation and there is likely to be significant volatility around the testimony.