News and views
Old habits die hard. Traders have gotten very used to the risk on/risk off environment that has existed for FX markets for the best part of the last year whereby good US data has been bad for the US$ and vice versa. However, in a significant break on Friday, correlations started to move. The US$ found strength in the US non-farm payrolls report and importantly it held the bid tone for another session in London and NY with the DXY gaining circa 0.5%. Oil prices settled slightly lower and other commodities tended to follow the dollar move.
A wobble in equity markets added to the improved US$ bid tone. The Shanghai market pushed through the Friday’s lows as markets debated how active the PBoC might become as it tried to pull back loan growth. And the UK markets were also hit as Lloyds hinted at a massive GBP15bn rights issue and institutional investors shrugged their shoulders. GBP was hit hard with a low of 1.6432 while EUR also spilled lower to hit 1.4105. AUD was hit to a low of 0.8331 while NZD hit lows of 0.6694. The cross continued to move lower hitting a low of 1.2368 as longs continued to bail out.
Japan credit data remains sluggish. July M2 edged up 0.2%mth to 2.7%yr from 2.5%yr in June, matching April-May 6-year high. Broad liquidity continued at a (revised) –0.1%yr pace. July Bank Credit (including Shinkin) slowed to 2.1%yr from 2.4%yr.
Japan current account surplus narrows on seasonals. June current account surplus reported at ¥1,153bn not seasonally adjusted following a ¥1,302bn in May. The merchandise trade surplus rose to ¥602bn from ¥387bn, in line with the customs data, with exports still weak at –37.0%yr, though an improvement from –42.2%yr, and imports –43.8%yr. The –¥63.5bn in net transfers, and the services balance at –¥116bn were a modest improvement, while the income surplus of ¥730bn was a largely seasonal narrowing from the ¥1183bn in May.
Japan core machinery orders rebounded in June. Rising 9.7%mth, core machinery orders are now down “just” –29.7%yr from –38.3%yr in May. Together with June foreign orders rebounding 43.8%mth to –57.8%yr from –73.7%, it translated into a rise in total machinery orders of 2.3%mth, –40.9%yr from –44.6% in May and record –49.4%yr in January.
European Sentix investor confidence rose from -31 to -17 in July, returning to its upward trend after a small dip in June. Expectations rose by 8pts, reversing the fall in June, while current conditions rose by 15pts to -39. The survey tends to follow trends in equity markets, so the resumption of the rally in July will have driven this result.
Outlook
How long the US$ continues to strengthen remains to be seen. But with a number of key US risk events due later in the week (FOMC and retail sales) plus a slab of Chinese data due today, traders will have a lot to watch. The NZD risks testing the key 0.6600 break-out point, a level which needs to hold if our more upbeat medium term outlook is to remain in place.
