News and views
Risk appetite recovers after Shanghai closes. After a wild Asian session which saw Chinese equity markets sharply lower and a quick snap to risk aversion, currencies recovered losses through the London and NY session. European stocks refused to follow the Asian lead and closed with gains while the S&P500 was also up by a reasonable 1.1%. Commodities had a better session, bond yields rose and the US$ lost ground. The Fed sounded more upbeat on the economy noting that the economy was “levelling out” from “pace of contraction is slowing”. And the Fed also announced that it had “decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October”. 10 year bond yields rose to 3.75% though bidding on the 10yr auction into the Fed statement cannot have been an easy task for traders. Commodities had a better session with copper registering modest gains, crude settling up just over 1% on NYMEX and a bit more focus on sugar which is pushing 30 year highs.
EUR had a choppy session wobbling to 1.4120 over the Fed statement but recovered to 1.4218. GBP shrugged of a dovish BoE to bounce back above 1.65. AUD saw strong gains from sub 0.8200 to a high of 0.8327. And NZD hit a high of 0.6720.
US trade balance improved to -$27bn as exports grew at a faster pace than imports for June, while the real trade balance improved as well to -$35.9bn.
The FOMC further upgraded its view on the US economy, noting that activity is “levelling out” as opposed to contracting at a slower pace as in the previous statement. Despite this, they continue to commit to keeping policy settings easy for an extended period of time. The FOMC also announced that they would slow the pace of the final stages of their $300bn Treasury purchase programme, so that it will now be completed at the end of October instead of September.
Japanese July corporate goods prices rose 0.4% in the month to be down 14.3%yr. Raw materials prices are the major contributor to that rate of decline, being down 42.1%yr in July. They are however also the only real source of upward pressure in the monthly change, with a 2.0% rise. Final stage goods fell 0.2% in July, contributing to a fifth successive fall in the year-ended rate of inflation (i.e. deeper deflation).
Eurozone industrial production fell 0.6% m/m in June, reversing the 0.6% May rise and holding the annual figure to -17.0%, worse than market expectations.
UK labour market data was mixed. The ILO unemployment rate rose to 7.8% in the three months to June, up from 7.6% previously and the highest in 14 years while the claimant count rose by 24.9k, less than expected. Average earnings rose 2.5% over the past quarter, when compared to a year ago.
The Bank of England Inflation Report was released for August. Governor King’s statement was modestly dovish, as was the report but no more so than market participants were expected. The report did note that inflation is anticipated to be volatile in coming quarters due to specific factors impacting on the annual rate (VAT and energy) and that CPI growth might fall temporarily to below 1% – inciting an open letter to the Chancellor. Overall, the Bank’s expectation is that the economy is more likely to grow from here than contract but the recovery will be slow and prolonged.
Canadian trade balance improved to -$0.055bn for June on higher oil receipts to the US and a rise in the price of oil. Over the past three months, however, exports continued to fall by more than import contraction. The Canadian trade balance on a monthly basis remains just off its historical lows of -$1.108bn seen in January of this year.
Outlook
The NZD held the important 0.66 breakout point yesterday allowing us to retain our upward bias on NZD/USD near term as global data momentum still remains favourable for commodity currencies in our view.
