News and views
US investors returned from their long weekend in a positive mood, helping send risk assets higher and the US dollar lower. The S&P500 closed up 0.7%, with gains in metals boosting the profit outlooks for raw materials companies such as Alcoa. Copper gained 2.8%, while oil was 4.8% higher ahead of tomorrow’s OPEC meeting, the dollar’s decline and inflation expectations cited as factors. A choppy US treasuries session ended with yields only 2bp higher, the strong 3yr auction result balanced by concerns over tomorrow’s $20 billion 10yr auction. US 3mth Libor is now at 0.30%, 7bp lower than yen Libor, a post-1993 record. The IMF said the crisis is “almost certainly behind us”, and revised its Eurozone GDP forecasts for 2009 and 2010 higher.
The US dollar’s decline may have been helped by a UN report recommending the dollar, as a world reserve currency, be replaced. The DXY broke below key support at 77.43 and now targets 75.90. EUR woke from its 24 hour slumber in London and powered from 1.4350 to 1.4535 (a new 2009 high) in the majors’ performance of the session. GBP’s 1.6350 to 1.6587 move was respectable enough, but not sustained, currently just under 1.6500. Yen strengthened (supporting the antidollar thesis) from around 92.80 to 92.04.
AUD continued higher, clearing 0.8580 resistance with ease and setting a new 2209 high at 0.8658, before settling around 0.8630.
NZD followed the majors, reaching 0.6984 (also a 2009 high) and currently congests around 0.6965. AUD/NZD remained in its mid-channel congestion area at 1.2380, earlier spiking to 1.2420.
Japan’s current account narrowed in July, bank lending softened in August. The bank lending result was entirely predictable, as the spike in demand for working capital late last year gives way to an investment ice age. On the current account side, a somewhat surprising narrowing of the income surplus and a softer trade position left the overall balance ¥640bn slimmer.
German trade surplus rose to €13.9bn in July. Export values for the world’s biggest exporter rose for a third straight month, while imports were flat.
German industrial production fell 0.9% in July, weaker than market forecasts, though partly offset by an upward revision for June from -0.1% to 0.8%. The annual pace of decline slowed only slightly to -17%. We would expect the strong orders inflow of recent months to translate into a pickup in production soon.
UK industrial production rose 0.5% in July, following an upwardly revised 0.6% gain in June. This result adds weight to the view that the UK economy bottomed out sometime in the second quarter, though activity remains well below peak levels (production was down 9.7% on a year ago).
UK same-store retail sales fell 0.1% y/y in August, after a 1.8% y/y increase in July. The British Retail Consortium noted that warm weather and discounting were behind the strength in June and July.
Canadian building permits fell 11.4% in July, mainly because of a strike by civic workers in Toronto. Residential permits were down 4.1%, the first drop in five months.
Outlook
AUD and NZD outlook today: Both AUD and NZD have taken leadership among the majors in this bullish phase, and their recent upward breaks through key resistance levels argue for more to come. Our tactical recommendation is to buy on dips, particularly back to 0.8500 and 0.6900. There’s enough Australian data today to provide short-term trading opportunities, the big question being whether retail sales, consumer sentiment and housing finance have started to moderate after a strong run. In NZ, electronic transaction data should hint at an improved retail sales report ahead.
