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Dovish comments from Fed's Yellen put the brakes on the dollar's rebound

Wed, Jul 1 2009, 06:18 GMT
by Saxo Bank Strategy Team

Saxo Bank

Heavy data slate today will look to confirm, or rebut, the green shoots theory

MAJOR HEADLINES – PREVIOUS SESSION

Headlines – previous session

US Apr. S&P/Case-Shiller Home Price Index out at -18.12% y/y vs. -18.63% expected

US Jun Chicago PMI out at 39.9 vs. 39.0 expected and 34.9 prior

US Jun Consumer Confidence out at 49.3 vs. 55.3 expected and 54.9 prior

AU AIG Jun Performance of Manufacturing out at  38.4 vs. 37.5 prior

JP Q2 Tankan Lge manufacturers Index out at -48 vs. -43 expected and -58 prior

fvJP Q2 Tankan Lge Manufacturers Outlook out at -30 vs. -34 expected and -51 prior

JP Q2 Tankan Non-manufacturing out at -29 vs. -27 expected and -31 prior

JP Q2 Tankan Non-manufacturing Outlook out at -21 vs. -23 expected and -30 prior

AU May Retail Sales out at +1.0% m/m vs. +0.5% expected and +0.3% prior

AU May Building Approvals out at -12.5% m/m vs. +3.3% expected and +5.1% prior

China Jun Manufacturing PMI out at 53.2 vs. 53.1 prior

China Jun CLSA Manufacturing PMI out at 51.8 vs. 51.2 prior

THEMES TO WATCH – UPCOMING SESSION

Themes to watch – upcoming session

GE Retail Sales (0600)

Sweden Manufacturing PMI (0630)

Sweden Riksbank Rate Announcement (0700)

Denmark retail Sales (0730)

Swiss Manufacturing PMI (0730)

EU Manufacturing PMI (0800)

UK Manufacturing PMI (0830)

US ADP Hiring Report (1215)

US ISM Manufacturing Index (1400)

US Pending Home Sales (1400)

US Construction Spending (1400)

US Fed’s Evans speaks (1515)

MARKET COMMENTARY

The first half of 2009 closed with a quick change in direction for the greenback after the US consumer confidence numbers for June disappointed. The Conference Board’s monthly index fell to 49.3 versus an expected 55.3 and 54.9 the previous month, marching in tandem with the deterioration in the weekly ABC data series. This was enough to negate the brighter numbers from the Chicago PMI which beat forecasts with 39.9 versus 39.0 expected. The USD received a lift from a reduction in risk appetite while Wall St slumped, though all indices managed finish Q2 with strong gains, the S&P posting its biggest quarterly gain since Q4 1998.

The heavy data schedule at the start of the new month got off with a bang in Asia. Japan’s Tankan displayed mixed results with the current indices showing a worse than expected number but the outlook indices registering better numbers. However, there was more caution by Japanese firms with regard to capital expenditure and this lent a mildly negative air to the overall data. USDJPY firmed a tad immediately following the release with a subsequent, later, more-significant gain more attributed to Fitch’s downgrading of Toyota’s long-term foreign and local currency ratings from AA to A+ while Moody’s also expressed a negative outlook for Japan’s F&B sector.

The next data of note came from China where the Jun official PMI rose marginally to 53.2 from 53.1 prior, the fourth straight month it has been in expansionary territory above 50, but was slightly disappointing compared to expectations. The private CLSA reading showed a better improvement from 51.2 to 51.8. The major impact from the China data was seen in the AUD, as the Australian economy is seen as heavily reliant on Chinese growth. The AUD was already under a bit of pressure following a dire buildings approvals number in May, which fell off a cliff to -12.5% m/m from +5.1% in April, and overshadowed a more respectable retail sales number at +1.0% m/m from +0.5% previously. However, the AUD is still holding onto the 0.8000 handle at time of writing.
Finally, if one wanted some positive data to preserve the “green shoots” hypothesis for the global economy one could look a South Korea’s trade numbers for June. While exports were down y/y, the fall was much lower than expected and the value of daily shipments rose for the fifth straight month. Bearing in mind that the US and China take about one-third of South Korea’s total exports, the data reinforces the positive factory output, capital investment and manufacturer’s confidence data seen earlier this week.

Aside from the data, market sentiment was driven by some extremely dovish comments from the Fed’s Janet Yellen. She was not optimistic that the US economy would bounce back to normal anytime soon and the jobless rate would likely deteriorate and it would take several years to return to full employment. She added that the risk was that inflation would stay to low, not too high, over the next few years. It was also possible that US rates would stay near zero for a couple of years, she added, noting that the Fed would not repeat the blunder of the 1930s in tightening policy too early and choking off the recovery. The most dovish, and possibly realistic, comments to data and are expected to be USD bearish near-term.
The theory of green shoots will be challenged with data releases in coming days. First off today for the European session we have the slew of PMI data for Europe. Again regarded as a more forward-looking indicator, markets will need to see an extension of the improvement seen last month in order to preserve the momentum in risk appetite. Later, the US sees the private ADP employment report, the precursor to tomorrow’s early non-farm payroll release, and the ISM data for the manufacturing sector. Note Canada is away today.

Published on  Wed, Jul 1 2009, 06:36 GMT