Commodity currencies flailing for support. AUD to drop on metals and equity rout?
MAJOR HEADLINES – PREVIOUS SESSION
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New Zealand Jul. Card Spending rose +0.8% vs. -1.0% in Jun.
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UK Jul. BRC Retail Sales rose +3.6% YoY and same store sales rose 1.8% (unadj. for inflation)
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UK Jul. RICS House Price Balance out at -8.1% vs. -10% expected and -17.6% in Jun.
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Australia Jul. NAB Business Confidence rose to 10 vs. 4 in Jun.
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China Jul. Producer Price Index fell -8.2% YoY vs. -8.3% expected and -7.8% in Jun.
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China Jul. Consumer Price Index fell -1.8% YoY vs. -1.6% expected and -1.7% in Jun.
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China Jul. Retail Sales rose 15.2% YoY vs. 15.0% expected
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China Jul. Industrial Production rose 10.8% YoY vs. 11.5% expected
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China Jul. Exports fell -23.0% YoY as expected and vs. -21.4% in Jun.
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China Jul. Imports fell -14.9% vs. -15.0% expected and vs. -13.2% in Jun.
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Bank of Japan left Target Rate unchanged at 0.10% as expected
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Japan Jul. Consumer Confidence rose to 39.7 vs. 38.0 expected and 38.1 in Jun.
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Germany Jul. Wholesale Price Index out at -10.6% YoY vs. -9.7% expected and -8.8% in Jun. Sweden Jul. CPI out at -0.5% MoM vs. -0.6% expected
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UK Jun. Visible Trade Balance out at £6451 vs. £6200 expected
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UK Jun. DLCG House Prices out at -10.7% vs. -12.0% expected
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Canada Jul. Housing Starts fell to 132.1k vs. 145.k expected and 17.8k in Jun.
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US Q2 Nonfarm Productivity rose 6.4% vs. 5.5% expected and 0.3% in Q1
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US Q2 Unit Labor Costs dropped -5.8% vs. -2.5% expected and -2.7% (revised from +3.0%) in Q1
THEMES TO WATCH – UPCOMING SESSION
(All times GMT)
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US Jun. Wholesale Inventories (1400)
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US Weekly API Crude Oil and Product Inventories (2030)
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US Weekly ABC Consumer Confidence (2100)
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Japan Jul. Domestic CGPI (2350)
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Australia Aug. Westpac Consumer Confidence (0100)
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Australia Q2 Wage Cost Index (0130)
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Japan BoJ Monthly Report (0500)
Market Comments:
The data from China last night was largely as expected - clearly the credit gasoline has helped bolster consumption domestically as Retail Sales continue to grow at a very rapid clip even while Industrial Production. We all have to wonder what exactly the Chinese factories are producing more of than last year with Exports dropping at a steep -23% year-on-year clip. Apparently (or should we say supposedly), the massive continued investments in infrastructure and increase in domestic consumption are picking up the slack from markets abroad. Another interesting data point that sets up heightened interest in the sustainability of the Chinese economic trajectory is the New Yuan Loans data, which showed a steep drop to CNY 356 billion in July vs. CNY 500 billion expected and a shocking 1530 billion in June. This is apparently due to an attempt by the Chinese authorities to limit the risks of a new bubble forming in equities and property markets. This fall and winter will be an interesting stress test for the Chinese economy.
Action in the currency markets ahead of tomorrow's key FOMC meeting show a continuation of the risk aversion moves over the last few trading sessions, even as major equity markets so far continue to resist a steep sell-off.
EM currencies are particularly weak in the knees over the last couple of days and the JPY has come storming back now that US treasuries took back all of the ground they lost after the positive US employment report on Friday . It appears the stars are beginning to realign in terms of the positive correlation of USD and JPY strength. Among the G-10 currencies, the Swedish krona has been the weakest performer over the last couple of days, which makes sense in light of the increasingly shaky CEE currencies, and especially Latvia's debt downgrade and terrible GDP report. EURSEK is already testing the key 10.37 resistance area that was the previous low since November of last year and close to the old head and shoulders formation neckline.
US productivity and unit labor cost data for Q2 was a shocker, showing massive increase in productivity and drop in unit labor costs as companies launch an all out effort to enhance profitability with a reduced cost structure. The paradox of savings will most certainly ensure that this trend is unsustainable. It is also another piece of the weak end demand picture. No on has a plausible explanation of where end demand will come from in a recovery scenario - except for those who claim that the government is the only potential source of increased demand. Let's see the latest weekly US ABC consumer confidence number later today to see how Americans like "losing jobs at half the rate as when I took office" as Obama put it.
It appears from the broader market action that risk aversion will continue to drive the market here - USDCAD is swooshing above 1.1000 after its amazing foray all the way below 1.0800 recently. EURUSD is perched close to the key short term rising trendline around 1.4100, which could trigger a go at 1.3750 eventually. AUDUSD Is somehow remaining a bit resilient, but is likely a massive accident waiting to happen if this action continues.
Goldman Sachs was out indicating that it thought the metals rally is overdone yesterday. If they are right (gold is already beginning to look worse than hobbled on the latest USD strength) and major equity markets follow the lead of the weaker action in emerging markets, then AUDUSD may have a date with 0.8000 very soon. The key short term event risk, of course, is the FOMC monetary policy statement tomorrow and the market's reaction to it. The Fed is unlikely to give any hint of a more hawkish policy, considering the massive slack in the economy, it likely thinks that it has endless time to "wait and see". The risks are slanted toward a continued correction in risk appetite.
Chart: GBPJPY
GBP has been a weak performer over the last couple of days. The watershed announcement by the BOE that they were expanding QE programs and the general risk aversion of the last couple of sessions are outweighing the continued stream of better than expected numbers - the latest being the RICS House Price Balance showing a -8% reading. Are we to expect sustainable UK house price appreciation? Hardly. If the FOMC helps to set off a further round of treasury buying, then the JPY will continue to be the star performer here in the near term and downside momentum in GBPJPY, which recently saw its attempt above the previous 162.50 area high firmly rejected.
