USDJPY on the bid after US data as bonds feel the pain of a higher than expected US PPI number.
MAJOR HEADLINES – PREVIOUS SESSION
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UK Aug. RICS House Price Balance out at 10.7% vs. 0.0% expected and -5.7% in Jul.
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Australia Q2 Dwelling Starts fell -3.7% vs. +2.0% expected and -2.1% in Q1
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China Aug. Foreign Direct Investment was off -17.52% YoY YTD vs. -2.03% in Jul.
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New Zealand Aug. Non-resident Bond Holdings dropped to 74.5% from 76.6% in Jul.
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Switzerland Q2 Industrial Production rose 2.7% QoQ vs. +7.3% expected
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Norway Aug. Trade Balance out at 24.9B vs. 30.8B in Jul.
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UK Aug. RPI out at +0.5% MoM vs. 0.2% expected
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UK Jul. DCLG House Prices fell -8.3% YoY vs. -9.5% expected and -10.7% in Jun.
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Germany Sep. ZEW Survey (expectations) rose to 57.7 vs. 60 expected and 56.1 in Aug.
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EuroZone Q2 Labor Costs rose 4.0% YoY vs. 3.4% expected and 3.6% in Q1
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US Aug. Producer Price Index rose 1.7% and 0.2% ex food and energy
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US Aug. Advance Retail Sales rose 2.7% and 0.6% ex Autos and Gas vs. 1.9%/0.0% expected, respectively
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US Sep. Empire Manufacturing was out at 18.88 vs. 15.0 expected and 12.08 in Aug.
THEMES TO WATCH – UPCOMING SESSION
(All times GMT)
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US Jul. Business Inventories (1400)
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US Fed's Bernanke to Speak (1400)
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US Weekly API Crude Oil and Product Inventories (2030)
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US ABC Weekly Consumer Confidence (2100)
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Australia Jul. Westpac Leading Index (0100)
Market Comments:
At the last BoE meeting, sterling got some measure of relief as the bank decided not to move forward with rumored measures to cut the deposit rate for banks who held their reserves at the central bank. Today, however, the Bank confirmed that it is considering making such a move and GBP took an enormous hit versus the broader market, swooning all the way back below 1.6500 vs. the USD and sending EURGBP to a new since June.
The purpose of such a move is to jump start lending by the banks, who are hoarding capital as they try to repair their balance sheets and all manner of ugly assets they still contain. The very weak sterling yesterday came with very little to no news flow and one has to wonder if someone was in the know beforehand - very suspicious. In any case, the pound has been very consistent in reacting to every move from the BoE during this part of the cycle. But is this reason to completely give up on the pound vs. the single currency? The ECB has been very dovish of late and has further to move in that direction if conditions warrant - which they may. Let's see if EURGBP pays any to the 200-day moving average up around 0.8885, just above today's high thus far.. This sell-off in GBPUSD has been rather damaging to the up-trend - see more in today's chart. Meanwhile, the RICS House Price Balance number was far better than expected and suggested that more estate agents are seeing rising rather than falling prices in the housing market.
The RBA statements at its last meeting at the beginning of this month were far less hawkish than expected, suggesting that an October hike the market was trying to price in was somewhat premature. The minutes released overnight confirm that the RBA's trigger finger is less than itchy at the moment, as it sought to avoid "premature tightening". It is a bit surprising to see AUD not biting a bit more to the downside on this story and recent, less than inspiring data from the Australian economy. It looks like Aussie traders are following the moves in risk appetite in equities (scratched to new highs yesterday) and gold, which has recently topped the 1000-dollar an ounce mark.
The Fed's Yellen was out with a rather dour speech about the economy and warned that deflation risk was greater than inflation risk. She recommended that the administration do more to support job growth.
Meanwhile, Obama is going a bit out on a limb by declaring that the job losses are "bottoming out" . Meanwhile, the treasury is considering unloading its share of Citibank for a significant profit (if it can get current market prices). Now if that isn't a signal that the rally in equities has moved too far, we'd like to know what is?
The German ZEW was uninspiring, with the current conditions part of the index still rather gruesome, even if the expectations part of the survey notched a marginal new high for the cycle. This survey is symptomatic of the kind of hope that is out there for a strong recovery and suggest show much optimism is already priced in here.
The expectations component has topped out around 70 three times in the last ten years, so we are already most of the way to the "top" after bottoming out at a remarkable -60 in October of 2008. It's great if reality turns out to be so rosy, but scary to contemplate the disappointment if the future proves more humdrum.
The US data was far stronger than expected in the headlines and saw the paradoxical re3action of the USD heading weaker after the data (USD moving in inverse correlation with risk appetite, bla bla....), though not convincingly. This is getting a bit silly - if the US is really in recovery mode, then this should eventually be a positive for the dollar. Looking at the internals of the retail sales data, it looks like much of the strength outside of Autos and Gas was due to back to school shopping (strength in clothing, general merchandise, book and sporting goods stores). The US PPI rose more than expected and bonds are selling off heavily, boosting USDJPY to new highs on the day. The JPY will be very sensitive to any further sell-off in fixed income. 91.75/92.00 looks like a key area of resistance for that pair.
Watch out for Bernanke's appearance today and the weekly US ABC Confidence reading tonight.
Chart: GBPUSD
GBPUSD topped out around that 0.618 Fibo for the move from the 1.70+ top to the 1.61 area low. The recent high, therefore is a key obstacle for the bulls. To the downside, we have brushed up against the 55-day moving average in today's trade - which has been an important MA in the recent past. Any larger extension in the GBPUSD sell-off will likely require that the USD is showing healthier rally signs elsewhere as well.
