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Global
central bank and government actions will continue to be extremely
important in the short-term with a potentially very important set of
events due in September. The ECB will be looking to enact bond
buying next month, but there could still be important barriers,
especially with political stresses within Germany. There will be major
concerns surrounding the Greek outlook and default threat There will be
pressure on the US Federal Reserve to relax policy further with the
next FOMC meeting due in September.
Key events for the forthcoming week
Date
| Time (GMT)
| Data release/event
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Wednesday August 22nd
| 18.00
| US FOMC minutes
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Thursday August 23rd
| 07.30
| Germany PMI index manufacturing
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Friday August 24th
| 08.30
| UK GDP (Q2 revised)
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Dollar:
There have been mixed US economic
releases over the past week with some relief over the latest retail
sales data and a solid housing-sector release offset by weak releases
for the latest regional PMI surveys. There will be a further discussion
of Federal Reserve policies ahead of the September FOMC meeting and
comments from Fed Chairman Bernanke will be watched very closely at the
end of August. Risk appetite has held relatively firm and there have
been further hopes for quantitative easing which will tend to limit
underlying defensive dollar demand. There should still be solid dollar
buying support on dips given the underlying global risks.
The dollar edged
weaker during the week as a whole with a retreat to two-week lows,
although ranges were relatively limited. The latest US retail sales data
was stronger than expected with a 0.8% increase for July from a revised
0.7% decline the previous month while there was also a core 0.8%
increase. Although there was a decline in consumer confidence for the
month, the data did lessen speculation over further Federal Reserve
quantitative easing to some extent which also helped underpin US yields
and provided some net dollar support.
The latest US consumer inflation
data was weaker than expected with no increase in headline prices while
there was a 0.1% increase in core prices to give a 2.1% annual
increase. The data will maintain expectations that the Fed will not feel
constrained by inflation considerations if it deems further
quantitative easing necessary.
The latest New York PMI
index was substantially weaker than expected at -5.9 for August from 7.4
previously and this was the first negative reading for over 18 months
while the Philadelphia Fed index was weaker than expected at -7.1 from
-12.9.
The other data was more supportive with industrial
production rising 0.6% while there was a the strongest NAHB
house-building index for five years at 37. Housing starts edged lower,
but permits rose to a fresh five-year high of 0.81mn which provided
support. Initial jobless claims were little changed at 366,000 from a
revised 364,000 The Bloomberg consumer confidence index also dipped to a
nine-month low.
There have been mixed data releases over the
past week and the overall analysis has been that the Federal Reserve is
less likely to move to additional quantitative easing in September.
Markets, however, seem reluctant to believe this analysis as equity
markets maintained a firm tone.
| Euro |
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Market
tensions will remain very high in the short-term with a further period
of uncertainty ahead of key events during September. There will continue
to be some degree of optimism surrounding potential bond purchases by
the ECB, but this will also be offset by underlying uncertainty
surrounding the potential constraints imposed by the German government
and by the Constitutional Court if it imposes conditions on the ESM
introduction while any rejection would be a severe Euro setback. There
will also still be important underlying concerns surrounding the Spanish
outlook and the need for a sovereign support package. Overall, the Euro
will struggle to make significant headway.
The Euro was
able to edge slightly higher during the week as a whole, although
momentum was lacking with no attempt at breaking above the 1.2440 level.
There
were reports that there could be a further delay to the German
Constitutional Court ESM ruling. A new lawsuit had been filed which
demanded that a ruling needed to be delayed until another lawsuit had
been ruled on in the European Court of Justice.
There were
slightly better than expected GDP releases from Germany and France, but
there was a second-quarter 0.2% contraction for the Euro-zone as a whole
which was in line with expectations. The data maintained unease over
both the economy as a whole and the rate of deterioration in the
peripheral economies which will increase internal stresses. The German
ZEW index weakened for the fifth successive month with a decline to
-25.5 for July from -19.6 previously.
Spanish Prime Minister Rajoy stated
that the government had still not decided whether to request a
sovereign bailout as it needed further details on conditions which would
be attached. There were indications that the German Constitutional
Court still wanted to make its ESM ruling on September 12th despite the
other lawsuits being submitted, although the situation could change
rapidly.
There was a significant decline in Spanish bond yields
during the day with 10-year yields declining to a 1-month low which
helped underpin Euro sentiment, especially with advances for European
equity markets.
German Chancellor Merkel repeated that
all measures would be taken to protect the Euro and also reinforced the
necessity of conditionality. These comments maintained pressure on the
Spanish government to apply for EFSF support which would be one
condition before the ECB could consider buying bonds.
There were
still very important underlying political stresses and unease
surrounding the Greek situation with Prime Minister Samaras due to meet
Euro-zone leaders over the next few days in an attempt to secure easier
loan terms and further financing.
Yen:
There
has been a shift in relative yields over the past week with rising
yields important in providing initial dollar support. The possibility
of further monetary easing in the US and Euro-zone will still tend to
underpin the yen in the short-term. The Japanese currency will
also continue to gain underlying support from unease surrounding the
regional economy and a lack of growth in the global economy. The Bank of Japan
will continue to be an important focus in the short-term and there will
be pressure for the central bank to relax monetary policy further to
help support competitiveness.
There was net dollar support
from a further significant rise in US Treasury yields which helped
underpin the dollar. The relationship between the dollar/yen rate and
US yields remains very important and there will be reduced interest in
yen buying if US yields remain higher with the dollar pushing to
one-month highs above 79.50.
There will be further concerns
surrounding the regional economy and pressure for China to maintain
competitiveness which will also maintain pressure for the Bank of Japan
to resist any yen gains. There will still be an increase in exporter
selling as the dollar rises, especially if it moves towards the 80
level.
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| Sterling |
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There will be further concerns surrounding the UK economic outlook with
fears over further short-term weakness. There will also be an important
element of uncertainty, especially as there has been conflicting
evidence from recent economic data. There will be net expectations that
the Bank of England will move to additional quantitative easing within
the next few months. Evidence of a domestic rebound would provide some
degree of support for Sterling, but it will be difficult to make much
headway, especially as defensive demand as an alternative to the
Euro-zone is liable to be weaker.
Sterling was able to
secure an advance against the dollar with a peak in the 1.5750 area
while Sterling pushed to two-week highs beyond 0.7850 against the Euro.
The
latest inflation reading was significantly higher than expected with an
increase to 2.6% from 2.4%, contrary to expectations of a further
decline. There was also a higher than expected reading for core
inflation as there was less discounting than normal for the month as
prices had already been cut to boost demand.
The latest
labour-market data was stronger than expected with a 5,900 decline in
the claimant count for July following a revised 1,000 increase the
previous month and the ILO unemployment rate also declined to 8.0% from
8.1% as employment was boosted ahead of the Olympics. There were
concerns that unemployment would increase again once the games had
finished which dampened the impact.
The Bank of England minutes
from August recorded unanimous votes to keep interest rates and the
amount of quantitative easing on hold at the meeting. The majority of
members were content to assess the impact of previously-announced bond
purchases, although a minority did consider further action at this
meeting.
The headline retail sales report was stronger
than expected with a 0.3% gain for July while there was a significant
upward revision to the previous month’s data to 0.8%.
Sterling
continued to gain net support from buying support on the crosses as the
Euro retreated to two-week lows near 0.7810 before a tentative rebound.
Swiss franc:
There will be further concerns over potential deflation within the economy and there will be continuing pressure on the National Bank
to maintain the minimum Euro level. There will still be important
uncertainties surrounding the policy, especially if the bank has to
maintain or increase very high intervention levels as this would be an
important medium-term source of instability. For now, the bank is likely
to maintain a determined stance, but there will still be medium-term
uncertainties, especially if Euro-zone fears intensify.
The dollar retreated to lows around 0.97 against the franc during the week with the Euro trapped close to the 1.2010 area.
There
was a slightly weaker than expected reading for producer prices with a
0.3% decline for the month and an annual 1.8% fall. The data will
maintain expectations that the National Bank will continue to
maintain the minimum Euro level to stave-off the deflation threat,
although wider Euro-zone political and economic pressures are likely to
dominate Swiss franc trends and policies.
Rumours that the
National Bank was diversifying its Euro holdings increased speculation
that the bank was still being forced to intervene aggressively to
prevent the Euro weakening.
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| Australian dollar |
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The Australian dollar
hit resistance close to 1.06 against the US currency during the week
and retreated to lows towards 1.0450 where solid buying support did
emerge.
Domestically, a decline in consumer confidence was offset
by a rise in business confidence and the overall impact was limited as
global trends tended to dominate.
Although there were further
concerns surrounding the regional economic outlook, commodity prices
were generally firm which helped curb selling pressure.
The
Australian dollar will find it difficult to advance significantly,
especially given the decline in key commodity export prices and regional
growth fears.
Canadian dollar:
The
Canadian dollar maintained a robust tone against the US currency during
the week and challenged levels beyond 0.99 against the US currency. The
currency was boosted by a rise in oil prices during the week.
The domestic influences were limited with net reported capital outflows following substantial inflows the previous month.
Concerns
surrounding the global economy will tend to limit scope for further
significant Canadian dollar gains even if a near-term robust tone is
sustained.
Indian rupee:
The Indian rupee was
generally on the defensive and dipped to 2-week lows near 56 against
the US currency. There were further concerns surrounding the trade
outlook following recent weaker than expected data and the concerns were
heightened by rising oil prices which also had a direct negative impact
on the rupee.
The government continued to pledge greater reform
efforts in order to boost growth and the local stock market was broadly
resilient.
Persistent doubts surrounding the regional economy
and the impact of high energy costs will continue to limit the scope for
rupee gains even if losses are contained.
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| Hong Kong dollar |
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The Honk Kong dollar found some degree of support on dips towards 7.7580 against the US dollar during the week while there was resistance close to 7.7550. The Hong Kong currency
was unsettled by persistent doubts surrounding the mainland Chinese
economy while the rise in US Treasury yields provided some degree of US
support.
Unease surrounding the Chinese economy should prevent serious near-term pressure on the stronger limit of the currency band in the short-term.
Chinese yuan:
The yuan had
a slightly weaker tone for much of the week before edging back towards
the 6.36 area and ending little changed. The PBOC set the weakest
reference rate of the year before strengthening the rate late in the
week as the US dollar lost support.
There were further concerns surrounding the Chinese economic outlook
with unease surrounding the housing sector and a decline in inward
investment increased speculation that there would be a combination of
weaker growth and capital outflows.
There were further expectations that the PBOC would look to relax monetary policy further, especially with weaker export growth.
The
yuan will remain vulnerable to underlying selling pressure with
important concerns surrounding the economy and pressure to maintain
export competitiveness.
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