Daily Weekly Commentary

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Daily Weekly Commentary

Global central bank and government actions will continue to be extremely important in the short term ahead of critical events during September. There will be expectations of monetary easing by the Federal Reserve and ECB, although there will still be a high degree of uncertainty over the situation. There will also be major tensions surrounding the Euro-zone outlook with crucial negotiations surrounding Spain, Italy and Greece with market volatility likely to increase sharply.

Dollar: The US economic data releases have not shown a major trend, although the net outcome has been slightly more positive. Federal Reserve intentions will inevitably remain very important in the short term, especially after a more dovish set of August minutes. There is little doubt that the Fed will consider further action, but could decide against full-blown quantitative easing and look for alternatives. Immediate defensive dollar demand has eased given hopes that the ECB and governments may be able to stabilise the debt situation, but unease surrounding the global growth outlook should still underpin the dollar. The dollar weakened sharply in mid week following the Federal Reserve minutes, although it did manage to recover from its lowest levels. The US data releases did not have a major impact as US new home sales was stronger than expected with a figure of 372,000 for the latest week from a revised 359,000 previously while there was a small increase in jobless claims to 372,000 for the week. The PMI index for the manufacturing index edged higher to 51.9 from 51.4. The FOMC minutes from August’s meeting were significantly more dovish than expected. Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of economic recovery. The minutes will renew speculation that the Fed will move to expand quantitative easing at the next policy meeting, although there will still be concern over potential political barriers to such a move. There will also be a discussion over the most likely policy response which will be adopted, but net expectations of action will certainly increase and be sustained which will undermine the US currency. There was a further debate surrounding quantitative easing later in the week.  Regional Fed President Bullard stated that the FOMC minutes were slightly stale and that there had been a run of more favourable data since they were released. In this environment, Bullard stated that he would not back further easing at this stage and market expectations were dampened slightly which curbed Euro buying support.

		Euro There has been some stabilisation in Euro sentiment with expectations that the ECB will announce bond buying at the September meeting. There is no doubt the central bank will look to take action, but there are still very important economic and political barriers to a workable solution, especially with major political stresses within Spain and Italy. There will also be German unease over any aggressive bond buying plans. Even if action is taken, the underlying monetary implications will make it difficult for the Euro to sustain any initial gains. The Euro continued to benefit from expectations of ECB action which triggered a further covering of short positions. There were also significant comments from the German Bundesbank as it continued to warn against the potential ECB plans. In particular, there were concerns over potentially unlimited intervention. In quick succession, the ECB stated that it was misleading to report on a decision which had not yet been taken, in direct reference to the article in the weekend press which stated that the ECB would target a reduction in peripheral yields to pre-determined levels. There were also media reports that the ECB had the backing of the German government and would also be prepared to over-ride Bundesbank opposition to the plans. There was still a high degree of uncertainty surrounding the situation with markets far from confident that the ECB would be able to secure all the conditions needed for intervention. There were also further fears surrounding the Euro-zone outlook. There were reports that capital was still flowing out of the Euro area which had some impact in undermining sentiment. Markets remained cautious over the Greek situation with Prime Minister Samaras due to hold talks with Euro-group head Juncker on Wednesday as the Greece looks to an extension to the austerity plans. There was further speculation surrounding the prospect for ECB peripheral bond buying with a further series of rumours surrounding potential action and some possible comments that there could be unpublished targets for peripheral bond caps which was met by a high degree of market scepticism. There was a slightly stronger than expected reading for the Euro-zone PMI manufacturing index, but there was a decline in the services-sector index and there were still important reservations surrounding the Euro-zone outlook, especially as the orders component continued to weaken sharply. This maintained cautious sentiment and consumer confidence also deteriorated further in the latest release. There were reports from Spanish officials that technical negotiations were taking place surrounding a potential sovereign bailout, but that any decision was unlikely before mid September. The net impact was to provide some Euro support. German and French officials put pressure on Greece to adhere to the reform commitments.
		There has been some stabilisation in Euro sentiment with expectations that the ECB will announce bond buying at the September meeting. There is no doubt the central bank will look to take action, but there are still very important economic and political barriers to a workable solution, especially with major political stresses within Spain and Italy. There will also be German unease over any aggressive bond buying plans. Even if action is taken, the underlying monetary implications will make it difficult for the Euro to sustain any initial gains. The Euro continued to benefit from expectations of ECB action which triggered a further covering of short positions. There were also significant comments from the German Bundesbank as it continued to warn against the potential ECB plans. In particular, there were concerns over potentially unlimited intervention. In quick succession, the ECB stated that it was misleading to report on a decision which had not yet been taken, in direct reference to the article in the weekend press which stated that the ECB would target a reduction in peripheral yields to pre-determined levels. There were also media reports that the ECB had the backing of the German government and would also be prepared to over-ride Bundesbank opposition to the plans. There was still a high degree of uncertainty surrounding the situation with markets far from confident that the ECB would be able to secure all the conditions needed for intervention. There were also further fears surrounding the Euro-zone outlook. There were reports that capital was still flowing out of the Euro area which had some impact in undermining sentiment. Markets remained cautious over the Greek situation with Prime Minister Samaras due to hold talks with Euro-group head Juncker on Wednesday as the Greece looks to an extension to the austerity plans. There was further speculation surrounding the prospect for ECB peripheral bond buying with a further series of rumours surrounding potential action and some possible comments that there could be unpublished targets for peripheral bond caps which was met by a high degree of market scepticism. There was a slightly stronger than expected reading for the Euro-zone PMI manufacturing index, but there was a decline in the services-sector index and there were still important reservations surrounding the Euro-zone outlook, especially as the orders component continued to weaken sharply. This maintained cautious sentiment and consumer confidence also deteriorated further in the latest release. There were reports from Spanish officials that technical negotiations were taking place surrounding a potential sovereign bailout, but that any decision was unlikely before mid September. The net impact was to provide some Euro support. German and French officials put pressure on Greece to adhere to the reform commitments. Yen: After some weakening pressure earlier in August, the yen has regained support. The expectations of further Federal Reserve easing, allied with the potential for the ECB to sanction aggressive bond buying has improved the yen’s relative appeal which will underpin the yen. There will also be yen demand in relation to fears surrounding the Asian growth outlook. There will still be concerns surrounding competitiveness and pressure for yen gains to be resisted with the Bank of Japan under pressure to act.   The yen strengthened during the week on a shift in monetary expectations elsewhere. Growth concerns were important with Japan recording a JPY517bn deficit for July as exports fell by 8.1% over the year with a particularly sharp slowdown in shipments to Europe. The yen maintained a solid tone on caution over risk, but there will be important pressure for currency gains to be resisted given competitiveness issues. The dollar was unable to push above the 79.50 area against the yen and retreated sharply following the FOMC minutes. There was renewed speculation that the Fed would sanction additional easing at the September meeting which undermined yields and pushed the US currency sharply lower to a trough around 78.30. The yen was also broadly resilient in the face of a recovery on Wall Street. The prospect of Federal Reserve easing, together with the potential for aggressive ECB bond buying will be important in strengthening the yen’s relative appeal and this will be very significant in providing near-term yen support with funds reluctant to push funds elsewhere. The latest Chinese PMI data was weaker than expected with a further monthly decline which will maintain doubts over the growth dynamics and also provide yen support with the yen holding around 78.50 late in Asian trading on Thursday.
		Sterling There will be further concerns surrounding the UK economic outlook, especially with renewed weakness in consumer spending surveys and fears surrounding the impact of weak Euro-zone demand.  There will be expectations of further Bank of England action to boost quantitative easing. In relative terms, Sterling has been underpinned by Euro-zone weakness and expectations of Federal Reserve action, although this could prove very temporary in nature, especially with government stresses and increased vulnerability for the AAA credit rating.  Overall, Sterling will find it hard to make much headway. Sterling pushed to a three-month high against the US dollar during the week while there were no major changes against the Euro. The latest government borrowing requirement was weaker than expected with a reported deficit for July. July is traditionally a strong month for the public finances due to corporate tax revenues, but receipts were disappointing. Excluding one-off receipts, borrowing increased to GBP44.9bn for the first four months of the year compared with GBP35.6bn the previous year. There was a weaker than expected reading for the latest CBI retail sales reading with a decline to -3 from 11 the previous month and there was only a small offsetting impact from a slightly stronger than expected reading for mortgage approvals. The net impact was to maintain concerns surrounding the UK outlook and underlying fundamentals, especially with unease surrounding the AAA credit rating. Any move to cut the rating would inevitably put Sterling under strong short-term selling pressure. 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 volume of capital flows from the Euro-zone and any credible measures by the ECB could help to slow inflows, at least temporarily. There will still be a high degree of medium-term uncertainty surrounding the situation and the risk that the minimum Euro level could be broken. After seeing sharp losses, the dollar found some support on dips to below the 0.9550 area against the franc while there was again no significant movement in the Euro. Interest rates remained below zero in the latest Swiss bill auction which suggests that there is still a high degree of defensive demand for the Swiss currency despite increased speculation that there would be ECB intervention to protect the Euro-zone. The continuing speculation over further Federal Reserve easing and the potential for quantitative easing by the ECB will continue to maintain speculation of defensive capital inflows into the Swiss currency with markets also assessing any reserve diversification moves by the National Bank given the impact on major currency pairs.

Australian dollar:

The Australian dollar was unable to maintain rallies during the week and dipped to test support levels below 1.04. There were further concerns surrounding the global growth outlook which undermined the currency, especially with further concerns surrounding the Chinese outlook. There were some expectations of reserve diversification into the Australian currency. The Reserve Bank minutes confirmed that the bank was on hold in the short term given the strength of domestic demand. There were no significant domestic releases during the week as international trends dominated The Australian dollar is likely to remain generally vulnerable, especially given the decline in key commodity export prices and regional growth fears. Canadian dollar: The Canadian dollar pushed to highs beyond 0.99 against the US dollar during the week, but it was unable to sustain the gains and it retreated back to the 0.9940 area. The currency continued to gain some net support from high oil prices. The domestic economic data was weaker than expected with a decline in retail sales which maintained unease surrounding the economic outlook. Concerns surrounding the global economy will tend to limit scope for further significant Canadian dollar gains even if major near-term losses are resisted.

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