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Weekly Market analysis
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Global central bank and
government actions will continue to dominate markets in the short-term.
The ECB bond-buying plan will provide a boost to near-term confidence
surrounding the Euro, but there will be important reservations
surrounding the medium-term outlook given economic weakness. Global
growth considerations will also remain important with a particular focus
on China while the US Federal Reserve faces a crucial policy decision
next week.
Dollar:
The
most recent US indicators have shown some degree of improvement which
will help underpin confidence in the outlook. If this pattern is
repeated with the latest payroll data, there will be recued expectations
of further Federal Reserve quantitative easing at the September policy
meeting. There will be still be underlying speculation that the Fed
will move to adjust policy within the next few months. There will also
be underlying concerns surrounding the underlying fundamental outlook,
especially with budget fears. Concerns surrounding the global economic
outlook should still be important in providing underlying dollar
protection and curbing underlying selling pressure.
The dollar was
unable to make any impression during the week as underlying demand for
the currency faded, especially with an improvement in underlying risk
appetite.
There was a weaker than expected reading for the ISM manufacturing PMI
index for August with a dip to 49.6 from 49.8 the previous month, the
third month out of four that the index had been below the pivotal 50.0
level with orders contracting. There was some relief that the
employment component held above the 50 level, but overall confidence
surrounding the growth outlook was fragile.
The US data releases
were overshadowed to some extent by the ECB decision, but all releases
were stronger than expected. The ADP employment report registered a
private payrolls increase of 201,000 for August from 163,000 the
previous month while jobless claims declining to 365,000 from 377,000
previously. The PMI non-manufacturing report also rose to 53.7 from
52.6. The data helped boost risk appetite, but may also discourage any
further quantitative easing by the Federal Reserve.
Euro
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The ECB plans to buy
peripheral bonds will help stabilise sentiment in the short- term.
There will still be serious concerns surrounding the Spanish outlook
with particular fears surrounding the banking sector. There are also
still important underlying political concerns as Spain will also be
under domestic political pressure not to accept a bailout. There will
also be fears surrounding the underlying growth dynamics which will
maintain rising unemployment pressures and there will be pressure for
the ECB to cut interest rates further. It will still be difficult for
the Euro to sustain any significant advance.
The Euro was
able to register net gains for the week with markets optimistic that the
ECB bond-buying plans would stabilise near-term conditions. The currency pushed to two-month highs above 1.2650 against the dollar.
There
was a weak German bund auction as, although yields were the same as for
the previous sale at 1.42%, there was a sharp decline in the official
bid/cover ratio to 1.1 and technically the auction was uncovered as
demand faded. This increased speculation that sentiment towards the
peripheral bond markets was improving and defensive bund demand
declining which provided a net boost for the Euro.
There was a
sharp decline in Spanish and Italian short-term yields and there was
also a sharp improvement in credit default swaps as markets continued
to price in ECB action over the coming few weeks. There were further
concerns surrounding the Spanish banking sector following the move to
provide additional support for Bankia. There were concerns that the
funds would be supplied through debt rather than equity which reinforced
an underlying lack of confidence in the banking sector.
There
was also some nervousness ahead of the German Constitutional Court ESM
ruling next week, although the consensus was that there would be a
conditional approval which could provide some degree of relief.
The ECB left
interest rates on hold at 0.75%, contrary to some expectations that
there would be a further cut and the Euro initially rallied in response
with a fresh challenge on the 1.2635 resistance area against the dollar.
In the press conference, President Draghi was generally downbeat over
the economic conditions with a warning that downside risks prevailed.
Growth forecasts were cut for the next two years in the latest staff
projections, maintaining pessimism surrounding the economic outlook.
Draghi
confirmed that the ECB would introduce the Outright Monetary
Transactions (OMT) bond-buying scheme. The plan was in line with the
succession of leaks supplied to the media over the past few days. The
ECB will be prepared to intervene in the secondary market and buy bonds
with a maturity of up to three years. There would be no formal limit on
the amount of intervention and the purchases will be fully sterilised.
The ECB is also prepared to give up creditor seniority on the new bonds
and Bundesbank head Weidmann dissented against the plan.
A key
element in the plan was conditionality as there will be no purchases
until a country has requested aid and also met conditions attached. In
theory, the bank would be prepared to stop purchases if
conditions were broken. There were concerns that political factors could
delay the plan’s introduction if Spain decided to try and avoid
requesting an aid package, but the net impact was a boost in short-term
optimism.
Yen:
The
yen will be undermined by higher bond yields elsewhere, at least in the
short -term. There will be concerns surrounding the Japanese
fundamentals with deteriorating growth prospects and demands for the Bank of Japan
to take further action to underpin the economy. Regional growth
concerns will also maintain pressure for competitiveness to be
sustained. There is still the potential for underlying yen demand given
a lack of confidence in fundamentals elsewhere which should limit net
losses.
The dollar found support near 78.20 against
the yen and rallied strongly during the US session with a peak close to
the 79 area. The US currency gained important support from the stronger
than expected US data as US Treasury bond yields increased.
There
was also a significant improvement in risk appetite which curbed demand
for the yen on defensive grounds. Risk appetite remained stronger in
Asian trading on Friday following the announcement of fresh Chinese
infrastructure projects which continued to curb yen demand and the
dollar consolidated just below the 79 level.
Bank of Japan Governor Shirakawa
was generally pessimistic surrounding the economic outlook. He did,
however, state that it would not buy government bonds for the purpose of
monetising public debt and buying foreign bonds would also be
tantamount to currency intervention which is not in the bank’s remit.
The comments tended to dampen expectations of an aggressive Bank of
Japan stance
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Sterling
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There will be further concerns surrounding the UK economic outlook,
especially with evidence of weak spending. The latest PMI surveys have,
however, provided some important relief and there will also be reduced
expectations that the Bank of England will take further near-term
action to expend monetary policy further. This shift in expectations
will provide some degree of Sterling support. The currency will also
tend to gain support if there is an improvement in risk appetite.
Underlying Sterling support is still liable to be very fragile.
Sterling challenged
14-week highs against the dollar during the week with a test of
resistance above 1.5950 as the UK currency held firm against the Euro.
There
was a stronger than expected reading for the manufacturing PMI index
with an increase to 49.5 for August from a revised 45.2 the previous
month. There was a stagnation in orders, although this did represent a
monthly improvement.
There was a weaker than expected construction PMI index
for August with a decline to 49.0 from 50.9 the previous month which
maintained concerns surrounding the construction sector. There was,
however, a leaked report that the services PMI index for August with a
stronger than expected reading of 53.7 from 51.0 previously.
The services data
was important in providing net support for Sterling with hopes that the
third-quarter trend for the economy as a whole would be stronger than
expected. There were further concerns surrounding the housing sector
following a weaker than expected Halifax house-price index with a
further 0.4% monthly decline for August.
The Bank of England
held interest rates on hold at 0.50% following the latest policy
meeting while the amount of quantitative easing was also left on hold at
£375bn. The decision was in line with expectations and provided only a
slight boost to Sterling.
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. Any sustained relief for the Euro-zone could
ease capital inflows into the Swiss franc and ease pressure on the Swiss National Bank
and this could encourage the bank to take advantage of the situation
and push the minimum level higher. Underlying uncertainty will remain an
important element.
The dollar dipped weaker against the
franc during the week, but a franc weakening against the Euro to lows
beyond 1.21 was important in providing some cushion to the US currency
as it held above the 0.95 level.
There was a weaker than expected GDP reading
with a 0.1% contraction for the second quarter following a revised 0.5%
gain the previous quarter. There will be further concerns surrounding
the threat of deflation and recession fears will intensify the
determination to resist renewed franc gains against the Euro.
There
was some speculation that the central bank would look to raise the
minimum Euro level as the rise in reserves was lower than expected for
the latest month.
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Australian dollar
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The Australian dollar
initially remained under pressure during the week with a retreat to
six-week lows below 1.02 against the US dollar. Domestically, there were
further concerns surrounding the growth outlook with a series of weak
PMI releases.
There was a mixed reading for the employment report with a drop in unemployment to
5.1% from 5.2%, but there was a decline in employment of over 8,000.
There was no change in interest rates with the RBA maintaining a wait
and see attitude.
After weakening on global growth concerns, the currency recovered
ground firmly as the US currency came under pressure and risk appetite
improved. There was also a boost following the announcement of Chinese
infrastructure projects.
Unease surrounding the regional economy
and weakness in key commodity prices is likely to curb any strong
recovery in the Australian dollar.
Canadian dollar:
The
Canadian dollar was able to find support on dips to beyond 0.99 against
the US currency and rallied to a peak near 0.98 later in the week.
The Bank of Canada left interest rates on hold at 1.0% and was slightly more cautious surrounding the growth outlook. The currency gained
support from optimism surrounding the domestic fundamentals and oil
prices held firm which provided support as the US currency was subjected
to further selling pressure.
Even with high oil prices,
concerns surrounding the global economy will tend to limit scope for
Canadian dollar gains, although losses for the currency should be
limited.
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