Weekly Market Analysis

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Weekly Market analysis

Global central bank and government actions will continue to be extremely important in the short-term. The ECB will be looking to enact bond buying in September, but there could still be important barriers, especially with unease within Germany and Euro-zone stresses could erupt again.  There will also be pressure on the Federal Reserve to relax policy further and markets will be expecting action from Asian central banks to support regional demand.

Dollar: There has been some stabilisation in the most recent economic data, but there will still be underlying concerns surrounding the outlook, especially with unease surrounding consumer spending levels. There will be potential political constraints on the Federal Reserve, but there will also be further speculation that the FOMC will move to additional quantitative easing at the September meeting. Defensive considerations will remain important and an underlying improvement in risk appetite will tend to curb immediate demand for US Treasuries and the dollar. Nevertheless, given the underlying shift in reserves, the US currency should be able to resist heavy selling pressure. The dollar drifted weaker on a trade-weighted basis, but did find support against the European currencies as the Euro retreated back to below 1.23 from highs near 1.2450. There were persistent doubts surrounding the US economy and regional Fed president Rosengren called for additional Fed action to boost the economy. The comments tended to undermine the US dollar to some extent and risk appetite was also relatively firm which dampened dollar demand. The further sharp increase in Swiss reserves fuelled expectations that the National Bank still had a substantial amount of Euros to sell and there was a retreat to test support below 1.24 against the dollar. US jobless claims fell to 361,000 in the latest week from 367,000 previously and the trade deficit also declined to US$42.9bn for June which was the lowest reading for 18 months as oil imports declined. The lower than expected deficit should also lead to an upward revision to second-quarter GDP estimates which will provide some limited dollar support.

		Euro There will be a delay in any ECB action to lower peripheral yields through fresh bond buying as they will have to wait for the German Constitutional court ruling in September.  Markets will fret over the potential short-term vacuum and there will also be growing political pressures with major fears surrounding the Italian and Spanish outlook.  The Spanish and Italian governments have been prepared to exert greater pressure on Germany and if there is no improvement in underlying tensions, there will be speculation that there could be a decision to pull out of the Euro area. Even if there is no break up, aggressive monetary policies will still tend to undermine the Euro in the medium term. The Euro failed to hold its best levels as the currency was unsettled again by underlying policy doubts. The low level of liquidity during the holiday period contributed to the choppy trading conditions with market rumours tending to have a bigger impact given low liquidity. The German economic data provided no significant support for the Euro-zone with imports and exports declining for July while there was a 0.9% decline in industrial production for the month. Germany’s credit rating was affirmed at AAA by Fitch which provided some degree of support while there were downgrades from Italy and Spain according to a minor ratings agency. The troika announced that it would spend all September in Greece assessing the situation and there were further tensions ahead of the August 20th scheduled payment to the ECB amid some expectations that Greece could be forced to default or be forced into covert ECB support. Eurogroup head Juncker stated that a Greek Euro exit was manageable although not desirable. In this context, underlying confidence in a definitive solution for the debt crisis was dampened. There were persistent tensions surrounding the Italian and Spanish economies as behind the scenes discussions on sovereign bailouts continued.  There were further suggestions that Spain would not accept a bailout if further conditions were imposed. The elements of blackmail evident in the discussions are unlikely to provide significant Euro support. There were still expectations that the ECB would move to bond buying in September once the German constitutional court has ruled. The fact that the ECB will not be able to take action for at least another month had a negative impact with some doubts whether a cohesive plan can be put together. There were rumours that the German Finance Minister was returning early from his holiday, to orchestrate opposition to the bond-buying plan as the general mood of uncertainty persisted. There were also reports that there would be delays to the next Greek loan tranche with Germany reportedly blocking any further support. Former ECB member Issing also stated that Germany could not be blackmailed into bond buying.
		Yen:  The potential for further monetary easing in the US and Euro-zone will tend to strengthen Japan’s relative yield support which will provide underlying support for the yen, especially with the Bank of Japan resisting further monetary easing. There will also be expectations that US bond redemptions will tend to strengthen the Japanese currency this month.  Defensive considerations will remain important in the short-term and there will be some easing of underlying yen demand if there is a sustained improvement in risk appetite.  The yen may, therefore, prove resilient even if near-term buying support is limited.   The dollar found some support near 78 against the yen during the week and rallied to a peak near 78.80 while the Euro it selling pressure above 97.0. The Bank of Japan left policy unchanged at the latest monetary meeting which provided a small yen boost given expectations that there could be a move to relax policy further. There was a 5.6% recovery in machinery orders for July following a 14.8% decline previously. The dollar gained support from a rise in US Treasury yields following the latest US labour-market data. There was also some expectations that the Federal Reserve may be less willing to back additional quantitative easing in the short-term which provided support to the dollar. The Chinese trade data was weaker than expected which renewed unease surrounding regional growth and also provided some underlying support. The Finance Ministry and Bank of Japan policies will remain an important focus, especially given expectations that the Chinese central bank will boost monetary policy further.
		Sterling There will be further concerns surrounding the UK economic outlook, especially after a downbeat Bank of England report and fears that weak Euro-zone demand will exacerbate the domestic downturn.  There will also be expectations of further quantitative easing by the Bank of England which will tend to undermine support. There will also be some speculation that defensive Sterling demand will weaken given unease surrounding the fundamental outlook. Overall, there is likely to be greater underlying Sterling vulnerability. Sterling found support on retreats towards 0.80 against the Euro during the week while the currency was contained within relatively narrow ranges against the dollar with resistance close to 1.57. The latest industrial production data recorded a sharp monthly decline of 2.5% for June, but a weak outcome had been expected given the influence of official holidays. The NIESR report was relatively weak with the economy estimated to have contracted 0.2% in the latest three-month period which will undermine expectations of a significant recovery for the third quarter as a whole. As expected, there was a downgrading of growth and inflation forecasts in the latest Bank of England inflation report with 2012 growth now expected to be around zero compared with 0.8% previously. The bank remained generally pessimistic over the outlook and also expressed major uncertainty surrounding the outlook given the Euro-zone fears. Governor King stated that the bank would be ready to take further monetary action if necessary. He also stated that the potential benefits of an interest rate cut would be more than offset by the potential negative effects, especially as it would be a considerable burden for some financial institutions. The latest UK trade data recorded a headline deficit of GBP10.1bn for June, the widest deficit for 15 years as exports came under pressure. Although the data may have been distorted by holidays, underlying confidence in the UK economy continued to deteriorate following Wednesday’s inflation report with fears that the economy would be unable to generate any fresh momentum. There were also renewed doubts whether the UK would be able to attract defensive capital inflows as investors were les convinced that the UK economy could provide safe-haven support given the domestic fundamentals. There were reports that institutional flows had turned Sterling negative.

Swiss franc:

Although confidence in the Euro-zone outlook has stabilised to some extent, defensive flows into the Swiss currency are likely to continue. The National Bank will still defend the minimum Euro level in the short-term, but there will be strong demands for the bank to consider capital controls or negative official interest rates if intervention is forced to remain at extremely high levels. For now, the central bank is likely to stand firm and await Euro developments.

The dollar found support just above 0.9650 against the franc and moved back to near 0.98. The Euro briefly spiked to a high near 1.21 on rumours that an automatic trading programme had bought aggressively, but quickly retreated back near 1.2010. The potential for capital inflows from the Euro-zone remained a key market focus.

The latest National Bank data recorded a further increase in reserves of over CHF40bn for July, only slightly less than the decline seen the previous month and this continued to illustrate substantial pressure on the Euro minimum level. The Finance Ministry continued to back the bank policy and stated that unlimited intervention remained possible.

Australian dollar

The Australian dollar maintained a strong tone for much of the week and pushed to four-month highs above the 1.06 level. The economic data was generally favourable with a solid increase in employment and rising home loans according to the latest data.  The Reserve Bank was slightly more cautious surrounding the outlook in its latest report which dampened sentiment to some extent. There were also fresh concerns surrounding the Chinese economy following the latest trade data and a further slowdown in industrial production growth which pushed the Australian currency back towards the 1.05 level. Although there will be expectations of central bank action to support the global economy, the Australian dollar is likely to be near a short-term peak. Canadian dollar: The Canadian dollar maintained a generally firm tone during the week and pushed to a peak near the 0.99 level before edging slightly lower. Risk appetite was generally solid during the week and the Canadian currency also drew support from rising commodity prices as grain prices continued to advance on US drought concerns.  There was a weaker than expected trade report which did have some impact in curbing currency demand. Concerns surrounding the global economy and commodity-price trends will tend to limit scope for Canadian dollar gains even if a near-term robust tone is sustained.