Good morning,
Summer bumblin’
We were dead in the middle of a summer slump with traders keeping more than one eye on the Olympics and liquidity positioning remaining poor. A speech by Fed Chair Janet Yellen due in a little over a week is being viewed as the starting gun for the run into Christmas but for now investors seem more than happy to take their foot off the gas and get a rest in given just how awesomely strange this year has been.
USD has managed to recover slightly from a weak retail sales and poor producer price figures. Sales fell in July although strong gains in car sales may explain away some of the weakness; you don’t buy much past the basics if you just lumped in on a car and so we can reasonably expect a rebound in the coming months or so. Likewise, near-term falls in producer prices are a small concern given the usual price cutting that we see as summer lines fall out of stock and retailers prepare for ‘back to school’ shoppers.
The rebound for the USD was a bit thin with the JPY managing to retain its recent strength.
Yen maintains stance of bad news is good news.
Further yen strength has also been seen this morning following a disappointing 0.2% annualised growth reading in Q2 versus a consensus expectation of around 0.7%. Exports and business spending were the main laggards and sum up the two main issues in global macroeconomics at the moment; poor global aggregate demand and a lack of productivity growth.
The Japanese are at best unable or at worst unwilling to deploy structural reforms; the 3rd arrow of Abenomics. Monetary policy cannot get businesses spending money and nor can fiscal policy as of yet so structural reforms are where the changes need to happen.
Single currency, single winner
Similarly the Euro continues to show more back bone than we had originally thought could be possible from a currency as beset by issues as it is in a post-Brexit atmosphere. Be that as it is, we are seeing EURUSD and EURGBP all roll higher and remain resilient to strong and varied pressures.
EURUSD has benefited from an environment that is anti-USD despite recent strong US data. We believe that market expectations of a rate hike by the Federal Reserve that sit at a 45% probability by the end of the year are underpriced by as much as 25% but regardless of whether they hike in September or in December, they are not doing so in August given the absence of a Fed meeting this month and markets are taking that as a cue to sell the greenback and grab some yield from emerging markets.
Both UBS and HSBC have raised the possibility of EURGBP hitting parity in recent weeks and while we see a more limited downside for sterling than that, investors are continuing to drag the pair higher. This will likely continue in the coming months.
UK post-Brexit data due
The data calendar from the UK died last week but fresh impetus to weaken sterling has not. To me the situation is fairly easy to read in that sterling is coming lower for many reasons; both political and economic.
This week sees post-Brexit retail sales and inflation data due from the UK but for today at least, the data calendar is very quiet.
Have a great day.