Calm after the storm..Not yet!
Charis Charilaou
Chief Dealer
The sharp 13 % fall in oil prices and the dramatic change in sentiment on Wall Street resulted in the US dollar recovering some ground to 1.5800 after posting a new all time low at 1.6040 last Tuesday. The increase in risk appetite helped currencies such as the GBP, AUD, CAD and NZD while "safe haven" currencies such as CHF and JPY lost the most ground.
In his 2 day testimony, Fed’s Chairman Bernanke tried to walk the thin line between inflation and growth highlighting the inflation pressures while at the same time painting a gloomy picture of the US economy. Bernanke did say that there may be times when currency intervention is warranted, but this should be done only rarely and in disorderly markets.
Although market data were not market moving, equity markets were on a rollercoaster ride as the US banks reporting season started with Merrill Lynch results coming worse than expected while Wells Fargo and Citibank reported a better than expected loss. SEC’s move to restrict short selling added to market volatility helping the DOW and other major market indices recover sharply higher.
UK’s June CPI surprised on the upside at 3.8% y/y highlighting again that stagflation risks in the UK are running high, while USD/JPY was following equities for the most of the week. The JPY fell to 103.75 against the USD at the start of last week as fears over the health of the US financial sector led to safe-haven strategies but both USD/JPY and EUR/JPY close the week sharply higher just below 107 and 169.50 respectively on the back of the equities rally.
Oil and gas prices were sharply lower after better than expected inventory data from the US and OPEC coming out with predictions of lower demand going forward. Traders were also optimistic on the talks between Iran and major world powers, including the US for the first time. According to a Reuters report, on Saturday major powers gave Iran two weeks to rein in its nuclear program or face tougher sanctions.
LOOKING AHEAD
Once again it's not going to be a big data week and the focus will be on the US government’s rescue package for Fannie May and Freddie Mac and whether it will go through in Congress. Eurozone survey data with July IFO and Eurozone flash PMIs are released on Thursday and are expected weaker to 100.5 from 101.3 with expectations down to 93 and current conditions down to 107.5 from 108.3. The July manufacturing Eurozone PMI is also expected lower to 48.9 from 49.2 in June.
GBP traders will focus on the publication of the 9th-10th July BoE MPC minutes. An 8-1 outcome is expected due to the worse than expected June CPI and PPI outcomes. Also market expects the CBI July Industrial Trends Survey to post a sharp fall to -12% from June's +1%. June retail sales on Thursday are expected to fall more, while a downward revision to May's jump is probable. UK growth concerns will be highlighted at the end of the week as the Q2 GDP estimate will be released.
In Japan core CPI for June is seen rising to 1.8%y/y from 1.5%. Risks especially from food are clearly to the upside. Thursday is the RBNZ meeting in New Zealand were we see rates are kept on hold.
STRATEGY
Having traded a new all time high in EURUSD some analysts feel that the line in the sand has been drawn at 1.6040. The steep fall in oil has been seen by technicians as the start of a deeper correction while the Tuesday-Friday equity rally has inspired bulls to call for higher prices. Is this the end of the storm in USD? Probably not. Credit markets are still tough with credit standards getting tighter and financial institutions in search of raising more capital. Housing is still weak and the blow up of the 15 year bull market shows no signs of stabilization yet. Oil (in spite of the last week’s steep correction) is a drag on economic growth while growth is getting weaker and unemployment is rising. In addition to this the different ECB-FED mandates and the increasing yield differential is helping the EUR higher while keeping the dollar low.
The week ahead might be key in determining the short-term direction for most asset markets. If the fall in oil continues it will be a real positive for the equity markets and the US dollar, but news on the weekend that talks between the US and Iran have reached a stalemate could push the oil price higher again. Focus will also be on US earnings reports again with US regional banks such as Wachovia and National Mutual reporting along with Bank of America and American Express. A break above 1.6040 would suggest a stronger move towards 1.6200 while support in the EUR/USD is at 1.5780 which is the July 11 low, last week’s low, the 20-day MA and the 61.8 fibonacci of the 1.5609/1.6037 move. Again we stress that intervention risks are increasing above 1.6000 but we still think that following the trend is appropriate under the circumstances.
Disclaimer
This research report or summary has been prepared by TFI PCL from information believed to be reliable. Such information has not been independently verified and no guarantee, representation or warranty, express or implied, is made as to its accuracy, completeness or correctness. This report is provided for information purposes only. Nothing in this report should be considered to constitute investment advice. It is not intended, and should not be considered, as an offer, invitation, solicitation or recommendation to buy or sell any of the financial instruments described herein. TFI PCL accepts no liability whatsoever for any direct or consequential loss arising from the use of this document or its contents.
