At 4:30 AM UK August MPC Meeting Minutes (exp 9-0, prev 3-6)
UK June Claimant Count (exp –10.0k, prev –13.8k)
UK June Unemployment Rate (exp 5.4%, prev 5.4%)
At 8:30 AM Canada June Manufacturing Shipments (exp –0.2%, prev –0.1%)
August NY Fed Manufacturing Survey (exp 18.5, prev 26.46)
US July core CPI m/m (exp 0.2%, prev 0.2%)
US July core CPI y/y (exp 2.2%, prev 2.2%)
US July CPI y/y (exp 2.4%, prev 2.7%)
At 9:00 AM US June TICS (exp $65.0 bln, prev $126.1 bln)
At 9:15 AM US July Industrial Production (exp 0.3%, prev 0.5%)
US July Capacity Utilization (exp 81.8%, prev 81.7%)
At 1:00 PM US August NAHB (exp 23.0, prev 24.0)
The dollar continues to firm against the euro and sterling, but drifts further versus the yen. A barrage of US economic data is slated for release in the coming session, including key gauges of inflation and manufacturing. The July core CPI figures are seen unchanged from their prior readings at 0.2% m/m and 2.2% y/y. The annualized headline figure however, is estimated to fall to 2.4% for July, down from 2.7% in the previous year.
The August New York Fed manufacturing survey is forecasted to fall to 18.5, down from 26.46 from July, while industrial production in July is seen slowing to 0.3% versus 0.5% a month earlier. Capacity utilization is expected to edge up slightly to 81.8% from 81.7%. Meanwhile, consensus estimates for the June TICS data is seen sharply lower at $65.0 billion, versus $126.1 billion from May.
Tuesday
Greenback Rose on Heightened Risk Aversion
The unwinding of carry trades continues to dominate the foreign exchange market. The greenback strengthened as investment capitals flow back to safe haven amid the heightened risk aversion. The euro fell another 100 pips today to as low as 1.3450 versus the dollar.
The market shrugged off economic data as all the eyes were on risk aversion. US CPI rose 0.1% in July, leading to a year-on-year rate down from 2.7% to 2.4% as expected. Excluding food and energy, core CPI rose 0.2% as expected. New York Fed manufacturing survey fell slightly from 26.46 to 25.06 in August, above the estimate of 18.5. US Treasury reported net foreign purchases of long-term securities for June were 120.9 billion, double the forecast of 65 billion. US industrial production increased 0.6% in July, beating the estimate of 0.3% and a reading of 0.5% in the earlier month. US capacity utilization was barely changed at 81.9% in July. The National Association of Home Builders/Wells Fargo sentiment index declined from 24 to 22 in August, the lowest since September 2001.
EURUSD will face interim resistance at 1.3480, followed by 1.35 and 1.3530. Additional ceilings will emerge at 1.3550, backed by 1.3570. Support starts at 1.3450, backed by 1.34, 1.3380 and 1.3350. Subsequent floors are eyed at 1.33.
The market shrugged off economic data as all the eyes were on risk aversion. US CPI rose 0.1% in July, leading to a year-on-year rate down from 2.7% to 2.4% as expected. Excluding food and energy, core CPI rose 0.2% as expected. New York Fed manufacturing survey fell slightly from 26.46 to 25.06 in August, above the estimate of 18.5. US Treasury reported net foreign purchases of long-term securities for June were 120.9 billion, double the forecast of 65 billion. US industrial production increased 0.6% in July, beating the estimate of 0.3% and a reading of 0.5% in the earlier month. US capacity utilization was barely changed at 81.9% in July. The National Association of Home Builders/Wells Fargo sentiment index declined from 24 to 22 in August, the lowest since September 2001.
EURUSD will face interim resistance at 1.3480, followed by 1.35 and 1.3530. Additional ceilings will emerge at 1.3550, backed by 1.3570. Support starts at 1.3450, backed by 1.34, 1.3380 and 1.3350. Subsequent floors are eyed at 1.33.
Volatility Props USD, JPY
At 2:00 AM Germany July HICP m/m (exp 0.5%, prev 0.1%)
Germany July HICP y/y (exp 2.0%, prev 2.0%)
Germany July CPI m/m (exp 0.4%, prev 0.1%)
Germany July CPI y/y (exp 1.9%, prev 1.8%)
At 4:30 AM UK July Retail Sales m/m (exp 0.2%, prev 0.2%)
UK July Retail Sales y/y (exp 3.4%, prev 3.4%)
At 5:00 AM Eurozone July HICP m/m (exp –0.2%, prev 0.1%)
Eurozone July HICP y/y (exp 1.8%, prev 1.9%)
At 8:30 AM US Weekly Jobless Claims (exp 313.0k, prev 316.0k)
US July Housing Starts (exp 1.405 mln units, prev 1.467 mln units)
US July Building Permits (exp 1.40 mln units, prev 1.413 mln units)
At 12:00 PMAugust Philadelphia Fed Survey (exp 9.0, prev 9.2)
With heightened risk aversion driving markets, the dollar and yen continue to benefit, while the British pound and euro remain laggards. US equities took another hit with the Dow losing over 167-pts on Wednesday as burgeoning fears of spillover from the subprime debacle linger. The increased cautiousness will likely prop the yen higher across the board as heavy unwinding of the carry trades persist.
US data due out today include weekly jobless claims, July housing starts, July building permits and the August Philadelphia Fed survey. Weekly jobless claims are seen slipping slightly to 313k, down from the previous week at 316k. Housing starts and building permits are both forecasted to reflect continued deterioration in the housing market, falling to 1.405 mln units and 1.40 mln units, respectively. Lastly, the August Philadelphia Fed survey is expected to slip to 9.0, down from 9.2 in July.
Germany July HICP y/y (exp 2.0%, prev 2.0%)
Germany July CPI m/m (exp 0.4%, prev 0.1%)
Germany July CPI y/y (exp 1.9%, prev 1.8%)
At 4:30 AM UK July Retail Sales m/m (exp 0.2%, prev 0.2%)
UK July Retail Sales y/y (exp 3.4%, prev 3.4%)
At 5:00 AM Eurozone July HICP m/m (exp –0.2%, prev 0.1%)
Eurozone July HICP y/y (exp 1.8%, prev 1.9%)
At 8:30 AM US Weekly Jobless Claims (exp 313.0k, prev 316.0k)
US July Housing Starts (exp 1.405 mln units, prev 1.467 mln units)
US July Building Permits (exp 1.40 mln units, prev 1.413 mln units)
At 12:00 PMAugust Philadelphia Fed Survey (exp 9.0, prev 9.2)
With heightened risk aversion driving markets, the dollar and yen continue to benefit, while the British pound and euro remain laggards. US equities took another hit with the Dow losing over 167-pts on Wednesday as burgeoning fears of spillover from the subprime debacle linger. The increased cautiousness will likely prop the yen higher across the board as heavy unwinding of the carry trades persist.
US data due out today include weekly jobless claims, July housing starts, July building permits and the August Philadelphia Fed survey. Weekly jobless claims are seen slipping slightly to 313k, down from the previous week at 316k. Housing starts and building permits are both forecasted to reflect continued deterioration in the housing market, falling to 1.405 mln units and 1.40 mln units, respectively. Lastly, the August Philadelphia Fed survey is expected to slip to 9.0, down from 9.2 in July.
Yen Soars Most in 9 Years
The yen had its biggest one-day gain against the dollar since 1998 as investors rushed out of carry trades amid credit market panic.
Global stocks tumbled today on fears of a funding crisis. The Dow Jones Industrial Averages were down more than 340 points in intraday trading, but rebounded at closing with a loss of just 13. The Fed injected 517 billion to banking system to ease liquidity needs. Short yen carry trades positions were unwounded as investors avoid risky investment in today¡¯s financial market turmoil.
As a result, high-yielding currencies, such as the Australian dollar, New Zealand dollar, and sterling, suffered steep losses. The Australian dollar fell from 0.82 to near 0.78 in intraday trading, the biggest drop in 21 years.
Global stocks tumbled today on fears of a funding crisis. The Dow Jones Industrial Averages were down more than 340 points in intraday trading, but rebounded at closing with a loss of just 13. The Fed injected 517 billion to banking system to ease liquidity needs. Short yen carry trades positions were unwounded as investors avoid risky investment in today¡¯s financial market turmoil.
As a result, high-yielding currencies, such as the Australian dollar, New Zealand dollar, and sterling, suffered steep losses. The Australian dollar fell from 0.82 to near 0.78 in intraday trading, the biggest drop in 21 years.
Dollar Fell after Fed Cut Discount Rate
The dollar fell after the Federal Reserve cut the discount rate by 50 percent to 5.75 percent and said that downside risks are on the rise. The euro rose as high as 1.3550 versus the dollar, while the sterling pared its earlier loss and climbed back to above 1.98 level against the dollar.
The Fed said in the statement that it is ¡°prepared to act as needed to mitigate the adverse effects on the economy arising from disruptions in financial markets.¡± The dollar rallied after the Fed cut window rates to increase liquidity in the market. The Dow Jones Industrial Average opened 300 points higher under the stimulus of the Fed¡¯s action.
Stocks pared half of its earlier gains as investors took a cautious stance and took profits before a US consumer sentiment report. The University of Michigan consumer sentiment fell from 90.4 in 83.3 in August, below the estimate of 88. The dollar edged down slightly after the below-the-expectation data.
The Fed said in the statement that it is ¡°prepared to act as needed to mitigate the adverse effects on the economy arising from disruptions in financial markets.¡± The dollar rallied after the Fed cut window rates to increase liquidity in the market. The Dow Jones Industrial Average opened 300 points higher under the stimulus of the Fed¡¯s action.
Stocks pared half of its earlier gains as investors took a cautious stance and took profits before a US consumer sentiment report. The University of Michigan consumer sentiment fell from 90.4 in 83.3 in August, below the estimate of 88. The dollar edged down slightly after the below-the-expectation data.
Markets to Consolidate This Week after Fed's Discount Rate Cut
Fed's 50 bps discount rate cut on Friday stabilized the markets which was in massive carry trade unwinding as the subprime mortgage crisis spread through global credit markets. But still, the ultimate carry trade pair, NZDJPY tumbled near to 10% while AUD/JPY also dropped close to 9%. High yielding currencies and European majors except the Swissy, were hammered much lower too before late Friday's recovery. Important technical levels were taken out in most pairs that signaled at least a medium term reversal. However, as a short term top/bottom should be in place after Fed stepped in, and with a rather light calendar, more consolidation could be seen this week before extending the reversed trend.
The greenback did ride on carry trade unwinding and surged against most currencies except the yen on flight-to-safety flows. Fed's unexpected discount rate cut from 6.25% to 5.75% has stabilized the financial markets and triggered some retreat in the greenback too. To be clear, the discount rate is the rate that the Fed charges to lend money directly to banks and other lending institutions. Meanwhile, the commonly talked about Fed Funds Rate is that the rate that banks ay to borrow from the marketplace. In addition to lower the rates, the Fed also allow terms of financing to extend to 30 days. Most importantly, in the statement, the Fed acknowledged that "Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward". Downside risks to growth have "increased appreciably". Altogether, even though the act did stabilized the markets and suggest that Fed is openings door to turning bias to neutral and even pathing the way to a Fed Fund rate cut, it is taken as a confirmation of the acknowledgement of the seriousness of the subprime problem. In other words, more bad news could still come in the near future and markets will continue to be vulnerable to them. The discount rate cut, and even a Fed Fund rate cut could halt the current liquidation of riskier assets but the trend will likely continue.
One thing to note is that the Swiss Franc is relatively less affected by the massive carry trade unwinding due to its low yield status. Even though it ended lower against the dollar, the Swissy did rose against both Euro and Sterling. The late buying in Swissy is perhaps an indication that more carry trade unwinding with Swissy is around the corner.
Economic data played a secondary role last week. Though, housing data from the US did showed further deterioration in the housing markets. Housing starts in US dropped much fore than expected to an annual rate of 1.381m in Jul, from 1.47m. Building permits also dropped to a 10 year low of 1.373m. From the data, in addition to NAHB Housing Market Index which fell to a 20+ record low, there is no signal of bottoming of the housing market yet. Consumer inflation data from US were inline with expectation with headline CPI moderated to 2.4% yoy, core CPI staying at 2.2%. PPI was mixed with headline number accelerated to 4.0% while core PPI moderated to 2.3%.
However, Trade deficit surprised the market by dropping to -$58.1b. Capital flow remained near to record at and dropped slightly to 120.9b only, partly reflecting flight-to-safety flows. Retail sales rebounded by rising 0.3% mom with ex-autos rising 0.4%. Regional Fed survey were mixed with NY state index at 25.1 while Philly Fed index dropped to 0.
Data from Eurozone saw Q2 GDP rose 0.3% qoq, 2.5% yoy, down from prior 0.7%, 3.1%. Jul HICP confirmed to be -0.2% mom, 1.8% yoy. There were speculations that with below target inflation and risk of subprime problems' spread over to Europe, ECB could call off it's expected Sept rate hike.
In addition to carry trade unwinding, Sterling was also hammered after UK CPI eased to 1.9% in July, down from 2.4% June, and being lowest in 15 months. Most importantly, the inflation rate was below BoE's target rate of 2.0%. The quarterly inflation report released earlier this month forecasted another hike to 6% is needed to bring inflation back to 2%. However, this week's CPI report is putting much doubt to this forecasts. Also, BoE Minutes revealed MPC elected to hold its benchmark interest rate at 5.75% in August unanimously by 9-0 vote, inline with consensus. One of the main focus in the minutes was indeed that that most members had 'no firm view' on the need for further rate hike. From the employment report, unemployment held steady at 5.4% for the second month in a row in June. However, earnings growth continues to report a slowdown and moderated from 3.5% to 3.3%. Markets were paring bets on another hike in near term.
Japan's Q2 GDP rose 0.1% Q/Q only with annualized rate at 0.5%. GDP deflator remains weak and dropped -0.3% yoy. There is also speculation that BoJ will further delay another rate hike due to current turmoil in the financial markets.
Commodity currencies remains under tremendous pressure last week. In addition, Kiwi will further sold off after June retail sales dropped unexpectedly dropped -0.4%.
The greenback did ride on carry trade unwinding and surged against most currencies except the yen on flight-to-safety flows. Fed's unexpected discount rate cut from 6.25% to 5.75% has stabilized the financial markets and triggered some retreat in the greenback too. To be clear, the discount rate is the rate that the Fed charges to lend money directly to banks and other lending institutions. Meanwhile, the commonly talked about Fed Funds Rate is that the rate that banks ay to borrow from the marketplace. In addition to lower the rates, the Fed also allow terms of financing to extend to 30 days. Most importantly, in the statement, the Fed acknowledged that "Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward". Downside risks to growth have "increased appreciably". Altogether, even though the act did stabilized the markets and suggest that Fed is openings door to turning bias to neutral and even pathing the way to a Fed Fund rate cut, it is taken as a confirmation of the acknowledgement of the seriousness of the subprime problem. In other words, more bad news could still come in the near future and markets will continue to be vulnerable to them. The discount rate cut, and even a Fed Fund rate cut could halt the current liquidation of riskier assets but the trend will likely continue.
One thing to note is that the Swiss Franc is relatively less affected by the massive carry trade unwinding due to its low yield status. Even though it ended lower against the dollar, the Swissy did rose against both Euro and Sterling. The late buying in Swissy is perhaps an indication that more carry trade unwinding with Swissy is around the corner.
Economic data played a secondary role last week. Though, housing data from the US did showed further deterioration in the housing markets. Housing starts in US dropped much fore than expected to an annual rate of 1.381m in Jul, from 1.47m. Building permits also dropped to a 10 year low of 1.373m. From the data, in addition to NAHB Housing Market Index which fell to a 20+ record low, there is no signal of bottoming of the housing market yet. Consumer inflation data from US were inline with expectation with headline CPI moderated to 2.4% yoy, core CPI staying at 2.2%. PPI was mixed with headline number accelerated to 4.0% while core PPI moderated to 2.3%.
However, Trade deficit surprised the market by dropping to -$58.1b. Capital flow remained near to record at and dropped slightly to 120.9b only, partly reflecting flight-to-safety flows. Retail sales rebounded by rising 0.3% mom with ex-autos rising 0.4%. Regional Fed survey were mixed with NY state index at 25.1 while Philly Fed index dropped to 0.
Data from Eurozone saw Q2 GDP rose 0.3% qoq, 2.5% yoy, down from prior 0.7%, 3.1%. Jul HICP confirmed to be -0.2% mom, 1.8% yoy. There were speculations that with below target inflation and risk of subprime problems' spread over to Europe, ECB could call off it's expected Sept rate hike.
In addition to carry trade unwinding, Sterling was also hammered after UK CPI eased to 1.9% in July, down from 2.4% June, and being lowest in 15 months. Most importantly, the inflation rate was below BoE's target rate of 2.0%. The quarterly inflation report released earlier this month forecasted another hike to 6% is needed to bring inflation back to 2%. However, this week's CPI report is putting much doubt to this forecasts. Also, BoE Minutes revealed MPC elected to hold its benchmark interest rate at 5.75% in August unanimously by 9-0 vote, inline with consensus. One of the main focus in the minutes was indeed that that most members had 'no firm view' on the need for further rate hike. From the employment report, unemployment held steady at 5.4% for the second month in a row in June. However, earnings growth continues to report a slowdown and moderated from 3.5% to 3.3%. Markets were paring bets on another hike in near term.
Japan's Q2 GDP rose 0.1% Q/Q only with annualized rate at 0.5%. GDP deflator remains weak and dropped -0.3% yoy. There is also speculation that BoJ will further delay another rate hike due to current turmoil in the financial markets.
Commodity currencies remains under tremendous pressure last week. In addition, Kiwi will further sold off after June retail sales dropped unexpectedly dropped -0.4%.
Yen Choppiness Resumes
At 4:30 AM UK July PS net borrowing (exp –6.1 bln sterling, prev 7.443 bln sterling)
UK July PSNCR m/m (exp –11.0 bln sterling, prev 10.339 bln sterling)
At 10:00 AM US July Leading Indicators (exp 0.4%, prev –0.3%)
The foreign exchange market remained volatile in early Tokyo trading, with the yen pairs leading the movement amid lingering risk aversion. Although last week’s 50-basis point cut in the Fed’s discount rate tempered growing fears of a credit crunch and its impact on the economy, traders will remain cautious as it remains uncertain whether the FOMC will cut the Fed fund rate next month. The major currencies rebounded against the yen on Friday and continue to hover around those ranges, with dollar/yen near 114.20 and euro/dollar steady just beneath the 1.35-level.
The week ahead is light on key economic data, but some highlights include the Bank of Japan’s monetary policy decision, Japan’s trade balance, Germany’s ZEW survey, Germany’s GDP, UK GDP and US durable goods orders. However, the currency market will likely take its cues from the credit and equity markets.
UK July PSNCR m/m (exp –11.0 bln sterling, prev 10.339 bln sterling)
At 10:00 AM US July Leading Indicators (exp 0.4%, prev –0.3%)
The foreign exchange market remained volatile in early Tokyo trading, with the yen pairs leading the movement amid lingering risk aversion. Although last week’s 50-basis point cut in the Fed’s discount rate tempered growing fears of a credit crunch and its impact on the economy, traders will remain cautious as it remains uncertain whether the FOMC will cut the Fed fund rate next month. The major currencies rebounded against the yen on Friday and continue to hover around those ranges, with dollar/yen near 114.20 and euro/dollar steady just beneath the 1.35-level.
The week ahead is light on key economic data, but some highlights include the Bank of Japan’s monetary policy decision, Japan’s trade balance, Germany’s ZEW survey, Germany’s GDP, UK GDP and US durable goods orders. However, the currency market will likely take its cues from the credit and equity markets.
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