Market Brief
USD continues to find buyers post-FOMC meeting. The Feds accompanying statement was encouraging for US hawks as the committee upgraded its view of the housing and labor markets. However, the critical modification came when “some” was introduced to the sentence “the Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market.” This indicates that the Fed has moved closer to hiking rates at the September meeting although clearly the FOMC remains data dependent. In reaction to the meeting USD, US rates, US stocks and oil rallied (signal the market is reading it the same). USD/JPY 3-day bullish run has now taken the pair above the 124 handle. EUR/USD fell sharply on the report to 1.0960, then staged a minor rally but heading into the European session is under heavy supply pressure (1.0950 last). Commodity currencies were mixed in Asian with AUD performing well while NZD fell. Recent stabilization in commodity prices has allowed EUR funded carry traders to become less cautions, supporting AUD in the process. Asia's regional equity indices there was green across the board. The Nikkei rallied 1.04%, Shanghai Composite rose 1.00% and Hang Seng was marginally higher at 0.14%. Following the increase in Fed Fund rates, US 10-Year treasury yields rose 3bp to 2.130% and Asian rates were higher across the board.
Overnight, Australia’s June building approvals fell -8.2% m/m, well below market expected decline of -1.0%. Annually, approvals increased 8.6% following a revised higher rise of 18.3% in the prior month. New Zealand’s June building permits declined 4.1% m/m. From Singapore, 2Q unemployment rate increased to 2.0% above expectations of 1.9% and prior read of 1.8% in 1Q. In Japan, June industrial production quickened by 0.8% m/m above consensus of 0.3% and May decline of 2.1%. A report by the IMF released overnight stated that Japans economic outlook is for growth is actually weaker than during the nations extended period of deflation, despite gains made under Abenomics. According to Giovanni Ganelli who compiled the IMF report low levels of business investment and slow progress in reforms (ie third arrow) will hamper expansion. We remain bearish on the JPY due to policy divergence theme.
In the European session, headline EA consumer confidence is expected to fall, to -4.4 from -3.4. The fall can be easily attributed to the Greek crisis. Spanish Q2 GDP is likely to quicken to 1.0% q/q from 0.9% q/q , which would be in line with the government forecast. Swedish 2Q GDP is expected to rise to 0.7 % q/q from 0.4% q/q. Swiss KOF leading indicator is expected to increase to 90.4 from 89.7 in July, which would be good news after some weak economic data reads.
The US 2Q GDP is expected to rebound solidly to 2.5% from -0.2% in 1Q. However, recent improvement in housing markets, government spending and production skews the risk to the upside surprise. A strong read should provide one of the final two key data points for a rate hike in September. The second will be Augusts inflation data. We remain bullish on the USD (encouraged by the FOMC statement) especially against the JPY and CHF. Finally, Mexico central banks is expected to hold policy rate at 3.00%. The rapid collapse of the MXN might prompt members to enact FX measures to limit the peso’s rapid deprecation. We remain bullish on the USD/MXN, due to oils low prices, Mexico’s uncertain economic outlook and expectation of Fed hikes. Should USD strength accelerate and MXN decline, we would watch for Banxico to move forward with defensive rate hikes.
Currency Tech
EUR/USD
R 2: 1.1436
R 1: 1.1278
CURRENT: 1.0980
S 1: 1.0819
S 2: 1.0660
GBP/USD
R 2: 1.5930
R 1: 1.5803
CURRENT: 1.5511
S 1: 1.5330
S 2: 1.5171
USD/JPY
R 2: 135.15
R 1: 125.86
CURRENT: 123.89
S 1: 120.41
S 2: 118.89
USD/CHF
R 2: 1.0129
R 1: 0.9719
CURRENT: 0.9599
S 1: 0.9151
S 2: 0.9072