Articles from September 2013

US Dollar slides as money markets risk worries decrease

Risk appetite has continued on an improving trend since the end of August.
US Dollar slides as money markets risk worries decrease
A mixture of easing tensions surrounding Syria and stronger data globally have helped to shore up sentiment. US Treasury yields have lost some upside momentum as tapering worries have eased, providing relief to risk assets including emerging market currencies.

Therefore, the Dollar continues to lose ground and looks susceptible to additional slippage in the days ahead. Eurozone industrial production will be the main data releases of note today.

In Asia, central banks in Korea, Philippines and Indonesia will follow the RBNZ overnight with policy decisions. No change in policy is expected from any of the central banks. Indeed, the recent firming in the rupiah suggests that there will be less urgency for Indonesia’s central bank to hike rates to protect the currency.

The Indian rupee has been the best performing currency since the start of the month as portfolio capital has returned. In the near however, the INR looks may struggle to breach the 63.00 level versus US Dollar.

Swiss officials continue to defend the CH Franc ceiling and show no sign of eliminating it any time soon.

Wise Money agrees that the Franc remains overvalued but the reality is that Swiss economic data has shown some improvement while foreign demand for CHF assets has eased in the wake of improving sentiment towards peripheral Europe as reflected in reduced Swiss banks’ foreign liabilities.

The SNB is also not intervening to hold back CHF gains, with reserves growth flattening out over recent months. Although any reversal of flows from Switzerland will prove sticky the bias for EUR/CHF will be higher. In the near term the currency pair may run into resistance around the top of its recent range around 1.2438.

Syrian action now deemed unlikely on Putin intervention

American military action in Syria looks increasingly unlikely after President Obama, seemed to back the political solution suggested by the Russians of the Assad regime giving up its chemical weapons.
Syrian action now deemed unlikely on Putin intervention
Mr Obama, faced with increasing opposition in congress to the use of military force, will now push for a UN resolution on disarmament that will probably also authorise the use of the force if the deadline for handing over weapons is not met. It marks a huge political U-turn for the American government, who looked set for launch air strikes imminently.

The news has released pressure on the US Dollar, lifting the Yen in particular as the Nikkei also regains highs last seen in July.

Sterling, in the absence of any more developments in Syria, looks set to consolidate above the 1.57 until next week’s FOMC meeting. Today’s unemployment numbers from the UK are the highlight, particularly as forward guidance is now explicitly tied to getting the jobless rate back below 7 per cent.

The recent Bull Run in Sterling and UK economic data in general remains a concern for at least one branch of the UK government, with Vince Cable warning against complacency after only a few months of good data. With little UK data left this week, focus now turns to retail sales, which are expected to show strong growth and CPI data forecast to show inflation remains stubbornly above target.

The attention of the market is very focused on Sept 18 and the FOMC meeting. Tapering is expected to commence but the exact make up of any reductions, either in Treasury bills or MBS or something involving reverse repos is very unclear at the moment.

Last week’s jobs number confused matter slightly posting lower than expected jobs growth and the unemployment rate falling only because the participation rate continued to fall. Even with the slight slowing in the pace of job creation the Fed has gone to extreme lengths to pre-warn the markets about tapering, failing to begin this month would be a huge surprise.

US Dollar on the defense

Yesterday the US Dollar came under pressure as speculation increased that the Federal Reserve will hold off on tapering in September.
US Dollar on the defenseThis speculation increased significantly following the disappointing payrolls data on Friday which came in much lower than hoped for at +169,000 against hopes for a reading over 200,000.

The labour market data and most especially the non-farm payroll data was always going to be a leading indicator to direct the Fed and although the Fed are still confirming that they have an open mind on tapering, the view is that they will hold off for now.

In the money markets this could lead to further gains for GBP/USD and EUR/USD especially if the possibility of intervention in Syria recedes as it currently seems to be the position with the hopes of Syria placing its chemical weapons under international control.

In relation to economic data, we have just had Italian GDP which has come in worse than expected for Q2 with a revision down to -0.3% for the quarter on quarter reading against the expectation of -0.2%, French manufacturing production and industrial output also came in weaker than expected.

The weaker data will help to reinforce the view that the ECB need to keep policy loose and should help to keep a lid on EUR/USD gains.

Elsewhere in China data has continued to point in the right direction with August industrial production rising to 10.4% and retail sales coming in at 13.4% against expectations of 13.2%. The good Chinese data will boost risk appetite and will help support the AUD which has gained overnight.

The UK Chancellor George Osborne publicly stated yesterday that the British economy is ‘turning a corner’, but investors holding GB Pounds remain unconvinced and are not buying into the rhetoric for now. Recently, we have seen a very strong run in economic data which has translated into a stronger Pound to some extent although there is still an element of caution.

Fed’s tapering timing crucial distraction from Syrian crisis

As most politicians were divided last week on the Syrian crisis at the G20, investors and economists remain divided on the timing of the Federal Reserve’s tapering programme.
Fed's tapering timing crucial distraction from Syrian crisis
With softer than expected data out from the US non-farm payroll figures, investors looking to flock to the US with their capital suffered a setback as the tapering programme can only be put into action with stronger employment numbers.

However, since the number was not weak at 169,000 new jobs in August against an expected number of 180 000, the Federal Reserve is still expected to announce that tapering could begin this month or early October, as Ben Bernanke will reveal early next week after the interest rate decision.

As we move into this week, US stock m arkets could be faced with considerable volatility depending on if the Congress decides to authorise a military strike against Syria. We start this morning with the Greenback slightly weaker than the previous weeks at 1.5640 GBPUSD and 1.3175 EUR USD.

Amidst expectations that the Fed will curb quantitative easing as early as this month or the next, gold has extended its losses and has fallen 17% this year.

From the UK, it was further revealed that manufacturing production has also risen for the second month in July by 0.2% adding to the already accumulated positive sentiment after a spate of good data from the economy.

With no economic data out from the UK today, expect Sterling to continue to remain strong as it has surged upwards against the greenback, post the softer job numbers to a high of 1.5650 early this morning, coupled with the evidence that suggests Britain’s economy is slowly starting to recover.

George Osborne is also expected to make a statement today to reiterate that the coalition’s plans of spending cuts and policy measures were the right step in getting Britain back on its feet towards recovery.

US Non Farm Payroll data released

The Non-Farm Payrolls is arguably the most important release of each month but this month it will be the most vital indicator for the future direction of the US Dollar.
US Non Farm Payroll data released
Ben Bernanke and the FED hinted for months that the improvement outlook in the US labour situation could trigger a scaling back of Quantitative Easing. September has become to be known as SepTaper as a tapering of the asset purchase programme could be a real possibility.

The US dollar, stocks and treasury yields indicates that many investors are still unsure there is enough reason for the Federal Reserve to taper asset purchases in September and the Non-Farm Payrolls today could provide vital clues.

According to most economists a 150,000 reading or better will be enough for the FED to scale down QE. According to the consensus, the market is expecting a reading of 180K and if past NFP releases are any guide, anything below consensus could spark a US Dollar selloff. There is a strong argument for a bullish number.

Service sector activity expanded at its fastest pace since January 2006 and interestingly, the employment component of the report rose to its highest level in 6 months. The ISM index rose from 56 to 58.6 in the August. Jobless claims dropped to 323k from 332k and continuing claims also declined by 43k to 2.95 million. The only disappointing data came from the manufacturing sector where job growth slowed slightly despite an increase in activity.

Over in Europe, the ECB kept interest rates unchanged. Draghi started yesterday’s press conference talking about the gradual signs of recovery, but he warned of downward risks. Draghi conceded, while answering one of the questions, that he doesn’t exclude the possibility of more rate cuts again if market interest rates move in an unsatisfactory way.

The ECB has been uncomfortable with the rise in the market interest rates and he has used forward guidance to reduce volatility to contain the market’s overreaction to the recovery. The ECB raised its 2013 GDP forecast to -0.4% from -0.6% but lowered next year’s forecast to 1.0% from 1.1%. Widespread improvements in U.K. data contrast sharply with mixed economic reports from the Eurozone.

The Bank of England has also left monetary policy unchanged yesterday. We will have to wait two weeks to see if the MPC members are comfortable with a much improved outlook for the UK economy.