• Market still looking for indication on scaling back of QE
  • France downgraded from AAA to AA+
  • Chinese Q2 GDP growth 7.5 percent


USD – Currency markets are largely being driven by prospective interest rate differentials, with the dollar reacting to changes in sentiment about the timing of a scaling back in the Fed’s current QE program.  Consequently, the greenback lost ground following last Wednesday’s more dovish than expected FOMC minutes, though it ended the week off its lows. The focus this week will now be on Bernanke’s semiannual testimony to Congress starting on Wednesday, as markets search for further insights into Fed policy. He is likely to again emphasize that the decision to begin exiting the bond buying program is data dependent. In this regard, in a relatively heavy economic calendar, the market will be looking to releases such as today’s June retail sales figures and the industrial production data later in the week. Also of interest today will be the July Empire State index.  Retail sales rose less than forecasted in June as demand cooled at building materials outlets and restaurants, showing the biggest part of the U.S. economy lacked momentum as the second quarter drew to a close.  The 0.4% gain followed a 0.5% increase in May that was less than previously reported.  Retail sales excluding autos fell to unchanged as automobile demand remains a bright spot as American consumers replaced older vehicles.  Cars and light trucks sales in June came in at a 15.89 million annual rate, the fastest since November 2007. Manufacturing in the New York region expanded in July at the fastest pace in five months as the area’s factory activity stabilized amid a slowdown in growth.  The Federal Reserve Bank of New York’s general economic index climbed to 9.46, the highest since February, from 7.8 last month. Lastly, there will be a slew of earnings releases this week that may also have some impact on the market.

EUR – The euro is trading in quiet ranges vs. the dollar amid a light economic calendar.  The single currency is holding above $1.30 after spiking to peaks at $1.32 last week following comments by Fed Chairman Bernanke supportive of maintaining the Fed’s current stimulus program.  In another setback for the euro zone, France was downgraded last week from AAA to AA+.  Ratings agency Fitch cited concerns about budget deficits, high joblessness and weak economic growth as factors behind its decision to cut its outlook on the region’s second largest economy.  Euro zone Industrial Production reported last week fell 0.03% in May, a sign that the pain in the region continues.  The euro will likely take its cues this week from further testimony by Bernanke.  With prospects of a reduction in stimulus measures in the US and continuing low interest rates in Europe with prospects for further cuts, the euro will remain under pressure.

GBP – The market is focusing on Wednesday’s release of the minutes from the most recent Bank of England meeting to see how new Governor Carney voted.  If he voted for further bond purchases, we will likely see a further decline in the pound.  The market will be trying to come to grips with the fact that Carney is likely to be a dovish force at the BOE.  This week will also see inflation data tomorrow, with both PPI and CPI expected to show a slight decline MoM.

JPY – The JPY weakened against USD as speculation increased the Federal Reserve will reduce monetary stimulus while the Bank of Japan will maintain its bond-buying program.  Japan is on holiday and it has been a relatively quiet session for JPY.  At a meeting last week, Bank of Japan policy makers stuck with their pledge to expand the monetary base by 60 trillion yen ($605 billion) to 70 trillion yen per year in their effort to stem deflation.  JPY traded back above 100, but met resistance at the psychological 101.00 level. We expect it to remain near this level leading into the July 21st Upper House elections.

Commodity Currencies – The Australian dollar strengthened against the U.S. dollar in the Asian trading session from its weakest level since September 2010 on the back of positive growth news out of China, Australia’s biggest trading partner.  The Aussie had declined 9.9 percent over the past few months and the New Zealand Kiwi 4.5 percent over the same span.  These declines were in large part due to fears over a cooling of Chinese economic growth and growth outlooks.  The market is pricing in a two-thirds likelihood that the RBA will lower rates when they meet next month from a record low 2.75 percent to 2.5 percent.  The Canadian dollar weakened for a second day in a row after the largest weekly gain since December 2011.  The BoC will meet on Wednesday and are expected to keep rates steady at 1.0 percent.

RMB – The Chinese Renminbi hit a two-week low after posting slowing growth and factory output, increasing fears that the world’s second largest economy is cooling.  The release of the Q2 GDP report out of China has provided some indication that this slowdown in economic growth is not proving worse than expected, with GDP growth slowing in line with projections from 7.7 percent in Q1 to 7.5 percent in Q2.  The quarterly growth rate, however, increased slightly from 1.6 percent Q/Q in Q1 to 1.7 percent Q/Q in Q2, giving some support to the government’s annual growth target of 7.5 percent in 2013.  The main contributor to growth in the first half of 2013 came from a 4.1 percent increase in gross capital formation.

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