• US new home sales at highest levels in years

  • Sterling strong on expectations of increasing GDP growth in second quarter

  • Japan elections give PM Abe majority

USD – This week’s economic calendar is quite light, with little to add to the economic picture after Fed Chairman, Ben Bernanke, highlighted decisions to begin tapering the Fed’s current QE program last week. The G20 summit over the weekend resulted in a call for a careful and clearly communicated unwinding of monetary stimulus. The communication from the meeting underscored the harm excess volatility of financial flows may do and highlighted the potential negative side effects of prolonged monetary easing, but recognized the support to the global economy from accommodative monetary policies. At the G20 meeting growth was put before austerity, as the communication said that “we agreed that our near term priority is to boost jobs and growth”. The benefits of expansive policies in the US and Japan were acknowledged while the recession in the euro area and a slowdown in emerging markets were highlighted. There will be interest in new and existing homes sales figures. In May, existing home sales were at their highest level since November 2009, with new homes sales the strongest since August 2008. Both were expected to show further improvement in June, as the US housing market continues to recover. However, sales of previously owned homes unexpectedly dropped in June, hurt by a lack of supply and rising mortgage rates that have slowed the real estate rebound.  Purchases fell 1.2% to a 5.08 million annualized rate. Also this morning the Chicago Fed National Activity Index for June climbed to negative 0.13 from a revised negative 0.29 reading in May.  The negative reading indicates national economic growth was below its historical trend, and suggests subdued inflationary pressure from economic activity in the coming year. Meanwhile, durable goods data are forecast to rise by 1.2% in June after May’s strong 3.6% increase. The US initial jobless claims and earnings data could have an impact on market sentiment this week.

EUR – The euro is modestly higher vs. the dollar but within recent ranges ahead of key economic releases this week.  The single currency is hovering near $1.32 on optimism that the economic data will continue to show progress on the road to recovery.  Germany’s Bundesbank reported today that the economy grew strongly in Q2, aided by gains in industrial production and construction.  The central bank added that inflation risks were subdued while also reporting signs of a slowdown underway, calling into question the durability of Q2’s gains.  Euro zone Consumer Confidence and Purchasing Manager’s Index (PMI) data this week are forecasted to show gains with the key PMI data projected at 49.2, on the precipice of the 50 threshold denoting expansion.  The euro is likely to be largely rangebound this week pending the release of these economic reports.

GBP – The pound has increased for five consecutive days amid indications the economy improved during the second quarter.  The pound is up .6% against the dollar to 1.5365 in today’s trading, the highest level since late June.  The Office for National Statistics will publish the second quarter GDP on Thursday and expectations are for GDP growth of 0.6%, an increase over the 0.3% in the first quarter of this year.

JPY – The JPY has strengthened over 1% against USD  following the Upper House election on Sunday. The election results proved largely as expected coming in  line with the final opinion polls, with the coalition government of the LDP  and  New Komeito party winning a majority of seats in the Upper House. With  the  government  now  having  control  of both houses of the Diet, it should  enable  swifter  implementation  of key economic policies, making it easier  to  push ahead with implementing Abenomics, which should continue to weigh  upon  the  yen  ahead.  Prime  Minister  Abe  has already called for speeding  up  policymaking  even further, vowing to concentrate on restoring a strong  economy  and  escaping  deflation.

Commodity Currencies – The Canadian dollar is trading near one month highs in advance of a government report being issued tomorrow that should indicate that retail sales have increased in May.  The loonie gained against the US dollar last week when inflation increased in the month of June, even though the figures came in below the BOC’s target inflation rate of 2%.  The Australian dollar rose after the Federal Reserve damped expectations of an imminent reduction in bond purchases, creating greater demand for higher-yielding assets.  However, traders are indicating there is a 75% likelihood to a quarter percent drop in the RBA benchmark rate to 2.5% in their next meeting.  The Aussie, which is down 8.3% this year, has been the second worst performer among the 10 developed-nation currencies tracked by Bloomberg with only the yen performing worse.

RMB – The Chinese renminbi fell amid reports showing capital outflows in the wake of an economic downturn for the world’s second largest economy.  The People’s Bank of China said on July 19th that it has ended a floor on borrowing costs previously set at 30% beneath the benchmark.  The PBOC increased the daily yuan fixing by .05% to 6.1721 and is indicating a willingness to continue its recent financial reforms.  These reforms may include a widening of the trading band from +/- 1% to potentially +/- 2%.  With more two-way movement being recently introduced in the direction of the renminbi, it is hard to tell whether or not it is beginning to trade at an equilibrium level.