- US Q2 GDP growth 1.7%; unemployment dropped from 7.5% to 7.4%
- UK services displays fastest growth pace in 6 years
- Aussie at three-year lows on negative retail sales figures
USD – After a heavy data week in the US last week which saw GDP surprise on the upside and payrolls surprise on the downside, the dollar index DXY gained 0.3% and closed at 81.908. US Q2 GDP growth came in at 1.7% surpassing the forecasts in the market of a 1.0% increase though not enough to change the tune coming from the Fed on any potential tapering. The Federal Reserve offered no new indication on a reduction in its $85 billion dollar bond purchase program after their meeting last week. The US reportedly added 162,000 non-farm jobs last month while markets were expecting a more robust reading of 184,000. During the same period, the unemployment rate fell to 7.4% from 7.5%, though this reading may be a result of a reduction in the labor force along with the jobs added. The three month rolling average of 175k jobs/months has slowed modestly from a reading of 233k leading into February. The slowdown in jobs growth is tracking closely the slowdown in overall economic activity over the same period. This upcoming week will have releases of ISM non-manufacturing, trade balance, and initial jobless claims for the markets to review in hopes of determining the likelihood that quantitative easing may begin its tapering course in September.
EUR – The euro is trading near the upper end of recent ranges as markets reassess the timetable for Fed tapering in the US. The single currency hit peaks of $1.33 overnight before falling back to the mid-$1.32 levels. The euro was lifted last week after a softer jobs report in the US caused many to pare back expectations of when the Fed will begin reducing its quantitative easing program, which many had predicted could begin in September. The ECB also left interest rates unchanged at 0.50% last week with ECB head Draghi affirming that interest rates in Europe will remain low for an extended period. He added that risks to the region are tilted towards the downside, which may be reaffirmed by economic releases today. Eurozone Retail Sales slid -0.5% in June from the previous month, reflecting continuing consumer weakness. But the Purchasing Manager’s Index (PMI) rose to 50.5 in July, raising optimism that the region is making gradual progress towards recovery. The report’s above 50 reading denoting expansion paints a mixed picture for the region, with Germany registering a strong performance while France and the other European countries continue to struggle. Given this, euro gains are likely to be capped with continuing risks to the downside until the recovery becomes broad based.
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GBP – The pound advanced for a second straight day versus the dollar after an industry report showed UK services expanded at the fastest pace in six years in July, adding to signs the recovery is gathering pace. Last week’s data also showed manufacturing and construction both rose more than economist forecasts, proving the UK economy is doing better than most people expected. This week brings the Bank of England’s Quarterly Inflation Report on August 7, where Governor Mark Carney will detail plans for forward guidance on interest rates. It is expected that rates will remain low, at least in the short term, putting some pressure on the pound.
JPY – The yen continued to strengthen against the USD as investors weighed in on when the Federal Reserve will slow the pace of bond purchases that have contributed to weakening the greenback. After disappointing US jobs data last week, the JPY held gains against the USD as it leads to risk off sentiment which is also negative for Japanese stocks. The Topix moved more than 2.4% per day on average last week, the biggest fluctuations since June. The yen tends to strengthen during periods of financial turmoil because Japan’s current account surplus makes the country less reliant on foreign capital. Investors will weigh in Prime Minister Shinzo Abe’s stimulus policies against concerns over China’s slowing economy and prospects the US will end its bond buying program.
Commodity Currencies – The Australian dollar is trading at almost three-year lows after retail sales growth showed little improvement, increasing the odds that the Reserve Bank of Australia will cut already record low interest rates from 2.75% to 2.5% when they meet tomorrow. Retail sales in Australia were flat in June from the previous month, after a revised 0.2% showing in May and after economists had predicted a 0.4% gain. The economy is struggling from a reduction in mining investment and a slowdown in the growth of China, Australia’s largest trading partner. The New Zealand kiwi is also struggling after hitting a one-month low after China banned the imports of milk powder from the Fonterra Cooperative Group Ltd. Dairy based exports are a key driver in the New Zealand economy; if this ban were to continue it could continue to weigh on the kiwi. The Canadian dollar is flat against its US counterpart, despite a poor reading from the US payrolls release. Gold and crude oil continue to fall and the loonie was not propped up as in previous months from month-end buying.
RMB – The Chinese renminbi closed within 0.1% of a 19-year high with the most recent PMI reading suggesting that momentum in the world’s second largest economy may be picking up. The non-manufacturing PMI increased from 54.1 in July from 53.9 in June. The PBoC increased the renminbi’s fixing rate by 0.08% today, the most in a month, to 6.1767 per dollar. This upcoming week will provide a large number of data points and shed some light on the strength of any pickup in the economy with July industrial production data, trade balance, and retail sales all due along with CPI.
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