- The dollar and yen reduced yesterday's gains as risk aversion eased and global stock markets stabilized on Tuesday. US producer prices fell more than expected, not prompting the Fed to raise interest rates anytime soon. Housing starts and building permits unexpectedly declined; still, indicating the US housing sector has stabilized. The S&P 500 rose 9.94 points to 989.67 after finding support in the 980 area. The USD/JPY dropped, testing the 94-area support. Sterling rallied, helped by higher-than-expected UK inflation. The Australian dollar rose on hawkish RBA August 4 meeting minutes stating that further rate cuts are unlikely and inflation will not fall as much as previously expected. The Canadian dollar advanced on higher crude oil prices and a report of continued strong foreign investments in Canada.
- The EUR/USD gained as Germany's investor confidence jumped to the highest level since April 2006. There is a small head-and-shoulder top with a neckline in the 1.40 area, which is also the support from the uptrend that started back in March. We expect this support to be tested in the next few days. If it is broken, the EUR/USD may fall to the 1.36 area.
Financial and Economic News and Comments
US & Canada
- The Globicus/qEcon Research US overall leading economic index hit a record-low -8.7 in December 2008 and the short leading index plunged to a record-low -16.7, their lowest levels since the early 1950s. Having risen every month since December, all the leading indexes are now strongly positive. The long leading index advanced to 9.3 in June, while at -7.7 the coincident index showed the US economy remained in the recession at the end of Q2 2009. The overall leading index and the short leading index for July rose to 8.3 and 5.6, respectively, indicating an end of the Great Recession. The LEI is rising strongly with the coincident index having improved modestly since its bottom in March, suggesting the coincident index should turn positive in July or August. US GDP growth should be in a 3% range in Q3 2009, higher than consensus expectations.
- US producer prices declined a more-than-expected 0.9% m/m in July after a 1.8% m/m increase in June, PPI data from the Labor Department showed. The PPI fell a more-than-expected 6.8% y/y, the largest fall since records began in 1948, following June's 4.6% y/y decrease. The July month-on-month PPI decline was mostly due to a 2.4% m/m slide in energy prices and a 1.5% m/m decline in food prices. The core PPI, which excludes food and energy, unexpectedly slipped 0.1% m/m in July, a slight decline after rising 0.5% m/m in June, the biggest rise since October 2008. The core PPI advanced a less-than-expected 2.6% y/y, following June's 3.3% y/y rise. Overall, July US PPI figures indicate producer-price inflation is currently not an immediate concern for the Fed.
- US housing starts unexpectedly declined 1.0% to a seasonally adjusted 581,000 annual rate in July after an upwardly revised 6.5% increase to 587,000 in June, according to figures released by the Commerce Department. July housing starts fell 37.7% y/y. The decline in July housing starts was due to a 13.3% drop to 91,000 in multi-family starts. However, single-family starts grew 1.7% to 490,000 in July, a fifth straight monthly increase. Regionally, housing starts dropped 16.3% in the Northeast, fell 1.4% in the South and declined 1.6% in the West, while starts increased 2.9% in the Midwest. Building permits unexpectedly decreased 1.8% to a 560,000 annual rate in July after an upwardly revised 10.0% rise to 570,000 in June. Permits for single-family units rose 5.8% in July, a fourth consecutive monthly gain.
- Foreign investment in Canadian securities totaled C$10.511 billion ($9.5 billion) in June, showing foreigners invested in Canada's securities for a sixth consecutive month, following a revised C$18.778 billion in May, figures from Statistics Canada showed. Meanwhile, Canadian investors bought $1.441 billion of foreign securities in June.
- The ZEW eurozone economic expectations index rose more than expected to 54.9 in August from 39.5 in July, indicating eurozone investor confidence improved this month, according to data from the ZEW Centre for European Economic Research. The current economic situation index increased to -82.1 from July's -90.7.
- The ZEW German economic expectations index jumped more than expected to 56.1 in August from 39.5 in July, indicating Germany's investor confidence rose to the highest level since April 2006, ZEW data showed. The current economic situation gauge improved more than expected to -77.2 from July's -89.3, helped by last Thursday's Q2 2009 German GDP release of 0.3% q/q GDP growth, according to the ZEW report.
- UK consumer prices stayed unchanged m/m in July after a 0.3% m/m increase in June, according to CPI data released by the Office for National Statistics (ONS). The consumer-price inflation rate was at 1.8% y/y, the lowest level since September 2007 and the same rate as in June. The core CPI rate accelerated at 1.8% y/y in July, the fastest pace in eight months, following June's 1.6% y/y.
- The UK retail price index declined a less-than-expected 1.4% y/y in July after falling 1.6% y/y in June, RPI data from the ONS showed. July RPI excluding mortgage interest payments rose a slightly more-than-expected 1.2% y/y, following June's 1.0% y/y increase.
- The Japanese leading economic indicators index, a measure of future economic activity, was revised upward to 79.9 for June from a preliminarily reported 79.8, higher than 76.9 in May, final June LEI data from the Cabinet Office showed. The coincident index, measuring present economic activity, was revised up to 88.0 from a previously reported 87.8, higher than May's 87.1.
- The Reserve Bank of Australia, regarding the timing and process of removing the current expansionary policy stance, stated that its decision will require balancing the risk of stoking inflation versus prematurely killing off confidence and demand, minutes of the RBA August 4 meeting released today showed. The minutes read: In discussing the timing and process of removing some of the current expansionary policy setting, members noted that it would, when it began, involve balancing two risks. There was a risk of overstaying a very accommodative setting in a recovering economy, particularly when underlying inflation still needed to decline to reach the target. On the other hand, there was a risk of an early tightening choking off confidence and demand prematurely. A particular source of uncertainty was whether the recent growth in household spending was due mainly to the temporary fiscal measures, in which case it would probably soon fade, a more general decline in risk aversion, or the more persistent effects of lower interest rates. Information over the period ahead would be important in judging this. RBA policy makers had cut the cash rate to the current record-low 3.00% in anticipation of very weak economic outcomes and in recent months had left open the possibility of further rate cuts should the Australian economy deteriorate further, the minutes said. Given the recent improvement in the global and domestic outlooks, it now appeared unlikely that this would be necessary, policy members said, adding that if the economy evolved as anticipated in the forecasts, the Bank would in due course need to adopt a less expansionary policy stance.
FX Strategy Update