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- Japanese Yen Gains as Carry Trades Tumble, Japanese GDP Rises for First Time Since Q1 2008
- Euro Breaks Below Trendline Support, Warrants Bearish Bias
- British Pound Racks Up Steep Losses Ahead of UK CPI Release
US Dollar Rally Continues as S&P 500 Plunges 2.4% Despite Surprising US Economic Data
In the US, economic news was broadly positive but had little impact on risk appetite, as the S&P 500 closed down 2.4 percent and the US dollar gained amidst flight-to-safety. Looking to the data on hand, the New York Fed's Empire manufacturing index jumped to a reading of 12.08 in August from -0.55, marking the first expansion in activity since April 2008 and the biggest increase since November 2007. Adding to this, the latest TIC flows report showed that foreign demand for US long-term equities, notes and bonds rose a net $90.7 billion in June, which was much better than forecasts for a $17.5 billion increase and compared with net sales of $19.4 billion in May. A closer look at the data shows that net buying of Treasury notes and bonds totaled $100.5 billion, the most since records began in 1977, suggesting that the massive debt accumulated by the US government has yet to lead investors to question the safety of US assets.
According to Bloomberg News, the Commerce Department may report on Tuesday that US housing starts and building permits continued their rebound during the month of July. Indeed, housing starts are projected to have risen for the third straight month to an annual rate of 598K from 582K, while building permits are forecasted to have risen to 576K from an upwardly revised 570K. These will be some of the first housing-related indexes released for the month of July, and though it has a mixed history as a solid leading indicator, surprising results may be telling for subsequent new and existing home sales reports.
Japanese Yen Gains as Carry Trades Tumble, Japanese GDP Rises for First Time Since Q1 2008
The Japanese yen was the strongest of the majors on Monday, gaining 2 percent against the Australian dollar and New Zealand dollar, as risk aversion gripped the markets once again. This sentiment came despite data that showed that Japanese GDP expanded for the first time since Q1 2008 during Q2 by 0.9 percent from the previous quarter, and by 3.7 percent from a year earlier. The improvement was almost exclusively the result of a 6.3 percent rebound in exports from Q1, and even though household consumption rose 0.8 percent, overall private demand dropped by 1.3 percent and domestic demand fell 0.7 percent. Furthermore, as part of the private demand component, capital investment - aka business spending - dropped by 4.3 percent, indicating that businesses remain cautious on the Japanese growth outlook. All told, even though the GDP results were right in line with expectations, investors are ultimately skeptical that an export-based recovery is in the works for trade-reliant economies like Japan, and that the Q2 results may be the best we'll see in 2009. This explains why the Japanese news did not help revive demand for carry trades and equities, and instead, risk aversion took its toll on the markets throughout the Asian, European, and US trading sessions. From a technical perspective, pairs like EURJPY, GBPJPY, NZDJPY have broken below trendlines that have served as support since early to mid-July, and given the signs of important turns in equities, there are serious downside risks for the JPY crosses in general.
Related Article: Japanese Yen Weekly Trading Forecast
Euro Breaks Below Trendline Support, Warrants Bearish Bias
The euro and Swiss franc both tumbled against the US dollar and Japanese yen on Monday as risk trends drove price action rather than fundamentals. The Euro-zone trade balance posted a surplus for the third straight month in June. Indeed, exports only fell by a seasonally adjusted 0.1 percent during the month, compared to a drop of 1.8 percent in May, while imports went unchanged after tumbling 2.5 percent in May, all of which put the trade balance at a seasonally adjusted 1 billion euros. Meanwhile, Swiss retail sales rose during June at a rate of 0.9 percent from a year ago, up from -1.4 percent in May. That said, this is a highly volatile indicator and isn't necessarily indicative of a jump in consumption. From a technical perspective, EURUSD broke below an intraday trendline connecting the July and August lows, which warrants a bearish bias on the pair. On the other hand, USDCHF remains contained to a tight range, but breakout potential is very high.
Looking ahead to Tuesday morning, a steady rally in European equities throughout July to the highest levels since Q3 2008 is likely to underpin the case for a rise in German investor sentiment for the month of August. The ZEW survey on the economic outlook is forecast to rise to a more than 3-year high of 45 from 39.5, while sentiment on current conditions is projected to edge up to 7-month high of -85.5 from -89.3. Surprisingly strong results could lead the euro to gain following the news on a very short-term basis, but disappointing data would likely have a greater impact, and could trigger sharp declines in the currency.
British Pound Racks Up Steep Losses Ahead of UK CPI Release
The British pound was one of the weakest major currencies on Monday, losing 1.7 percent against the Japanese yen and 1.2 percent versus the greenback. The moves come ahead of the release of the UK's consumer price index (CPI) reading for the month of July, which is expected to fall for the first time in six months at a rate of -0.3 percent. This may lead the annual rate of growth, which is more closely watched by the Bank of England, is forecasted to fall to 1.5 percent, the lowest since November 2004, from 1.8 percent, keeping inflation within the central bank's acceptable range of 1 percent - 3 percent, but below their 2 percent target. If CPI falls more than projected, the British pound could pull back sharply as the markets will anticipate that the BOE will expand their quantitative easing efforts even further before year-end. On the other hand, if CPI holds strong, the currency could rally in response.
Related Article: British Pound Weekly Trading Forecast
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