Financial News August 21, 2015
USD absorbs depreciation of other currencies
At the margin newly arisen risks from China and the implied USD appreciation may dissuade those members of the FOMC who lack confidence in US economic momentum from voting for a hike in September.
But currencies cannot escape relative value; hence, the US as a largely closed economy with the greatest internal growth momentum is relatively less affected, implying the USD bears the burden of others' adjustment.
"Furthermore, if Fed policymakers are dissuaded from policy firming due to risks from China, it is even more likely that other major central banks' policies will push back tightening or move toward outright easing. It is worth stating that our forecasts implicitly force the USD to absorb nearly all of the depreciation of other currencies. This is not to say that the US is unaffected by Chinese growth or the weakening of the CNY", states Barclays in a ressearch note.
Bullish bias in EUR rates is unlikely to disappear
The bullish bias in EUR rates is unlikely to disappear as the ECB has little choice but to remain accommodative, if not increase this accommodation at some point. Therefore, a more bullish message from the September ECB meeting is possible.
"While there is a bullish bias in rates, levels are not found to be attractive to initiative a new outright position though. In EGBs, short-term tactical outperformance of Spain is seen versus Italy in the 10y sector with this week's Spanish auctions out of the way and Italy likely to issue a new 10y BTP at the 28 August month-end auction", says Barclays.
Bund ASW at 40bp trades close to the wides of the summer currently. While setting up for the September swapped issuance pipeline can put tightening pressure on spreads, the current level is not very expensive fundamentally, and the bullish sentiment in the rates market can likely overshadow any expected near-term swapped issuance anticipation near term.
"Therefore, a further outright rates rally is likely to be seen that squeezes Bund ASW more before considering any tactical shorts", added Barclays.
Euro area PMIs on focus
The EUR has been well supported of late, regardless of the latest developments pointing towards a rising probability of the ECB turning more aggressive on monetary policy, at least verbally. Both weakening commodity price developments and a stronger EUR may have increased downside risks to inflation considerably, especially if growth momentum fails to accelerate from the current levels.
From that angle today's focus will be on preliminary August PMI releases. Considering muted external demand prospects due to Asia related tensions, business activity is unlikely to improve strongly.
Under such conditions it cannot be excluded that medium-term inflation expectations as measured by 5y inflation swaps will continue to trend lower in the weeks to come, says CAB Bank. This in turn suggests that the ECB will have to become more aggressive in order to prevent deflation fears from reappearing. It must be noted that starting with the next week several central bank members including Executive Board member Coeure will speak.
"As a result to the above outlined conditions we advise against buying the single currency around the current levels, in particular against the USD and GBP", suggests CAB Bank.
Market attention remains on China and the Fed
Moving on from Greece, market attention remains on China and the Fed. Following China's currency devaluation last week, the Chinese stock market remained very volatile this week, facilitating the downward pressure on global stock markets and commodities with Brent oil down another c.5%, just shy of its lows in January.
Meanwhile, emerging markets, especially the currencies, are under remarkable pressure helped by the China story, Fed getting closer to the lift-up and domestic issues in certain EM countries. In this environment, bond markets have stayed resilient with 10 Bund rallying 7bp and 10y Treasuries and Gilt yields falling by 10bp.
Somewhat weaker-than-expected US inflation data and relatively dovish July FOMC minutes have also helped the bond market strength this week.
"The recent fall in oil price will also likely to lead the ECB to lower its inflation projections in the 3 September staff projections. Furthermore, at 1.12, EURUSD is struggling to cheapen, especially during flight-to-quality episodes, partly because it is also a funding currency now", says Barclays.
Lastly, with almost up to the 4y part of the German curve again trading below -20bp following the recent market rally, ECB is anecdotally pushing its QE purchases further out on the yield curve, not just in Germany but also in some peripheral issuers, which is making longer-end EGBs more resilient.
Market Review August 21, 2015
On the very day that Greece received the first tranche of its new EUR 86bn bailout package, from the European stability mechanism, the European Union’s rescue fund, Prime Minister Alexis Tsipras has decided to resign and call a snap general election, which will be held next month. In the next few months, Alexis Tsipras government has much to do in order to meet the terms of the bailout and persuade its creditors to consider giving Greece some much needed debt relief. The election will most probably complicate that timetable and will inevitably create more uncertainty about where the future of Greece. However, despite the risks it involves, Tsipras’s strategy seems necessary for broader democratic and political reasons.
Released during the Asian session, Japan Flash Manufacturing PMI came in at 51.9 versus the estimated 52.1, New Zealand Credit Card Spending rose 9.7% versus the previous of 6.6% and Chinese Caixin Flash Manufacturing PMI came in at 47.1 missing the estimated 48.1. The US Dollar is sharply lower against the other majors especially against Euro and Yen as markets seem to be adapting to expectations of a Fed rate hike in September. EUR/USD rose to the 1.1294 level making EUR the strongest currency for the week. Furthermore, Gold extended its gains reaching as high as $1168 per ounce.
Released during the early European session this morning, GfK German Consumer Climate came in at 9.9 versus the estimated 10.2, French Flash Manufacturing PMI came in at 48.6 versus the estimated 49.8 and French Flash Services PMI came in at 51.8 missing the estimated 52.1. Moreover, German Flash Manufacturing PMI came in at 53.2 beating the estimated 51.7 and German Flash Services PMI came in at 53.6 versus the estimated 53.7.
Elsewhere, the United States equities suffered the steepest one-day sell-off in more than a year on concern over global growth in China and other emerging markets. DJIA dropped -2.06% to close at 16990 and breaking below the 17000 handle, which is the largest decline since February last year. S&P 500 also dropped -2.11% to close at 2035.73.
The main event for the day will be the Canadian Core CPI, Core Retail Sales and United States and Europe Flash Manufacturing PMI.
Data releases to monitor:
EUR: Flash Manufacturing PMI, Flash Services PMI, Consumer Confidence.
USD: Flash Manufacturing PMI.
CAD: Core CPI, Core Retail Sales, CPI, Retail Sales.
GBP: Public Sector Net Borrowing.
Trade Idea of the Day
NZD/JPY
Currently the pair is trading at 81.36. Traders must monitor the 83.25 resistance level and the support level of 80.67 for possible breakouts. A possible scenario would be a movement towards the 81.19 support level where a break may lead to the 80.90 area. An alternative scenario could be a movement towards the 81.90 resistance level where a break could lead to the 82.15 area.
