Central Banks Play Crucial Role In Currency Markets

Movements overnight highlight the crucial role that central banks play in the currency markets nowadays. There was considerable divergence on the commodity currencies – AUD was the best-performing G10 currency overnight, followed by NZD, while CAD was the second worst (after JPY). CAD is clearly being influenced by the US economy, where yesterday’s disappointing June retail sales figure showed a gain that was short of market estimates. The Bank of Canada meets tomorrow, its first meeting under new Gov. Stephen Poloz, but almost all economists expect the statement to remain unchanged. The Reserve Bank of Australia (RBA) on the other hand released the minutes of its 2 July meeting, which revealed that the board members thought the inflation outlook was “slightly higher” due to the AUD’s recent drop. That reduced the likelihood of a rate cut at next month’s RBA meeting and caused AUD/USD to jump. I think the rally in AUD/USD is overdone and speculators may want to take a look at going short at these levels – perhaps even going short AUD/CAD in expectation of some mean reversion there. To my mind, a China slowdown seems more likely than a US slowdown at this point and so AUD seems more vulnerable to me than CAD. As for NZD, Q2 inflation was less than expected, which suggests that the RBNZ will be able to keep rates low for longer than expected. Yet NZD still strengthened vs USD. I still like to sell AUD/NZD as I believe the China slowdown will hit Australia more than New Zealand. This uptick may be a good opportunity. Meanwhile, JPY was the worst-performing G10 currency in anticipation of further dovish comments in the minutes of the recent Policy Board meeting, which will be released tomorrow.

It’s CPI day! CPIs are coming out in the UK, Eurozone and the US. Given that the worry nowadays is that inflation may be too low, currencies will be helped by higher inflation figures, which reduce the need for further extraordinary monetary measures to prevent deflation. UK producer prices and consumer prices are due out today. The Bank of England Monetary Policy Committee says one of its two major concerns is “the potential responsiveness of inflation expectations to continued above-target inflation.” Hence any indication that inflation is indeed continuing above target will be seen as discouraging further QE and therefore GBP-positive. Today’s data unfortunately are expected to give a mixed picture: mom changes are under control but yoy rate of increases are accelerating. Eurozone final CPI for June is out; the forecast is merely the provision figure, +1.2% yoy. The ZEW survey for July is forecast to show some improvement in the picture in Germany, which would be surprising, given the slowdown in factory orders and the decline in exports. Optimism in the face of these data would be likely to be EUR-positive.

In the US, CPI is expected to be up 0.3% mom in June, an acceleration from +0.1%, while core CPI is forecast to repeat May’s 0.2% rise. On a yoy basis, headline CPI should accelerate but core should fall slightly. These numbers should help to assuage any fears among FOMC members that inflation is too low and hence help to smooth the way ever so slightly for tapering off QE. That would be USD-positive. US industrial production for June is forecast to be up 0.3% mom, an acceleration from unchanged in May. Eurozone IP for May was -0.3% mom and UK IP was flat mom, so the US figure would once again demonstrate the resilience and strength of the US economy, which should be USD-bullish. Finally, the National Association of Homebuilders’ (NAHB) Index for July is forecast to fall back a bit to 51 from 52. But that’s still above 50, meaning more respondents said conditions were good than said they were poor. Last month’s figure was a seven-year high and the biggest monthly jump since 2002, so a small decline is not surprising. Sustained confidence among homebuilders in the face of surging mortgage rates (up 120 bps from the lows last November), will help to give Mr. Bernanke & Co. confidence that they can taper off QE without tapering off the housing market too.

The Market

EUR/USD
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• EUR/USD is virtually unchanged since yesterday. It dropped during the European session and rebounded after finding support at 1.2990. Trend remains to the upside. Resistance levels can be found at 1.3140 and 1.3200, support at 1.2990 and 1.2890.

USD/JPY
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• USD/JPY made gains yesterday, breaking above the 100.00 level but lost half of the gains later after failing to break above its top Bollinger Bands (4-Hour) level. We expect the outlook to remain bullish with some further down move possible. Resistance levels come at 100.70 and 101.35, support at 98.60 and 97.00. The 100 level always remains a key level.

GBP/USD
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• GBP/USD ended the day marginally lower. Just like EUR/USD it dropped during the European session and recovered most of its losses later on. Resistance levels come at 1.5180 and 1.52780, support at 1.5050 and 1.4950

Gold

• Gold suffered losses yesterday, trading in a tight range around its middle Bollinger Bands (4-Hour). Resistance levels can be found at 1300.00 and 1343, support at 1260.00 followed by 1226.50

Oil

• WTI marginally higher after a volatile day full of ups and downs. WTI lost its gains during today’s early trading hours finding resistance at the 106.70. With stochastic being in overbought region and its strong two week rising trend line close to breaking down, we believe it is highly likely to see a move to the downside today. Resistance levels can be found at 106.70 and 107.40, support at 105.40 and 103.90

BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS

MARKETS SUMMARY