Developments were rather few and far between today after another dubious set of data were released from China. Euro touched a new local low vs. the USD, JPY and GBP but there was no conviction in the move.
The euro drooped to a new low versus the dollar, sterling and the yen as no real news was apparently bad news for the single currency and the action defaulted lower for much of the day before a sudden boost as the US equity trading session got under way. Ignoring the latest uptick as we are writing these words, the old lose-lose argument that I have presented before for the euro is an easy one to make: further EU chaos and prospects of a partial EU defaults/peripheral devaluations mean uncertainty and weakness.
On the other hand, closer union and attempts to “save the system” would likely entail considerable ECB money printing since real structural reform remains a pipe dream until further notice. This makes the Euro an awfully attractive carry trade funding currency. Meanwhile, as a backdrop, the clearly struggling China and slower accumulation of central bank reserves globally takes pressure off EUR/USD appreciation as well, especially if oil prices begin to drop again.
The latest in a string of arguments on who should leave the eurozone the soonest was issued today by BoAML analysts, who suggest that Italy has more reason to leave the EU than Greece. A Bloomberg article discusses their work.
The pound got a bit of a boost today as details emerged of the "funding for lending" scheme that the Bank of England announced previously together with the UK government. Cue eventual disappointment - first you need credit worthy borrowers and the UK economy is a balance sheet mess with a housing market that is one of the world's most unaffordable. This BBC report has a few details.
Chart: EUR/USD
EUR/USD’s next obvious target is the round 1.20 level and then the multi-year low posted at 1.1876. Local resistance is 1.2300 and then 1.2500 if we get a bounce in the near-term before the downside resumes.
Chinese Data
A Bloomberg BusinessWeek article from today quoted Li Keqiang, a regional Communist Party head, who said in 2007 that the figures that go into China’s gross domestic product are “man-made” and “for reference only.” An especially shining example of this was the data overnight suggesting that China saw +7.6% YoY growth in Q2, despite, as the linked article points out, flat electricity consumption and other indicators pointing to more significant weakness.
To be fair, the major developed economies aren’t immune from inaccurate reporting methods, often via statistical manipulation, but there is certainly a distinct difference in scale here, though it does appear efforts are being made to improve the data in China. But that’s tough to do as long as growth is attached to political carrots. No matter, the market took the data in stride and shrugged it off, and even the likes of AUD/USD was content today to climb well off yesterday’s lows and follow the S&P 500’s lead. The belief is perhaps that China will ensure (force?) sufficient growth for now to keep the situation stable or the landing soft as it heads towards an important leadership change later this year.
US PPI Data And Inflation
The US PPI data was in line at the core and much higher than expected at the headline, triggering about a 5-pip rally in USD/JPY as Treasuries pretended to react – there’s no sign of inflation demons stirring just yet - that would take considerable further persistent signs of rising prices – which are only going up in government sponsored industries like education (cheap federal loans) and especially health care.
Looking Ahead
It looks like this market would like to sneak into the weekend without further volatility, but a US equity session stands between now and that possibility, and yesterday’s session was very nervous, so be careful out there. The bond markets have been sending off a rather loud signal that something is amiss, but a big EUR/USD boost at the US equity open today suggests bears may have to be patient.
Economic Data Highlights
- China Q2 GDP out at +7.6% vs. +7.7% expected and vs. +8.1% in Q1
- China June Retail Sales out at +13.7% YoY vs. +13.4% expected and+13.8% in May
- Switzerland June Producer and Import Prices out at -0.3% MoM and -2.2% YoY vs. -0.4%/-2.2% expected, respectively and vs. -2.3% YoY in May
- US June Producer Prices rose +0.1% MoM and +0.7% YoY vs. -0.4%/+0.2% expected, respectively and vs. +0.7% YoY in May
- US June PPI ex Food and Energy out at +0.2% MoM and +2.6% YoY as expected and vs. +2.7% YoY in May