By GCI Forex Research
Fundamental Outlook at 1400 GMT (EDT + 0400)
USD
The FOMC decision to keep the Fed balance sheet elevated initially led to broad-based dollar weakness against other G10 currencies. But the greenback recovered against the euro and sterling during the Asia session, while the yen held onto its gains. The Fed shied away from policy normalization at this stage on the grounds that “the pace of economic recovery is likely to be more modest in the near term than had been anticipated.” While the term QE2 has been used to describe the decision to reinvest maturing principal payments from agency debt and agency MBS into longer-dated Treasurys, it is important to note that there is no net new money creation. Fed officials aim to maintain the face value of holdings at ~$2.054 trn. Although it is difficult to ascertain how much MBS is maturing and Fed officials do not specify how long they will keep the balance sheet elevated, we do know that there is about $50 bn of agency debt that matures by the end of 2011. The dollar should remain weak in the near term relative to the yen and the Swiss franc as the Fed has effectively pushed out the beginning of policy normalization. Risk sentiment should remain supported as policy remains stimulative and the higher beta commodity currencies should benefit. The euro could also benefit, but H2 2010 should give the Eurozone its own reasons to worry on growth.
EUR
German CPI for July was above expectations at 1.2% y/y and 0.3% m/m. The increase was mainly due to rising energy and food prices. In France, industrial output was lower at -1.7% (cons. -0.1%, prev. 1.7%). However, overall industrial production rose by 0.8% in the second quarter.
ECB Executive Board member Stark sees no major downward risks to price stability in the foreseeable future, and said inflation risk from money supply and credit growth will play a major role in determining future policy. The ECB only settled €9 mn worth of bonds as part of the bond-buying program last week, which represents a significant fall-off from the €81 mn settled the week before. Given that the ECB settled €16.5 bn worth in the week immediately after the scheme’s introduction in May, the ECB is clearly backing away from bond purchases. The fact that Eurozone sovereign bond spreads continue to tighten in spite of this is certainly a euro-positive development but second half growth is expected to be softer.
JPY
The FOMC decision renewed downward pressure on USDJPY after the BoJ voted unanimously to keep the policy rate unchanged at 0.1% and did not announce further easing measures. USDJPY has managed to hold in above 85. Finance Minister Noda was on the wires for a third successive day, noting that “Currency moves after the Fed’s decision appear a little one-sided. Excessive foreign exchange moves are bad for the economy, so I will keep closely monitoring the market”. Yesterday marked a significant escalation of rhetoric when Noda suggested that the government and the BoJ should cooperate on the strengthening yen, a clear hint that the government would prefer to use BoJ easing as a tool to limit yen strength, rather than resort to actual FX intervention.
Vice Banking Minister Otsuka echoed these sentiments during the Asia session, saying that that government and the BoJ must cooperate to prevent a rapid rise in the yen adding to deflationary pressures, and went on to say that solo FX intervention by Japan would have little effect on currency markets. Otsuka said that the BoJ will need to act if FX moves have a big impact on the economy. Although he does not have authority over FX matters, his views offer a useful insight into government opinion.
GBP
The Bank of England is likely to present its new growth and inflation outlook as part of the publication of the inflation report. While growth for 2011 and 2012 is likely to be revised notably downwards the rate of inflation for 2011 is likely to be revised upwards. This demon-strates once again the difficult situation the BoE finds itself in. The weaker economic outlook points towards a continuation of the expansionary monetary policy. The higher rate of inflation on the other hand would justify moderate tightening. However the uncertainty regarding the economic outlook is high and the BoE is likely to place the emphasis on a more pessimistic economic outlook. The British government’s fiscal consolidation is likely to slow the recovery which in the end is likely to dampen inflation. The higher inflation is mainly due to the VAT increase and thus can be interpreted as transitory. This suggests that the central bank will maintain its expansionary monetary policy for some time yet to come. All in all the inflation report is likely to paint a depressing picture of the British economy, putting pressure on Sterling. Prior to that, the labour market data is due for publication. In June jobless claims are likely to have fallen once again, which is likely to provide moderate support for Sterling.
AUD
Australian consumer confidence strengthened again in August, a result our Australia economists ascribe to the RBA remaining on hold for a third successive meeting. The level of the confidence index is now only 3.8% below the record high in a times series that began in 1974.
TECHNICAL OUTLOOK
EURUSD BULLISH While support at 1.2990 holds, expect recovery towards 1.3334 ahead of 1.3511 Fibonacci level.
USDJPY BEARISH Bearish pressure holds above 84.83; break of this level would expose next support at 81.85 and 79.95 key support level. Near-term resistance holds at 86.66 ahead of 88.12.
GBPUSD BULLISH Pullback is seen as a correction, but holding 1.5665 support. Initial resistance is defined at 1.5999 ahead of 1.6458 key high.
USDCHF NEUTRAL Recovery has room to run toward 1.0676 with 1.0866 Fibonacci resistance next. Support holds at 1.0332 for now.
AUDUSD BULLISH Upside potential held at 0.9222 ahead of 0.9389. Near-term support comes in at 0.9033 ahead of 0.8896.
USDCAD NEUTRAL Model is neutral; 1.0587 and 0.9931 mark the key directional triggers.
EURCHF NEUTRAL The gains are expected to move towards 1.4010/41 with scope for 1.4231 next. Initial support lies at 1.3730 ahead of 1.3511.
EURGBP NEUTRAL Momentum is slowing; 0.8532 and 0.8068 have now become the key directional triggers.
EURJPY NEUTRAL Model is neutral; sustained break of 110.02 will put odds in favour of bearish trend. 115.19 defines the near-term resistance.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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