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Euro shrugs off data to rise on remnimbi flows and improving outlook

EUR

The euro rose on Tuesday as a result of investors covering euro-funded yuan trades after the Chinese authorities intervened to devalue the remnimbi, which sank over 2.0% in a matter of hours.

The euro has become a popular funding currency of late due to its liquidity and low funding rates.

The single currency was further supported after Greece came one step closer to closing a 3-year 85bn bailout deal. After long negotiations with officials from the Troika Greece agreed a “technical” settlement, although a “political” agreement had yet to be passed, and could still be problematic, given Tspiras’s weakening grip and the unpopularity of the bailout with voters in the central and northern euro-zone countries who will be paying.

Unimpressive data from the ZEW for Germany failed to dent enthusiasm for the single currency. The ZEW Economic Sentiment Survey for Germany fell by 4.7 points to 25.0 in August, which was just above its long-term average of 24.9. In an accompanying note ZEW President Professor Clemens Fuest said: “a substantial improvement of the economic situation in Germany over the medium-term is now improbable.” Nevertheless he also added: “The German economic engine is running smoothly..”

Sentiment data for the Euro-zone from ZEW was more positive, and showed a rise of 4.9 points to 47.6 for economic sentiment and a recovery of 4.3 to -10.3 for Current Situation.

USD

The dollar was marginally lower at the time of writing on Tuesday after mixed data showed a decline in Productivity but a higher-than-expected rise in Labour Costs, which would indicate a pick-up in wages, resulting in a heightening of rate hike expectations.

Non-Farm Business Sector Labour Productivity increased by 1.3% in the second quarter, missing expectations of a 1.6% rise; the previous quarter’s massive -3.1% drop was, however, revised up to -1.1%.

Unit Labour Costs, a large part of which are comprised of salaries and worker benefits rose by an unexpectedly high 0.5% in the three months to June, when only a 0.1% increase had been forecast. This was, however, still very much lower than the 2.3% rise in Q1.

A rise in Wholesale Inventories may also have weighed as they could be reflective of a fall in demand.

The main news on Tuesday was China’s devaluation of the remnimbi in order to help the competitiveness of its exporters which have been suffering from a slow-down in demand recently. The remnimbi was semi-pegged to counterparts so it could only move a maximum of 1.0% in a day, however, the PBOC decided to relax the rules governing its value, in order to move towards a more free-floating market dictated exchange rate.

The dollar appeared unaffected by the news from China whilst commodity currencies were the worst hit. The aussie, kiwi and loonie fell as China is a big consumer of their commodity exports, and the devaluation was seen as another symptom of the economic slowdown.

GBP

The pound fell mostly on Tuesday, but due to a lack of data meant its fluctuations were more prone to news affecting counterparts rather than its own drivers.

Technical analysis provided more useful insights on such a slow day, and with the pair having been range-bound now for so long – especially in cable – analysts are talking about an increased chance of a breakout, perhaps on Wednesday when Employment data is released. Exchange rates can only go sideways for so long, they argue, before probabilities favour more directional movement.

The catalyst for such a breakout might come from the employment figures to be released on Wednesday (tomorrow) which will include the closely watched Average Weekly Earnings metric. A rise in Earnings tends to precede increases in the inflation rate, and would be a pre-condition for the BOE raising interest rates.

JPY

The yen lost ground versus the dollar, as Economic Watchers Survey presented a mixed picture of the Japanese economy.

The current index of the survey rose to 5.6 in July, the first rise in in three months, from 51.0 in the past month. On the other hand the outlook index of the survey dropped for the second consecutive month to 51.9 in July from 53.5 in June. The outlook for Japan’s service sector workers deteriorated to the lowest level in six months in July, amid concerns over higher import costs and volatile weather patterns.

The Bank of Japan officials are assessing the strength of the rebound in the economy from an estimated slump last quarter. Worsening sentiment could dampen personal consumption which has failed to fully recover from the consumption tax hike last year.

BOJ Governor Kuroda said last week after the central bank kept its stimulus policy unchanged, that he needed to see “hard” data to determine the strength of spending in July.

EUR

The euro rose on Tuesday as a result of investors covering euro-funded yuan trades after the Chinese authorities intervened to devalue the remnimbi, which sank over 2.0% in a matter of hours.

The euro has become a popular funding currency of late due to its liquidity and low funding rates.

The single currency was further supported after Greece came one step closer to closing a 3-year 85bn bailout deal. After long negotiations with officials from the Troika Greece agreed a “technical” settlement, although a “political” agreement had yet to be passed, and could still be problematic, given Tspiras’s weakening grip and the unpopularity of the bailout with voters in the central and northern euro-zone countries who will be paying.

Unimpressive data from the ZEW for Germany failed to dent enthusiasm for the single currency. The ZEW Economic Sentiment Survey for Germany fell by 4.7 points to 25.0 in August, which was just above its long-term average of 24.9. In an accompanying note ZEW President Professor Clemens Fuest said: “a substantial improvement of the economic situation in Germany over the medium-term is now improbable.” Nevertheless he also added: “The German economic engine is running smoothly..”

Sentiment data for the Euro-zone from ZEW was more positive, and showed a rise of 4.9 points to 47.6 for economic sentiment and a recovery of 4.3 to -10.3 for Current Situation.

USD

The dollar was marginally lower at the time of writing on Tuesday after mixed data showed a decline in Productivity but a higher-than-expected rise in Labour Costs, which would indicate a pick-up in wages, resulting in a heightening of rate hike expectations.

Non-Farm Business Sector Labour Productivity increased by 1.3% in the second quarter, missing expectations of a 1.6% rise; the previous quarter’s massive -3.1% drop was, however, revised up to -1.1%.

Unit Labour Costs, a large part of which are comprised of salaries and worker benefits rose by an unexpectedly high 0.5% in the three months to June, when only a 0.1% increase had been forecast. This was, however, still very much lower than the 2.3% rise in Q1.

A rise in Wholesale Inventories may also have weighed as they could be reflective of a fall in demand.

The main news on Tuesday was China’s devaluation of the remnimbi in order to help the competitiveness of its exporters which have been suffering from a slow-down in demand recently. The remnimbi was semi-pegged to counterparts so it could only move a maximum of 1.0% in a day, however, the PBOC decided to relax the rules governing its value, in order to move towards a more free-floating market dictated exchange rate.

The dollar appeared unaffected by the news from China whilst commodity currencies were the worst hit. The aussie, kiwi and loonie fell as China is a big consumer of their commodity exports, and the devaluation was seen as another symptom of the economic slowdown.

GBP

The pound fell mostly on Tuesday, but due to a lack of data meant its fluctuations were more prone to news affecting counterparts rather than its own drivers.

Technical analysis provided more useful insights on such a slow day, and with the pair having been range-bound now for so long – especially in cable – analysts are talking about an increased chance of a breakout, perhaps on Wednesday when Employment data is released. Exchange rates can only go sideways for so long, they argue, before probabilities favour more directional movement.

The catalyst for such a breakout might come from the employment figures to be released on Wednesday (tomorrow) which will include the closely watched Average Weekly Earnings metric. A rise in Earnings tends to precede increases in the inflation rate, and would be a pre-condition for the BOE raising interest rates.

JPY

The yen lost ground versus the dollar, as Economic Watchers Survey presented a mixed picture of the Japanese economy.

The current index of the survey rose to 5.6 in July, the first rise in in three months, from 51.0 in the past month. On the other hand the outlook index of the survey dropped for the second consecutive month to 51.9 in July from 53.5 in June. The outlook for Japan’s service sector workers deteriorated to the lowest level in six months in July, amid concerns over higher import costs and volatile weather patterns.

The Bank of Japan officials are assessing the strength of the rebound in the economy from an estimated slump last quarter. Worsening sentiment could dampen personal consumption which has failed to fully recover from the consumption tax hike last year.

BOJ Governor Kuroda said last week after the central bank kept its stimulus policy unchanged, that he needed to see “hard” data to determine the strength of spending in July.



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