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    IronFX Daily Commentary | 22/07/15

    •Downward revision to US IP causes mean reversion A market never goes in a straight line. Yesterday during New York time many of the markets that have been trending recently reversed: equities were lower, bonds yields declined, gold and oil rallied and the dollar fell. Fed fund rate expectations declined. However, the reversal partially reversed during Asian trading this morning and oil and gold are both lower, as are most other commodities. Almost all equity markets are trading lower and USD remains far below its opening levels of Tuesday.

    • The trigger for the move was weak annual revisions to the US industrial production (IP) report,which significantly revised the post-recession performance of the US manufacturing sector and left the current capacity utilization further below the long-run average. These annual revisions to the IP report usually aren’t market moving, but this time the revision was enough to change investors’ thinking about the nature of the recent recovery and the amount of slack in the economy. IP for the last six years since the recession ended was revised down to annualized growth of 3.5% instead of 4.0%, and within that, oil drilling was much stronger and manufacturing much weaker than previously thought. For example, manufacturing output had been reported to have exceeded the 2007 peak in the middle of last year; now it’s known to be still 4% below the peak. Of particular importance for the dollar was the downward revision to capacity utilization: lower capacity utilization means less pressure on prices and less urgency to hike rates.

    •Of course, weaker-than-expected manufacturing means even less-than-expected demand for commodities. Nonetheless the commodity currencies gained during US trading, although they began to weaken during the Asian trading day. I think the news is distinctly bearish for commodities and commodity currencies. It was bad enough that Chinese growth is slowing; if US manufacturing is also weak, then where will the support for commodities come from?

    Australian CPI mixed; headline below estimates Australia’s Q2 CPI came in mixed Wednesday. The closely watched trimmed mean was in line with estimates on a qoq basis and slightly higher than expected on a yoy basis, which initially send AUD higher, but the headline figure was lower than expected on both a qoq and yoy basis and after some time that seemed to win out and AUD moved lower. The fact that almost every commodity listed on Bloomberg is falling this morning may also have something to do with the weakness in AUD. Plus RBA Governor Glenn Stevens repeated previous comments that the question of further cuts in interest rates remains on the table.

    Self-defeating austerity: Endeavour Greece, a non-profit group that supports entrepreneurs, found that 58% of the 300 companies it surveyed between July 13 and July 17 reported a significant impact on their operations caused by the limitations imposed to cross-border transactions.Over two-thirds reported a significant drop in revenues. Most stunning, 23% are now planning to transfer their headquarters abroad for security, cashflow, and stability reasons. In this way, the restrictions on the banking sector are causing the economy to hollow out. This will only increase unemployment, decrease tax revenues and further increase the debt/GDP ratio.

    •Today’s highlights: During the European day, the Bank of England releases the minutes of its July meeting. Even though the market consensus is for another 9-0 vote in favor of unchanged rates, the recent hawkish comments by BoE Governor Mark Carney that the time for the first rate hike is getting closer put some risk on this scenario. We will be watching to see if any of the MPC members who previously voted for a rate hike are likely to resume their hawkish stance any time soon, perhaps at the August meeting. Based on the commentary from Bank officials over the past month and the two successive months of a jump in wage growth, the hawks could be encouraged to dissent soon. If this is the case, we would expect GBP to resume its bullish trend, mainly against the commodity related currencies and EUR. The decision was “finely balanced” at the last two meetings, and it would be interesting to see if it remains so.

    •In the US, existing home sales for June are forecast to have increased a bit. The housing starts and building permits released last week were consistent with an improving housing market. If the existing home sales are in line with a strong housing sector, this could keep confidence up and USD-supportive. The FHFA housing price index for May is also due out.


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