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    IronFX Daily Commentary | 24/07/15

    •The commodity rout continues Commodities continued to collapse, with most of the metals and agriculture futures lower this morning. Oil is seeing a small rebound after yesterday’s further declines into its second bear market this year (i.e., down 20% or more from the recent peak). The trend got a further kick this morning from the first of the July PMIs, when the Caixin/Markit manufacturing PMI (apparently Caixin is taking over from HSBC) fell to 48.2 from 49.4, far below estimates of a rise to 49.7. This number indicates that manufacturing hasn’t yet stabilized by any means and only further calls into question the official Q2 GDP estimate of 7.0% growth. That’s bad for demand in China, therefore bad for commodities and bad for the commodity currencies.

    • Almost all Asian stock markets are lower this morning as a result, the exception being the Chinese markets, oddly enough. I suppose the reason there is the old “bad news is good news” idea: that the decline in the PMI makes it more likely the authorities will come in and do something to rescue the economy and the stock market. My view is that if they could solve the problems that easily, they would have done so already. I don’t think anyone has a magic wand that will turn things around with a wave.

    • US earnings point to sluggish global economy, outperforming US Many of the US earnings reports that have been announced so far have mentioned the theme of a sluggish global economy, but within that, the US seems to be outperforming. Caterpillar, for example, said its sales to mining companies and energy generation equipment worldwide were down amidst the slump in ore and energy prices. “While economic conditions in the US are modestly positive, the global economy remains relatively stagnant,” CEO Doug Oberhelman said. “Many of the key industries we serve remain weak, and we haven’t seen sustained signs of improvement.” This is a key statement for the currency markets in general and the commodity currencies in particular. Even if the US is only “modestly positive,” the FX markets are about relative performance, and the US is outperforming the rest of the developed world, particularly those countries dependent on commodity production, such as Australia, New Zealand and Canada. The Atlanta Fed’s forecast for 2Q GDP growth is 2.4% qoq SAAR. Meanwhile, yesterday’s US jobless claims for the week ended July 18th hit the lowest level since 1973 – particularly significant since that was the week the survey for the July nonfarm payrolls were taken.

    • Meanwhile, Vale SA, the world’s largest iron ore producer, boosted its iron ore production in Q2 to the second-highest ever for the company despite plunging prices. BHP Billiton and Rio Tinto are also raising iron ore production. Given the slump in demand in China, increased production is likely to weigh on prices and weigh on the AUD (iron ore accounts for about 25% of Australia’s exports of goods).

    • The weaker commodity price is helping to boost the dollar’s value against EM currencies. The dollar’s value against a basket of EM currencies, as measured by the Fed’s “trade weighed dollar index – other important trading partners” hit a high for this cycle and, at 143.64, is approaching the record high of 146.85 set in 2003 (although in percentage terms, the Fed’s index against the major currencies has outperformed the OITP index so far this year, 8.7% vs 3.5%. This may be because so many EM currencies -- particularly CNY, which accounts for 16% of US trade -- are pegged vs USD.) Meanwhile the JP Morgan Emerging Market currency index, an index of 10 EM currencies vs USD that has been calculated since Jan. 2000, hit a record low.

    • One question: will the fall in commodity prices feed through to lower global inflation, which will in turn delay Fed tightening? Stay tuned for next week’s FOMC meeting to hear more on that topic, possibly.

    • Today’s highlights: During the European day, we get the preliminary manufacturing and service-sector PMI data for July from several European countries and the Eurozone as a whole. The expectations are for the manufacturing PMIs to remain unchanged or increase a bit, while service-sector PMIs are likely to decline somewhat. With the Greek crisis now off investors’ radar, economic data are likely to start being important. A rise the PMI could strengthen EUR a bit.

    • In the US, the Markit PMI is expected to remain unchanged. Market pays more attention to the ISM figure. Thus the reaction could be limited. New home sales for June are also due to be released. In line with the recent strong housing data, new home sales are expected to show a firming housing market. USD could strengthen a bit.


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