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    IronFX Daily Commentary | 29/07/15

    29.07.2015, 9am

    • A bit better tone There was a bit better tone to markets today. Chinese stocks were up at the opening and managed to poke their nose above yesterday’s close now and then, although at the time of writing they had slipped back into negative territory. Commodities were doing much better, with oil, most metals and about half the agricultural commodities rising. The calm in the Chinese market may be due to news that the China Securities Regulatory Commission set up a legal enforcement taskforce to check for clues related to the plunge in stocks on Monday, which is yet another sign that the government will do whatever it can to keep the market from collapsing.

    • USD lower nonetheless Nonetheless the dollar continued to deteriorate. Over the past few days the dollar fell as the turmoil in China caused Fed funds rate expectations to retreat, but the dollar has continued to fall even though China stabilized and Fed funds rate expectations were steady yesterday. This may have been because of the disappointing US consumer confidence figures yesterday, which missed expectations by the largest amount since 2010. The view on jobs deteriorated as well. The economic surprise index for the US has started to turn down recently, indicating that US economic indicators have been disappointing recently. This may be hurting the dollar, although it’s notable that the same trend is visible in most other regions as well. US growth may well be slowing, but if so it’s only part of a general slowdown in global growth.

    • A change in expectations may hit the dollar more than other currencies for the simple reason that nobody expects a change in most other currencies’ monetary regime for some time, so economic conditions may have less bearing on their currencies. Only USD and GBP rates are expected to change within the foreseeable future, so a change in the economic outlook will only affect the outlook for those currencies, or at least will affect them more than the others.

    • NZD was the best-performing G10 currency after Reserve Bank of New Zealand Gov. Graham Wheeler said that NZD should fall further, but ruled out sharply lower interest rates. ““At current levels of export prices, a more substantial exchange rate depreciation will be required to stabilise the net external liabilities position relative to GDP,” he said. He also predicted that tightening by the Fed and BoE could help NZD to ease. Nonetheless, he also said that large declines in interest rates would only be consistent with the economy moving into recession, and he didn’t see that happening. The statement reduced expectations of a large cut in rates and supported NZD. I expect that the rebound in NZD may be temporary,however, largely because I’m still concerned about China, its growth prospects and its stock market. Moreover, as I mentioned yesterday, China may be aiming to allow the CNY to depreciate and that could dampen demand in China for New Zealand’s milk. I expect milk prices to fall further and for NZD to fall with them.

    • USD fell vs most EM currencies as well, except TRY, which collapsed further. RUB was lower as well despite the rise in oil prices. The rebound in EM currencies was nothing like the recent falls, however, showing only modest short-covering. It seems that the market’s view on these currencies remains negative, not surprisingly.

    • Today’s highlights: The main event today is of course the results of the two-day FOMC policy meeting. I don’t think it’s going to be a major event. There is no update to the forecasts and no press conference following the meeting. The Committee will probably just tweak the first paragraph of the statement, the one that gives their view of the current economic conditions. The recent Beige Book showed that conditions continue to improve modestly, so they are likely to raise their evaluation of the economy somewhat, but not enough to shift anyone’s expectations about whether they are going to pull the trigger at the next meeting in September. For that we’ll probably have to wait till the minutes of the meeting are released on Aug. 19th.

    • Chair Yellen said recently that the labor market is getting “demonstrably closer” to normal, so labor isn’t a major bone of contention. The biggest thing that I’ll be looking for in the statement is any new comment on inflation. The gap between core inflation, currently running at 1.2%, and the Fed’s goal of 2% is still a major hurdle to tightening. I will also be looking for any comments on the dollar. A recent Fed paper determined that the earnings of U.S. foreign subsidiaries account for about 25% of the overall profits of US nonfinancial corporations, and the dollar's strength likely explains roughly a third of the recent decline in profits earned from foreign subsidiaries. So 1/3rd of 25% = 8% of the decline in US profits was due to the strength of the dollar; significant, but probably not enough to make them hold off changing policy.

    • As for the impact of the statement, after the April meeting, the last time there was no press conference, EUR/USD fell from 1.1170 to 1.1076, so about 1 cent, then rebounded to trade around 1.1120, so net net down 50 cents. USD/JPY moved 35 pips. GBP fell then 60 pips then came back 30, for a net decline of 30 pips. So there was some good volatility at the time of the announcement, but it didn’t cause a new trend.

    • Of course, if they say anything that really puts a date on lift-off, then it could be different. But they’ve been quite clearly for some time now that it’s meeting-by-meeting dependent on the data, so I don’t think the statement will say anything beyond what Chair Yellen said at her recent testimony, namely that if the economy continues to perform in line with expectations, then liftoff later this year will be appropriate.

    • Around four out of five economists believe that’s going to be in September, although the Fed funds futures for September are only at 18 bps, indicating that the market still has a lot of doubts. That’s why there could still be a surprise, at least in September. But probably not in July.

    • As for today’s indicators, the German GfK consumer confidence index for August and the French consumer confidence index for July are coming out. Neither is a market affecting indicator though.

    • Norway’s AKU unemployment rate for May is forecast to have risen to 4.3% from 4.2%. The official unemployment rate for May however, declined to 2.7% from 2.9%. This increases the possibilities for the AKU rate to decline as well, something that could support NOK.

    • In the US, pending home sales for June are forecast to have risen at the same pace as in May. Housing starts, building permits, and existing home sales for the same month all beat estimates, therefore we could see another positive surprise in pending home sales. This could prove USD-positive.


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