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IronFX Daily Commentary | 06/08/15

06.08.2015, 9am

Markets still watching the data: Despite Atlanta Fed President Lockhart’s comments about raising rates in September, the market is still watching the data closely. Maybe that was because Fed Gov. Jerome Powell started the US day off by saying that although the time for a rate hike was coming, he was still undecided about when the right time was and that he’d be “very, very focused on the data.” He said he would be especially attuned to employment data, which he said has been giving a better signal of growth than the GDP numbers. In that respect, Wednesday’s disappointing ADP report was definitely a negative event for the USD and the currency fell temporarily.

• But then the July non-manufacturing ISM index came in very strong, with the employment component particularly strong – both at post-crisis highs, indeed the highest levels in nearly 10 years. The implications of that number for Friday’s payroll figure partially cancelled out the weak ADP report and investors apparently still expect a number over 200k. That would be enough to satisfy those FOMC members who want to tighten in September and Fed funds rate expectations continued to rise. Nonetheless USD was opening modestly lower in Europe this morning against most of the G10 currencies, the exceptions being AUD, JPY and CHF.

• I expect that the market won’t be fully convinced about the Fed’s intentions until of course the Committee announces its decision on Sep. 17th. But until then there is still plenty of room for the market to revise up its rate expectations, which are currently pricing in only about a 50-50 chance of a rate hike in September. That means USD can still strengthen further, in my view.

AUD falls on higher unemployment AUD fell this morning after unemployment in July rose to 6.3% from 6.1%. However, in my view the news was actually good: the number of employed people rose far more than expected and the rise in unemployment was largely due to a rise in the participation rate, not the number of unemployed persons. However the market focused on the overall number, probably due to the “challenges” that the statistics agency has said it faces in compiling the report, which makes it less trustworthy. In any event a weaker AUD would go a long with the weaker tone in commodities yet again today, so the trend seems likely to continue.

Oil falls further despite bigger-than-expected drawdown Oil prices continued to fall in the US despite a much larger-than-expected decline in US inventories in the latest week. Nationwide refinery demand hit a record high. However, US domestic oil production continued to rise, and despite the big drawdown, inventories remain far above the usual level for this time of year, so prices fell anyway. I see this is a very bearish indication and so I remain negative on oil and the oil-related currencies. NOK was the strongest G10 currency over the last 24 hours; I’d suggest taking a look at whether it’s worth shorting it.

Today’s highlights: focus on Bank of England The spotlight today will be squarely on the Bank of England. We have a very big day in the UK, as the Bank will release its rate decision and the minutes of the meeting, plus the quarterly Inflation Report, all at the same time. The first reaction will most likely be on the number of dissenting votes, if any, and later on the new economic forecasts. Market expectations and ours are that the two most hawkish MPC members, Weale and McCafferty, will once again vote to raise rates by 25 bps, as they did up to and including last December.

• The minutes of the last meeting showed that if it had not been for the crisis in Greece and China, a number of members would have found the decision not to raise rates more finely balanced than before. Therefore, in the absence of these uncertainties, the hawks could decide to split and vote for a small increase in interest rates. If another member joins the dissenters this could be noticeably GBP-bullish.

• Following the tidal wave of the votes, we will shift our focus to the new economic forecasts for signs of further GBP support. Even though GBP has continued its choppy price action against EUR and USD, the pound has strengthened significantly against the commodity currencies AUD, NZD and CAD, and the Nordics SEK and NOK.

• As for the indicators, German factory orders for June were much stronger than expected, rising 2.0% mom instead of 0.3% as expected. EUR/USD spiked up on the news.

• UK industrial production for June will be released.

• In the US, initial jobless claims for the week ended Aug. 1 are due to be released.


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