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IronFX Daily Commentary | 24/08/15

24.08.2015, 10am

  • Euro and yen rally as Global stocks slump EUR and JPY are gaining from both, the sell-off in Asian stock markets caused primarily by China’s unexpected move to devalue yuan, and from falling expectations that the Fed will raise interest rates in September. The probability that Fed will hike has lessened from around 50% before China’s move to 28% on Monday. Even though China can be seen as the main reason why the global equities have plunged, other key factors help to maintain the slide. The slump in oil and other commodity prices, which increase deflationary pressures, and the currency devaluations in EM on global growth concerns. As fears of a global economic slowdown build up, investors move from riskier assets in EM to less risky DM government bonds.
  • Today, we have a very light calendar day. The only noteworthy indicator we get is the US Chicago Fed National activity index for July. With no forecast available, the market reaction is likely to stay limited at this release.
  • As for the speakers, Atlanta Fed President Dennis Lockhart speaks. The uncertain tone of the July FOMC meeting minutes suggested that the policy makers were somewhat less likely to raise rates at their September meeting, mainly due to concerns over inflation. Hence, investors are likely to pay more attention on Fed speakers, for clues if the time for the first rate hike is indeed “approaching”.
  • As for the rest of the week, on Tuesday, NZD could come under renewed selling pressure given the 2-year inflation expectation for Q3 is to be released. As expectations for another rate cut by the RBNZ build-up, a weak figure would add to the growing evidence that the economy of New Zealand is losing momentum.
  • The German Ifo survey for August is also coming out. The German ZEW survey for August showed a mixed picture for the bloc’s strongest economy. The expectations index declined once again from the previous month, while the moderate increase in the current situation index was not enough to reverse investors’ disappointment. The latest sell-off in the global stock markets, the fresh tensions in emerging markets and the renewed instability in Greece, could put further downside pressure in the expectations index. Therefore, a weak Ifo reading could add to evidence that the bloc’s growth engine is losing steam.
  • On Wednesday, in the US, durable goods orders for July are expected to have fallen, a turnaround from the month before, while durable goods excluding transportation equipment are estimated to decelerate somewhat. The focus is usually on the core figure where a positive surprise is needed to suggest the possible start of a turnaround in business investment and strengthen the dollar.
  • On Thursday, the main event will be the 2nd estimate of US Q2 GDP. The forecast is for the growth rate to be revised up, to show that the US economy expanded at a faster pace from the already encouraging growth figure seen in the first estimate. This is in line with the Fed’s expectations for a stronger Q2 growth, and could provide a boost to USD.
  • On Friday, we have the usual end-of-month data dump from Japan. The focus will be on the National CPI rate for July and the Tokyo CPI rate for August as BoJ officials’ showed optimism that the inflation will accelerate considerably in the coming months. Therefore, a rise in the CPI could strengthen JPY somewhat. At the same time, we get Japan’s jobless rate and job-offers-to-applicants’ ratio, also for July.
  • From Germany, the preliminary CPI for August is coming out. As usual, we will look at the larger regions for a guidance on where the headline figure may come in and thereby as an indication for the near-term direction of EUR. A rise in the German CPI rate could indicate a rise in the Eurozone’s CPI to be released next week and strengthen EUR a bit.
  • In the UK, the 2nd estimate of Q2 GDP is expected to confirm the preliminary growth figure and show that the economy grew 0.7% qoq in Q2. Coming on top of the recent encouraging data, this could add steam to the UK’s recovery and strengthen GBP somewhat.
  • In the US, we get the personal income and personal spending for July. Personal income is expected to have risen at the same pace as in June, while personal spending is forecast to have accelerated. The focus is usually on personal spending and a significant positive surprise is needed for the USD to remain supported.

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