While tensions in Syria are still elevated with a second American ISIS fighter killed in a battle, Gazprom beginning accepting payment in Rubles and Chinese Yuan (via the ESPO – Eastern Siberia Pacific Ocean – pipeline), Ebola outbreak causing enormous damage to West African economies (economic growth expected to plunge by 4% in the region according to the African Development Bank), Argentina’s black market peso completely out of control tumbling to over 14 / USD (14.45 according to Argentine newspaper Ambito), French jobseekers surging to record high of 3.424 million (with PM Manuel Valls blaming the ECB to do more as QE was the solution to everything) and IMF head Christine Lagarde put under a formal probe for negligence in a corruption investigation… AUDJPY continues to climb and is now trading above the 97.00 level for the first time since June 2013 and the S&P500 closed above the 2,000 for the second time in history.
While European bourses have been also climbing during the same period with DAX and CAC40 both up approximately 6.5% for instance, yields on all German bonds out to 3 years are now negative (see current German yield curve in green) with the 10-year Bund 90.1bps and French 10-year OAT yield trading at all-time-low at 1.25%. The orange curve represents the German yield curve 1 month ago, and the histogram tells us the change over the past month).
Euro: the single currency still remains under pressure and is now trading below the 1.3200 level against the greenback, down 8 figures since May meeting (Draghi’s ‘ready to act next meeting’). It seems that the market is expecting more easing measures at the ECB meeting next week (September 4). As growth is weakening, the ECB will be much more intolerant of low inflation (flash August Inflation is expected to fall to 0.3% YoY from 0.4% the previous month) and high unemployment rate (currently stands at 11.5%). As a reminder, ECB staffs reduced its annual inflation forecasts in Q3 from 0.9% to 0.7% for the year 2014 and from 1.3% to 1.2% for 2015. With the 5Y5Y Euro inflation swap – ECB’s preferred measure of MT inflation – falling below the 2% level, investors are predicting another cut in the last quarter of this year therefore raising expectations of further measures from the ECB Governing Council. In addition, we saw this morning that loans to private sector fell by 1.6% in July (vs. -1.5% consensus) while M3 money supply grew by 1.8% from a revised 1.6% in June.
After Draghi delivered a dovish speech at the Jackson Hole central bankers’ meeting concerning the falling expectations of future EZ inflation, we heard yesterday that the ECB appointed money manager BlackRock to advise a program to buy ABS in order to revive the faltering Euro-area economy (announced at the June meeting). I would put public QE (sovereign bonds) option on aside for the moment, however I would opt for further updates concerning the ABS program and a potential rate cut. Otherwise, the next important date for the EZ will be on September 18, the first tranche of the so-called TLTROs.
The next support on EURUSD stands at 1.3150 (yesterday’s low), followed by 1.3100 (September 2013 low). Another interesting development to watch is EURCHF, which is now trading below the 1.2060 key support. The next support stands slightly above 1.2020 before the floor of 1.2000 (which remains our target in the coming weeks).
GBP: Sterling, the once used-to-be market’s darling, has fallen more than 6 figures since its mid-July high of 1.7191 and is now trading slightly below 1.6600. It broke its 200-day SMA on August 19 for the first time in more than a year, bringing in more participants in Cable’s bearish trend as the market likes trending market. If we have a look at the CFTC’s Commitments of Traders (see below), we can see that the net speculative positions fell from above 56K on July 1st to 13K+ reported on August 19th. I expect a pause at current levels in the coming days between 1.6550 and 1.6600.
UK strong GDP 2nd estimates (0.8% QoQ, 3.2% YoY) two weeks ago didn’t manage to bring investors’ interest on the British pound as annual inflation came in much cooler than expected in July at 1.6% YoY (vs. 1.8% eyed) shattering expectations of an early rate hike from the BoE. The implied rate of the Short-Sterling March 2015 futures contract is trading at 89bps, down from 1.15% in the beginning of July.
JPY: I will finish this article with a quick update on Japan and the Yen. Despite US yields running low, below the 2.40% level (trading at 2.33% at the moment), USDJPY broke its strong resistance at 103 to trade at 104.43 (Monday’s high) before edging back below the 104.00 level. We heard lately from Japanese Vice Economist Minister Nishimura that the Japanese economy may need more time than expected to swallow the sales tax hike (April 1st) and that the government may have to be more vigilant for the second planned one (October 2015). As a reminder, Japan GDP shrank by 6.8% (annual pace) in the second quarter and erased Q1 gains. The market is bearish on the JPY against most of the currencies and traders are quite confident that the government and especially the BoJ will do ‘whatever it takes’ to sustain Abe’s ambitious goal.
If we have a look at the recent figures, we saw that industrial production slid 3.4% MoM in June (biggest decline since the March 2011 disaster). JP trade balance deficit widened to 964bn Yen for July (vs expectations of a 702.50bn gap Yen) and the country reported a second current account deficit in June (399.1bn Yen) and the first January-June deficit in 29 years.
Important July figures to watch overnight: Core Nationwide CPI, expected to remain steady at 3.3%, Unemployment rate (also to remain steady at 3.7% according to consensus) and Preliminary Industrial Production (expected to tick up to 1.0% MoM after June’s decline).
Based on my last couple of discussions I had with some traders, it seems that the market is looking for buying opportunities on USDJPY. Pivot point is seen at 103.50/55, where there is talk of lots of buy orders.