7/18/2006 2:50 am: EUR/$..1.2537 $/JPY..116.84 GBP/$..1.8209 $/CHF..1.2468 AUD/$..0.7497 $/CAD..1.1334
4:30 am UK June CPI y/y (exp: 2.3%, prev: 2.2%) 5:00 am GER July ZEW Current Situation (exp:14.0, prev: 11.9) ZEW Economic Sentiment (exp: 35.0, prev: 37.8) 8:30 am US June PPI (exp: 0.3%, prev: 0.2%) June Core PPI (exp: 0.2%, prev: 0.3%) 9:00 am US May Net Foreign Capital Flows –TICS (exp: $35.0 billion, prev: $46.7 billion)
Today’s determining data releases in the foreign exchange markets include Germany’s July ZEW survey (see more below), U.S. June Producer Price Index (PPI) and U.S. May Treasury Treasury International Capital System (TICS) report on capital flows. The latter two reports will shape the day’s trend, especially if the core PPI slows down to 0.2% from 0.3% and the TICS report meets our forecast of $35 billion, from April’s dismal $46.7 billion. A soft core PPI reading will raise speculation that Wednesday’s core Consumer Price Index (CPI) release will also come in below 0.3%, thus reducing expectations of an August Fed hike. Such an occurrence would serve as a significant counterweight to the dollar’s current safe haven-driven gains.
We expect the May TICS data on net capital flows to surprise on the downside. Not only do we expect the figure to come in below the May trade deficit of $63.5 billion, raising concerns of unsustainable deficit financing from abroad, but we see a significantly lower figure around the $35 billion mark.
Our TICS forecast is explained by the dollar’s 2.6% decline in May (trade weighted terms) and the S&P 500’s 3.1% drop in the same month. Recall that net foreign purchases of U.S. stocks tumbled 66% to $6.5 billion in April, the lowest since November 2005. Considering the sharp equity selloffs in May, foreign flows into U.S. equity could be in the red for that month, casting an ominous vacuum in the financing of the trade deficit.
On the bonds side, net purchases of U.S. Treasuries by private accounts, usually hedge funds, plunged 180% to a net selling of $7.8 billion in April. It was the biggest net selling by private entities of U.S. treasuries since October 2003.
Yen gains on China’s 11.3% GDP The Japanese yen pushes across the board, after China’s National Bureau of Statistics announced the official release of its gross domestic product (GDP) growth at 11.3% from a year-earlier period, following a 10.3% rise in Q1, bringing GDP growth in the first half of 2006 to 10.9%. Although government officials quelled speculation of another surprise revaluation, the Japanese currency rallied on speculation of further policy tightening measures.
The Q2 GDP figure was largely boosted by the 30.9% year-on-year increase in fixed asset investment. Despite two rate hikes in the past two years, last year’s 2.1% currency revaluation and April’s increase in reserve requirements, the National Bureau of Statistics said excessive liquidity and rapid credit growth remained a problem. Money supply – The M2, a measure of total money supply, grew 18.4% at the end of June from a year earlier, easing from May's 19.1% rise, while loan growth rose 15.2% at the end of June, from May's 16% increase.
Although these statistics reflect some responsive trend in credit, the financial authorities remain concerned with overheating liquidity, thereby raising chances of an outright revaluation and another interest rate hike. With the post-September 30 deadline for a possible tariff levy by U.S. Senators looming large, speculation of another surprise currency move has escalated; especially as we approach the first year anniversary of the July 21 revaluation.
We noted back in April that the People’s Bank of China’s rate hike of two months ago precluded a revaluation until July. While such an event is expected to weigh on USD/JPY, the pair remains boosted by the dollar’s treasury-led safe haven rally, uncertainty with North Korea’s missiles and rising oil prices destabilizing the yen.
After topping out at its seven-month trend line resistance of 117.26 in New York Monday trade, USD/JPY retreats below the 117 figure, below which 116.71 serves as interim support—38% retracement of the 121.36-108.97 low (see chart below). A TICS figure below $60 billion should steer the pair towards the 200-day moving average of 116.05, while our forecast for a $35 billion in the TICS is apt to drag the dollar towards 115.50, with support steady at 115.25—61.8% retracement of the said move.
Click for Chart 1
Euro turns to ZEW, TICS for hopeGermany’s ZEW survey should not alter market expectations for an August 3 rate hike from the European Central Bank (ECB) in the event that the current situation index grows by less than its expected 14.0 and the economic sentiment slips to 35.0 from 37.8. Recall the June sentiment survey declined by more than forecast to 37.8, while the current situation survey rose to 11.9 up from 8.7.
We expect EUR/USD to remain relatively unfazed by the ZEW survey given continued violence in Southern Lebanon and the more market relevant releases of PPI and TICS data.
Such bearishness has now extended towards the 1.25 support, which is backed by key foundation at 1.2475, which is also the 100-day MA. The chart below shows 1.24 as a viable target this week, which is the 50% retracement of the 1.2979-1.1824 move. We expect that another TICS figure below $50 billion on Wednesday could boost EUR/USD to 1.2590, with key resistance at 1.26.
In the event that core PPI slows to 0.2% and the TICS shows a reading below $50 billion, EUR/USD could lift up to 1.2590; especially in case of a sub 0.2% core PPI reading. A figure of more than $55 billion could only be dollar neutral in case core PPI remains at 0.3%.
Daily MACD suggest continued bearishness towards the 1.2475, which is just below the 38.2% retracement of the 1.2476-1.2862 move. 1.2470 also coincides with the 100-day MA. Preliminary resistance stands at 1.2640, followed by 1.2670—the 50% retracement of said move.
Click for Chart 2
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