The dollar has changed little after the 0.2% decline in June core PPI and 0.3% rise in core PPI came in both widely lower than expectations. The question now is whether tomorrow's annual core CPI continues to show a retreat and drops from May's 2.3% to 2.2% in June. Weak core inflation figures may boost stocks and risk appetite as well as reinforce carry trades, thus favoring the higher yielders against the U.S. dollar.
The 9 am EST TICS report on May capital flows is expected to show a decrease in total net inflows to $60 billion from $111.8 billion, while net foreign purchases of U.S. long-term securities is seen at $70 billion from $76.5 billion. Market watchers will scrutinize net inflows of U.S. Treasuries, which plummeted to $376 million in April, the lowest figure since there was an outflow in April 2006. Also worth watching is China’s holdings of U.S. Treasuries after having fallen in April, for the first time since October 2005.
At 9:15 am EST, is the June report on industrial production expected to have risen 0.5% after a flat figure in May, while capacity utilization is seen up at 81.6% from 81.3%.
At 1 pm is the Housing Market Index expected to show further deterioration, reaching 27 in July from 28 in June. This would be the fifth straight month of declines since the peak of 37 in February.
USD/JPY capped at 122, awaits China GDPUSD/JPY continued to tread around the 121.70-122.00 territory during Asian trade. Fresh 16-year lows against sterling have not stood in the way in the yen’s ability to cap the USD. A positive showing on U.S. industrial production may help the pair breach 122.20, but persistent risk of an equity market correction, as seen through the record amount of shorts held by institutional players, is expected to impose considerable resistance at 122.50.
Traders, however, could curtail their yen shorts ahead of this evening’s second quarter gross domestic product (GDP) figures from China (due at 10 pm EST), expected to show a 11% increase with inflation growing as high as 4%, surpassing the People’s Bank of China (PBOC) 3.0% target. In such case, nervousness of renewed rate PBOC hike hikes may upset Asian markets as well as the higher yielding currencies such as sterling, especially in the GBP/JPY. Interim support stands at 121.70, a breach of which is seen tackling the 121.45-50 figure. Paying close attention to the activity in U.S. equities is also required for the intraday moves in USD/JPY, especially if we see further selling in the S&P 500.
Euro capped by ZEWEuro came under pressure after Germany’s ZEW investment sentiment survey fell by 10 points to 10.4 in July, well below expectations of a 19.8 figure. It was the second consecutive monthly decline of the index. The ZEW current situation index declined to 88.2 from 88.7 in June. The survey may start shedding doubts about the continuation of Germany’s recovery in the face of rising oil prices and a strengthening euro. While this may slow the euro’s pace of acceleration, the EUR/USD exchange rate remains sufficiently underpinned by weakening fundamentals in the United States.
We warned yesterday of a consolidation in the EUR/USD rate around the 1.3770s. A strong U.S. industrial production figure may drag the pair towards the 1.3730-35, where we expect a newfound consolidation ahead of Federal Reserve Chairman Ben S. Bernanke’s speech tomorrow. Upside remains capped at 1.38, followed by 1.3820.
Sterling pierces the $2.0450 mark, but watch out for minutes and China GDPA smaller than expected decline in UK inflation pushed cable to fresh 26-year highs vs. the U.S. dollar at $2.04550, while breaking the 249 yen mark held since August 1992 onto a 16-year high at 249.53 yen. UK CPI slowed to 2.4% y/y in June from May’s 2.5%, exceeding expectations of a 2.3% figure. The core figure stood at 2.0% y/y, the highest since March of 1997.
Although sterling’s gains are clearly fundamentally driven, we warn traders of Wednesday’s release of the minutes from the Bank of England Monetary Policy Committee July decision, which produced a 25-basis point rate hike to 5.75%. The risk that the Committee made another contentious vote (such as 6-3 or 5-4), or even a 3-way split -- with some members demanding a 25-basis point rate hike and others no change--may be negative for sterling.
We also warn traders of China’s Q2 GDP (due at 10 pm EST), expected to grow by 11% while inflation growing as high as 4%, surpassing the PBOC 3.0% target. In such case, nervousness of renewed rate PBOC hike hikes may upset Asian markets as well as the higher yielding currencies such as sterling, especially in the GBP/JPY. We see upside capped at 2.0470. Support starts at 2.0430, followed by 2.04 and 2.0370.
Canadian dollar eyes 1.04The loonie surges to a fresh 30-year high against the USD at 1.0418 as the Bank of Canada may have to follow with another rate hike to combat inflationary pressures. Wednesday’s release of June CPI and core CPI is expected to show an increase to 2.6% from 2.2% in both series, thus paving the way for further tightening and CAD advances. Just like sterling’s 26-year highs are a manifestation of improved UK fundamentals and weaker U.S. dynamics, the same applies for the loonie’s 23-year high journey, which is propped by escalating oil prices, robust job market and upside inflationary risks.
We may see a brief interruption in CAD’s gains today in the midst upside risks from U.S. data, but tomorrow’s CPI is likely to drag the pair anew towards the 1.0380. Upside capped at 1.0470.
Ashraf Laidi
Chief FX Analyst
CMC Markets US
140 Broadway, 30th Floor
New York, NY 10005
(212) 644-4220
a.laidi@cmcmarkets.com
