Market risk appetite improves on global data

  • Risk rebounds on improving global data
  • The most recent risk rally faces a number of hurdles in the week ahead
  • A Multitude of Interest Rate Announcements in the Week Ahead
  • Outcome from emergency BOJ meeting & political uncertainty may impact the JPY
  • Key data and events to watch next week

Risk rebounds on improving global data

The past week began with disappointment stemming from Japan ’s lack of direct currency intervention and risk aversion looked probable to continue into the week. This was not the case as better than expected Australian 2Q GDP started a ripple effect culminating into a global wave of positive data surprises. Upbeat manufacturing numbers midweek out of China and the US saw safe havens soften and sent US equities soaring higher by greater than 2% Wednesday. The positive data stream continued Thursday as US July Pending Home Sales printed a much better than consensus +5.2% as compared to an expected -1% decline. Friday’s much anticipated NFP capped the data session as Private Payrolls jumped by +67k and the headline number declined by a less than expected -54k versus expectations of a -105k drop, seemingly cementing a renewed emergence of risk appetite.

The most recent risk rally faces a number of hurdles in the week ahead

Negative sentiment looks to have reversed with the prior week’s data releases but this most recent risk rally faces a number of hurdles in coming weeks. September has historically been an underperforming month for US equities and with the S&P facing critical resistance into its 100-day sma, currently 1105/10, along with a major horizontal pivot zone into 1130/35 may see near-term upside capped into these levels. Until these key price zones are breached, the current rally cannot be viewed as anything more than a correction towards range-bound conditions. Furthermore, much of the large moves realized this past week have occurred on extremely thin liquidity representing the opinions of a smaller percentage of market participants. Normal liquidity conditions should return next week. Price action in correlated markets also seems to confirm further circumspection into the current market euphoria. Gold, the alternative currency and a constant in the ‘safe haven’ asset class continues to trade at elevated levels into $1250/ oz. This may be a result of the softer dollar but the yellow metal’s divergence with risk suggests further downside could be in store. Elevated levels are a theme shared by European debt spreads as well. Although Friday has seen core-periphery spreads tighten, mainly as a result of a shot higher in German bond yields, they remain near May pre-crisis response levels and indicates continued concerns about the peripheral Eurozone(Ireland, Greece, Portugal) are highly probable.

A Multitude of Interest Rate Announcements in the Week Ahead

The week ahead sees a number of interest rate statements beginning down under with the RBA policy rate decision on Tuesday. The Reserve Bank is likely to remain on hold but accelerating growth evidenced by the stronger 2Q GDP suggests tightening for the following November meeting is an increasing possibility. The BOJ interest rate decision, also scheduled for release Tuesday, is likely to be a non-event as the target rate will remain steady at 0.10%. The focus in Japan remains to be on continued intervention speculation and the political uncertainty surrounding the September elections.

Wednesday sees the Bank of Canada rate decision and the market consensus for a 25 bp rate hike to 1% seems less of a likelihood considering the worse-than-expected 2Q GDP print of 2%. The risk is for a higher USDCAD as the market seems divided with a slight edge for a 25bp rate hike. The increasing uncertainty surrounding the decision may see the Canadian dollar weaken considerably if no tightening measures are taken. The heavy week of interest rate announcements winds down Thursday as the Bank of England is expected to keep the target rate steady at 0.50%. This is likely to be a non-event, the BOE’s policy is to withhold any post-decision press conferences unless there is a change in the target rate, and the focus will most likely be on the bevy of data scheduled for release next week.

Outcome from emergency BOJ meeting & political uncertainty may impact the JPY

Over the last few weeks BOJ Governor Shirakawa has been faced with mounting pressure from Prime Minister Kan to address the strengthening Japanese yen and deflation. In response, on Monday the BOJ held an emergency meeting and boosted their bank lending facility by 10 trillion to 30 trillion yen. While it was encouraging to see the BOJ take action, their response was viewed by many as being too little, too late and disappointed market participants. Many officials wanted the BOJ to engage in large-scale monetary easing; however Shirakawa is currently averse to increasing their purchases of government bonds outright from 1.8 trillion yen or lowering the policy rate from 0.1%.

Meanwhile, a more troubling topic at the moment for the JPY is the announcement of Ichiro Ozawa's candidacy for the DPJ Party Election on September 14th. The latest public opinion polls suggest the current Prime Minister, Naoto Kan, is currently leading by over 4:1; however Ozawa heads the largest faction in the DPJ and has been far more vocal in stating the need for intervention to prevent a stronger JPY. The risk here is that everyone will be so caught up in the election that they won’t be able to further address to Yen or their faltering economy. Additionally, many government officials in Japan feel that without U.S. support, unilateral intervention to halt the appreciating yen could ultimately be unsuccessful. In this scenario, it’s probable to see another test of the 15-year low in USD/JPY around 83.60 and the 8-year low in EUR/JPY near 105.45 over the coming weeks.

Key data and events to watch next week

The U.S. starts its week of economic data on Wednesday with the Fed’s Beige Book and July consumer credit. Thursday is set to release July Trade balance and the usual jobless claims. Friday wraps up the week with July wholesale inventories.

The Eurozone kicks off on Monday with September Sentix Investor confidence and the ECB’s Jurgen Stark will speak in Berlin. Tuesdays sees Swiss unemployment for August, German July factory orders, and speeches from the ECB’s Jurgen Stark and Lorenzo Bini Smaghi. Set for release on Wednesday is German and French July trade balance figures as well as Germany’s July industrial production. On Thursday, France sees its 2Q final non-farm payrolls and Germany is set to release August final CPI numbers. Friday rounds out the data with French July manufacturing and industrial production numbers.

The U.K. starts the action off the August Hailfax house price index, BRC August retail sales monitor, and new car registrations. Wednesday sees July industrial and manufacturing productions numbers and the August NIESR GDP estimate. The Bank of England will announce interest rates and its asset purchase target as well as release trade balance numbers for July on Thursday. Friday finishes things up with August PPI input and output readings.

Japan releases its August official reserve assets numbers and kicks of the BOJ monetary policy meeting on Monday. Tuesday sees the July preliminary leading and coincident index, August money stock, July machine orders, current account, trade balance and the BOJ will announce its target rate. Thursdays data include August bankruptcies and Eco Watchers survey results. Friday closes out the week with 2Q final GDP, August domestic CGPI and the BOJ will release its August 9-10 Board meeting minutes.

Canada kicks off on Wednesday with July building permits, August Ivey PMI and the Bank of Canada rate announcement. Set for release on Thursday is August housing starts as well as July new housing price index and international merchandise trade. Friday’s data sees the August employment report to wrap up the week.

The data down under begins on Monday with Australia’s AiG performance of construction index for August, ANZ job advertisements and TD Securities inflation numbers. On Tuesday, the RBA will announce its cash target, New Zealand is set to release 2Q manufacturing activity, and the July Australian home loans is set for release. On deck for Wednesday is New Zealand August card spending and the August Australian employment report. Thursday sees 2Q NZ Terms of Trade index and Australia foreign reserves numbers for August.

Be on the lookout for important China data as well. Monday sees 4Q China Manpower survey and trade balance numbers for August including exports and imports will be released on Friday.

Brian Dolan is chief currency strategist at www.FOREX.com.

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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