FOREX TRADING

Market Movers ahead

• US Senior Loan Officer survey with details on credit conditions and demand for loans will be released on Monday. Local business surveys are expected to show some strengthening while housing starts and building permits are expected to fall.
• The Euro area is facing a calm week in terms of macro data. ZEW expectations are likely to decline as market sentiment has turned more sour.
• In Asia focus turns to Japanese GDP data for Q2. Consensus is for 0.6% q/q GDP growth but we see some downside risk to that forecast. USD/JPY has declined to a new low and speculation is rising over potential intervention from the Bank of Japan.
• In Scandinavia attention will be on Norwegian Q2 GDP figures. We expect moderate growth.

Global Update

• Financial markets have become increasingly concerned about the risk of a slump with long-lasting repercussions. Data has turned softer in both Asia and the US.
• The Fed decided to bring its exit to a halt and as a result we have postponed our expectations for a first Fed hike until Q4 11.
• Euro area growth was strong in Q2, pulled up by Germany. Declining industrial production in June has raised concerns about growth in Europe too.
• European government bond spreads widened. On Thursday the ECB was seen purchasing government bonds in the market and spreads began to narrow.

Focus

• Wheat prices have rallied since early July. We assess the fundamental situation in the grains market and conclude that the recent rally is overdone and that a global food crisis is not imminent. In an alternative ‘agflation’ scenario, the impact on inflation is notable – in particular in emerging markets.

Market movers ahead

Global

Next week’s US data release calendar is quite full. The Fed’s July Senior Loan Officer survey to be released on Monday should shed some light on developments in credit conditions but also give an indication of the demand for loans. Local business surveys from Philadelphia and New York are expected to show some strengthening, likely reflecting a catching-up effect to the manufacturing ISM. Data for the housing market is still difficult to predict due to lagged effects from the first-time home buyer credit, but as these effects die out, the fear is that the weak housing figures are a sign of real underlying weakness. Hence, next week we expect both housing starts and building permits to fall, along with a weakening of the NAHB index. We anticipate a continued increase in US industrial production and rising producer prices driven by July’s oil price increases.

In the euro area, the only economic release of interest in the coming week is the German ZEW indicator on Tuesday. The ZEW expectations index has declined since April on the back of the escalation of the European debt crisis. Meanwhile ZEW current conditions have increased significantly, reflecting a strong German rebound. Recently the debt crisis has faded somewhat and risky assets have advanced. This was reflected in Sentix investor confidence, which advanced significantly in August. The Sentix indicator is usually a good predictor of German ZEW expectations, which indicate a positive ZEW release next week. However, market conditions have turned more sour over recent weeks as fears of global slowdown rise. We thus expect a slight decline in ZEW expectations.

UK retail sales are more important than inflation data next week as BoE is more worried about economic prospects than price pressures, which was the message from the past week’s Inflation Report. Retail sales have fallen more than surveys suggest, but we fear that weak data will continue. Housing data is also rapidly losing steam. The BoE Minutes will probably show that most members preferred an unchanged base rate at the meeting on monetary policy earlier on the month – if sole dissenter Sentance also joined the ranks, markets will interpret it as the MPC is getting more dovish. GBP strengthened last week as USD struck back but is overbought according to relative rates.

Switzerland is heading for a light data calendar in the coming week. No central bank speeches are on the agenda, and the only indicator likely to attract a little attention is the July trade balance due on Thursday. The main focus will be on exports, which should give an indication of the way GDP growth is heading.

In Asia focus turns to Japanese GDP data for Q2. Industrial production data points to a clear slowing of growth in Q2 as it grew only 0.2% q/q following a rise of 4.2% q/q in Q1. Consensus is for GDP growth of 0.6% q/q but we see some downside risk to that. Focus will also be on USD/JPY which has declined to a new record low and speculation is rising over potential intervention from BoJ. Comments from BoJ and the finance minister have been mixed on the issue. There is no data scheduled in China but focus is again turning to CNY as it depreciated versus USD in the past week after softer Chinese data. This throws some uncertainty over whether China is hesitating a bit on the appreciation of CNY.

Global Update: Euro shining – for now

Fear of a downturn intensifies

This week financial markets became increasingly concerned about the risk of a slump with long-lasting repercussions. Data has turned softer in Asia – particularly in China – and recent US data has been weak. In the US, initial claims data weakened further and is now at a level which is quite concerning and suggesting that the labour market may be slowing further. As a result of the disappointing signals from macro data, stock prices fell, yields went lower, the oil price fell to below USD78/bbl and EUR/USD weakened. Due to increased concerns, the Fed decided to bring its exit to a halt and as a result we have postponed our expectations for a first Fed hike until Q4 11.

The euro area provided very strong Q2 GDP figures, pulled up by 2.2% q/q growth in Germany, but industrial production declined in June, so concerns about European growth are materialising too.

European government bond spreads widened with Irish spreads widening the most, driven partly by concerns about the full cost of saving the Irish financial sector. On Thursday, the ECB was seen purchasing government bonds in the market and spreads began to narrow.

Weak US data tilts the Fed in a more dovish direction

The round of weak US data received over the most recent months – both for the labour market and private consumption – has caused increased worries about the economic recovery within the FOMC: the slowdown in the US economy has been more pronounced in the first half of the year than preliminary data had suggested. While a slowdown in the manufacturing sector had been widely anticipated, what is worrying the Fed and us, is that the high growth rates in the early phase of the recovery have not been enough to spur a convincing recovery in the labour market.

This increased concern was reflected in the FOMC statement. The FOMC revised downward the near-term growth outlook and decided to reinvest the principal payments from the Fed’s portfolio of Agency and MBS holdings in longer-term Treasuries. This implies that the balance sheet will be held constant and effectively puts the exit strategy on hold. While the amount of treasuries to be bought is insignificant, the decision sends a strong signal to markets. It provides a clear indication that rate hikes remain in the indefinite future and that the central bank is prepared for another round of quantitative easing if necessary. Given a softer H2 outlook and the FOMC shifting to an easing bias, we have revised our Fed Funds forecast. We now expect the first Fed Funds rate hike in Q4 11.

Renewed concerns about euro area periphery

This week government bond spreads widened again with Irish spreads widening the most, driven by renewed concerns in particular about the full cost of the Irish banking crisis. This was partly fuelled by the fact that two banks bid at the ECB’s weekly dollar liquidity providing auction – the first time there have been any bids since May – indicating that they could not raise dollars in the market though dollar liquidity should be plenty. On Thursday, the ECB purchased Irish government bonds and spreads narrowed. The ECB has not been buying government bonds for significant amounts over the past four weeks, but might now ‘restart’ the programme with more significant buying.

Industrial production in the euro area declined 0.1% m/m in June, but GDP growth in Q2 has nevertheless been impressive – particularly in Germany where growth stood at 2.2% q/q, the highest quarterly growth rate in decades. Greece is at the other end of the spectrum with a 1.5% q/q decline in GDP and unemployment that reached 12% in May.

The disappointing June production data could be a forewarning of a new slump in Europe, but we do not think so. Orders and confidence indicators still signal strong growth. Nevertheless, a slowdown should be expected after the strong Q2 performance and given the weakness in other regions we are aware that euro area growth prospects could quickly deteriorate.

On Wednesday, the Slovak parliament rejected its contribution to the aid package for Greece, but did approve its participation in the loan facility for countries in trouble. The Commission regretted this ‘breach of solidarity’, but said that Slovakia’s decision would not have any negative implication for the disbursement of the instalments of the loan.

More signs of slowing in Asia

The past week offered more evidence that growth in Asia is coming down. In particular, China is seeing activity come off the boil. Industrial production growth fell to 13.4% y/y in July, down from a peak of 19.2% y/y late last year. House prices also show signs of cooling off, with annual growth rates falling again to 10.3% from 11.4% in June. A Chinese slowdown has been expected – and needed – as inflationary pressures have been building. But the recent data suggests that this cooling of the economy is happening faster than projected. Chinese tightening measures have included reducing credit growth and measures to dent activity in housing. China has also told large companies to improve energy efficiency in order to meet its target of a 20% reduction in energy intensity over 2005-2011. This has contributed to the decline in industrial activity.

Trade data also painted a picture of a slowing Chinese economy. Import growth levelled off to 22.7% y/y in July after rising more than 80% y/y six months’ ago. Export growth is still growing strongly, which means that the Chinese trade balance rose significantly. This is putting global imbalances back in the spotlight – not least after US trade figures showed the opposite development in July. With US growth facing headwinds, this could put protectionism back on the agenda in the US. Interestingly, China put a stop to the appreciation of CNY this week and instead it depreciated against USD. It may be an effect of the weakening of EUR as China has said it will increasingly steer CNY against a basket of currencies including EUR. It might also be the weaker data that is leading the Chinese authorities to backtrack on the gradual appreciation. It clearly throws uncertainty into the outlook for CNY.

In India, industrial production growth has also showed the first signs of coming down. Production increased in June, but annual growth fell to 7.1% y/y from 11.3% y/y in May.

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