FOREX TRADING

Market Movers ahead

• There is little in the way of US events or data that can seriously be expected to move markets, partly because Monday is Labor Day.
• Can the German upswing continue despite the problems stateside? There is much speculation about this at present, so it will be worth keeping an eye on the figures for German manufacturing orders and output. The UK and Japanese central banks are holding rate-setting meetings, but we do not see either being particularly exciting.
• The US, China and big European economies will be releasing foreign trade data during the week, which could also say something about whether the familiar pattern is persisting, with Asia as growth engine and Europe as its big supplier.

Global Update

• The sense of relief was tangible as incoming data painted a slightly brighter picture than in previous weeks. The strong ISM figures in particular confirm that the risk of a really hard landing in the US is relatively small.
• In Europe, we had evidence that the upswing is becoming broader-based, and the PMI data from China indicates that the recent downturn in manufacturing there is over. On the other hand, the Bank of Japan disappointed with its not particularly ambitious easing of monetary conditions.

Focus

• Markets have interpreted statements from the Fed as signalling further easing of monetary policy. Reading its statements closely, however, this easing will only come if the economy deteriorates further. That is a realistic possibility, but we reckon that there is ‘only’ a 40% chance of further easing.

Market movers ahead

Global

The coming week should be relatively quiet in terms of US data releases, as markets will be closed on Monday for Labor Day. Over recent months, imports have rebounded faster than exports, furthering US trade imbalances. Therefore focus will be on Thursday’s release of trade balance figures, and whether imports are slowing down. In addition, we will be looking at the initial jobless claims, as there is still widespread uncertainty about the state of the US labour market. Furthermore, the Fed’s Beige Book is due to be published, followed by next week’s only Fed speech – Minneapolis Fed’s Kocherlakota (non-voter) later on Wednesday.

In Euroland markets will focus on German manufacturing orders on Tuesday. German PMI new orders indicate that manufacturing orders will increase at a slowing pace dragged down by export orders. We expect a 0.6% m/m increase in July following a 3.2% m/m increase in June. This is enough to indicate that German industrial production has kept momentum well into Q3 despite the US slowdown. Keep an eye on export orders though. Export orders increased sharply in June, so a negative reading in July would not be that surprising, but could nevertheless cause some alarm in the market. German industrial production due to be released on Wednesday is expected to show a 1.8% m/m increase in July following a 0.6% decline in June.

The policy meeting at the Bank of England is likely to spur little action in the market. The August Inflation Report saw the bank lower its GDP and inflation forecasts alike, but the VAT hike to take effect from January implies that CPI inflation is likely to overshoot the 2% target for an extended period. Recent data out of the UK has been mixed: while Q2 GDP figures came in on the strong side relative to expectations, the August PMIs proved somewhat weak. Also, the all-important housing market has seen signs of a deterioration lately. On the whole, we think the MPC will leave both the bank rate and the size of its asset purchase programme unchanged in September.

Switzerland seems to be heading for a very quiet week data-wise. There are no central bank speeches on the agenda and the only indicator of interest is the August unemployment numbers, which are expected to show a modest decline. The jobless data is not likely to attract much attention from the financial markets.

In Japan focus next week will be on the BoJ monetary meeting on 6-7 September. BoJ’s additional quantitative easing announced in connection with its emergency meeting last week appears so far to have been ineffective in stemming the appreciation of JPY. Nonetheless, we do not expect BoJ to announce new easing measures at this week’s monetary meeting as it would be an indirect acknowledgement that it did too little last week. However, BoJ could talk tough and start to prepare the market for further quantitative easing down the road. Hence, it appears that the only tool available to stem the strong JPY in the short run is direct intervention in the FX market. In China foreign data for August will be released this week. China’s exports have been surprisingly resilient in recent months but we suspect this is partly due to frontloading of exports to take advantage of the expiry of export tax rebates in mid- July. Hence, there will probably be some payback in exports in coming months.

Global Update

Relief

Following a wall of discouraging data recently things turned more upbeat this week, as we received positive surprises from both the US and China coupled with a continued flow of solid eurozone data.

There is little doubt that the US remains in a slowdown phase. However, the data published so far this week suggest that the slowdown remains orderly and limits the risk of an outright recession. This is very important information for the market, which has become increasingly nervous over recent weeks. Both equities and bond yields are trading higher.

While market sentiment is likely to remain fragile in the near term, there are signs that news flow could become less one-sided going forward. First, the improvement in pending home sales and weekly retail data suggests that things are falling apart. Second, there may be some important information in the improvement in the Chinese PMI, as China was leading the recent turnaround in global industry. Indeed, it would be important for global financial markets if signs of a turn in China mature.

US – less bad data

For once, this week offered some comfort in terms of data. Most importantly the manufacturing ISM for August surprised on the upside by rising to 56.3 from 55.5 in July, with very strong details on employment. We continue to expect a slowdown in the manufacturing sector with ISM reaching close to 50 by year-end. The report highlights that the slowdown remains orderly and the risk of a very hard landing is still limited.

Initial claims data moved lower for a second week. This follows a period of elevated readings through late-July and early-August, which was probably caused by temporary factors and seasonal distortions – but nevertheless added concerns in the market. Initial claims are now back in the range that has been prevalent since early this year. While this still indicates that the job recovery remains very moderate, it highlights that the economy continues to expand.

Pending home sales for July offered the first signs of bottoming out in US housing indicators following the expiry of the first-time-home-buyer tax credit. We believe it is likely that this piece of data will signal a general trough among housing indicators. However, we should not expect any fast pick-up in housing turnover and building activity given the current slow flow of mortgage applications for purchases.

ICSC retail sales data indicated that consumers ramped up spending in August. Hence, we should expect some good news to arrive with the August retail sales report.

Finally, the Fed released its minutes from the August meeting. This confirmed what we already knew from post-Fed meeting speeches – that the decision to reinvest mortgage proceeds was made to maintain the status quo and not to provide further stimulus. The FOMC’s minutes leave us little wiser on the threshold for potential additional quantitative easing. However, we currently believe that there is a 40% probability that the Fed will resume large-scale asset purchases in Treasuries (see Research US – Fed up with QEII).

Euro area – recovery becoming broader based

This week Eurostat released a breakdown of Q2 euro area growth and there was some encouraging news. First, Q1 was revised up to 0.3% q/q (1.9% y/y) from 0.2% q/q (1.7% y/y). Furthermore, Q2 details show significant contribution from consumption and investment – the service sector also recovered. It is positive that the recovery is becoming more resilient to external shocks as domestic demand has begun to pick up. Private consumption increased 0.5% q/q in Q2 and has now been growing for three quarters in a row. Investments also grew strongly in Q2 (1.9% q/q) while the contribution from inventories is fading. Besides GDP, we received August PMI data. Flash estimates were known, but final data brought some revisions. It is notable that French Manufacturing was revised up to 55.1 from 54.7. The ECB Governing Council delivered the expected as it extended the period of full allotment until at least Q1 11. There was a minor change in the terms relating the three-month tenders in Q4. Up until now, the rate on these tenders was fixed at the level of the refi-rate (1%). In Q4 these tenders will have a fixed rate corresponding to the average rate of the weekly seven days MROs. Read more here: Flash Comment – ECB meeting: A double dip is not on the cards

Asia – BoJ expands QE to stem yen appreciation

Last week the Bank of Japan (BoJ) expanded its quantitative easing in connection with an unscheduled emergency meeting. The BoJ introduced a new JPY10trn lending facility with a six-month maturity in addition to the JPY20trn three-month liquidity facility introduced in December last year. However, the BoJ’s move was certainly not aggressive and slightly disappointing and so far it does not appear that it will be enough to stem further appreciation of the yen. Should the yen continue to appreciate it looks increasingly likely that Japan will intervene directly in the FX Market. In Japan the decision to intervene is a political decision and intervention has become a major theme in the current leadership contest within the ruling Democratic Party of Japan and Ichiro Ozawa, the challenger to PM Kan in the leadership contest has close to promised that Japan will intervene in the FX market if he wins the election. Despite industrial production in July increasing slightly more than expected, the overall picture remains that growth in industrial activity has slowed substantially.

In China there are signs that the slowdown in industrial activity is coming to an end. Both China’s two manufacturing PMIs improved in August and the details were very strong with the new orders improving markedly and the inventory component declining. Hence, the new order-inventory-balance improved substantially. Therefore, it appears that manufacturing activity in China is bottoming out and should start to improve again in Q4. In the rest of Asia PMIs continued to decline in August, but as China has led the rest of Asia since late-2008, the improvement in China’s PMI might be a sign that PMIs in the rest of Asia are close to bottoming out.

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