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The EUR/USD pair keeps its latest bullish streak intact amid persistent broad based US dollar weakness, fuelled by yesterday’s FOMC minutes release and renewed US political jitters.
EUR/USD capped below daily pivot of 1.1740
The bulls are seen gathering pace for further upside, allowing the EUR/USD pair to consolidate yesterday's sharp recovery gains, in the wake of a non-favorable FOMC minutes induced massive USD sell-off. The US 10-year Treasury yields posted the biggest daily drop since July-end, dragging the greenback broadly lower.
The FOMC members expressed their concerns weak inflation, staying on the defensive with regard to the Fed rate hike prospects this year. However, the Fed indicated its readiness to begin reducing its $4.2 trillion balance sheet from next month.
Moreover, better-than expected Eurozone second quarter annualized growth figures also keeps the sentiment underpinned around the Euro. Eurozone Q2 flash GDP growth bettered expectations on yearly basis
Looking ahead, the major could regain 1.18 handle, should the European traders react negatively to the FOMC minutes release, which could trigger a fresh selling wave in the buck. Meanwhile, the pair could also get influenced by the Eurozone CPI report, ECB minutes and US dataflow due for release later today.
EUR/USD Technical Set-up
According to Mohammed Isah FXTechstrategy, “resistance comes in at 1.1800 level with a cut through here opening the door for more upside towards the 1.1900 level. Further up, resistance lies at the 1.1950 level where a break will expose the 1.2000 level. Conversely, support lies at the 1.1700 level where a violation will aim at the 1.1650 level. A break of here will aim at the 1.1600 level. All in all, EURUSD faces further upside pressure.”
The Sterling seems to have recovered the smile in the second half of the week, with GBP/USD now gravitating around 1.2900 the figure ahead of the opening bell in Euroland.
GBP/USD focus on UK data
Cable is posting its second consecutive session with gains so far today mainly helped by the renewed weakness surrounding the greenback.
In fact, the US Dollar Index stays on the defensive in response to the dovish tone from the FOMC minutes on Wednesday, while effervescence appears to have resurfaced in the US political scenario.
Ahead in the day, UK’s retail sales for the month of July are due, while the Philly Fed manufacturing gauge, industrial production and capacity utilization are all expected across the ocean. In addition, Dallas Fed R.Kaplan (voter, hawkish) and Minneapolis Fed N.Kashkari (voter, dovish) are due to speak.
Cable should also stay wary of the publication of the ECB minutes and the potential effects on EUR/GBP.
GBP/USD levels to consider
As of writing the pair is gaining 0.05% at 1.2898 facing the next hurdle at 1.2931 (55-day sma) followed by 1.2968 (10-day sma) and finally 1.3007 (38.2% Fibo of 1.2587-1.3266). On the flip side, a break below 1.2843 (low Aug.16) would open the door to 1.2808 (low Jul.12) and finally 1.2747 (76.4% Fibo of 1.2587-1.3266).
Felicity Emmett, Senior Economist at ANZ explains that it was another strong labour market report for Australia in July, showing employment up 28k and unemployment at 5.6%.
Key Quotes
“Some of the detail was a bit softer than the headline: full-time jobs fell, hours worked were down and the jobs gains were narrowly based. But we wouldn’t overplay these details. The labour market is clearly improving and additional job gains look likely in the near term. Further out, we continue to think that ongoing inroads into the unemployment rate will be more difficult to achieve, in part because the strong pace of public sector employment gains is unlikely to be sustainable.
The three most interesting aspects of the minutes from the July FOMC meeting centered on the balance sheet, inflation and financial conditions, points out the analysis team at Nomura.
Key Quotes
“Overall, markets perceived the minutes as mildly dovish. We maintain our forecast that the next hike will take place in December meeting. However, we think the minutes marginally lowered the likelihood of a December rate hike.”
“The greatest consensus appeared to be on the balance sheet. While some members were ready to announce the balance sheet adjustment at the July meeting, “most preferred to defer that decision until an upcoming meeting”, i.e., September. This supports expectations of an announcement of the balance sheet adjustment at the upcoming meeting next month on 19-20 September.”
“Regarding signs of the Committee’s thinking behind future rate hikes, the minutes conveyed a robust debate on the interpretation of the recent soft readings of inflation, and hence on the inflation outlook. Recall that at the July FOMC meeting, the participants had not seen the most recent inflation print (for July) which showed that a single item, lodging away from home, accounted for nearly all of the downside surprise for core CPI inflation.”
Forex today in Asia was dominated by broad USD weakness, as the US dollar continued to face double whammy amid renewed US political woes and less optimistic Fed’s outlook on inflation. Amongst the Asia-pac currencies, the Yen was the strongest, in response to better-than expected Japanese trade data, while the Aussie stalled its recovery mode on the back of mixed Australian jobs report. The NZD/USD pair sits near Tuesday’s high of 0.7333, as the bulls cheer upbeat NZ PPI data.
Main topics in Asia
NZD/USD headed to 0.7350 as NZ PPI underpins
The NZD/USD pair is seen extending their recovery from five-week lows in Asia this Thursday, now looking to take-out key resistances located near 0.7330 levels en route 0.7350 levels.
WH Chief Strategist Bannon: “We’re at economic war with China”
Remarks from the White House Chief Strategist Steve Bannon crossed the wires earlier today, via Reuters, as he expressed his views on China, Korea, and his enemies in the Trump administration in an interview with the American Prospect.
Australia proposes stronger money laundering rules, includes bitcoin - RTRS
The Australian Minister of Justice Michael Keenan said in a press release on Thursday, Australia announced a bill today to strengthen its money laundering laws, Reuters reports.
Australia’s July employment report: Mixed reading, full time jobs drop sharply
Australian July employment report came mixed, with the employment change at 27.9k vs 20k exp and 14k prior, with full time job creation at -20.3k vs 69.3k (revised higher) last, while part time jobs came at 48.2k vs -48k last.
Key Focus ahead
In the session ahead, the RBA Assistant Governor Ellis speech will remain in focus ahead of the key UK retail sales report. Meanwhile, from the Euroland, the final CPI, trade balance and ECB monetary policy meeting minutes will be closely eyed for fresh impetus on the Euro. In the North American session, the Canadian manufacturing sales will be released alongside a spate of US economic releases, including the jobless claims, Philly Fed manufacturing index and industrial production data. Besides, speech by the FOMC member Kaplan is also on the cards in the American morning.
GBP/USD re-takes 1.2900 in Asia, UK retail sales in focus
The GBP/USD pair caught a fresh bid-wave in Asia and extended its overnight steady rise to reclaim 1.29 handle. However, the bears continue to lurk above the last amid mixed market sentiment and increased nervousness ahead of the key UK retail sales data.
EUR/USD - Will ECB minutes re-establish the uptrend, Descending triangle noted?
EUR/USD found takers at the 20-day low of 1.1681 and ran into rising trend line hurdle after the Fed minutes released in the NY session showed growing concerns among policymakers about weak inflation.
UK retail sales volumes to fall in July - HSBC
HSBC analysts offer a sneak peek on what to expect from the UK retail sales report, which will be reported at 0830GMT later today.
ECB monetary policy meeting minutes preview – HSBC
In the view of analysts at HSBC, the ECB minutes is likely to provide fresh insights on the ECB Governing Council’s discussion on the recent euro appreciation and its impact on the growth and inflation outlook.
In Australia, it was another headline jobs data that beat the consensus, although tempered by a correction in full-time employment, explains the research team at TDS.
Key Quotes
“Strong upward trends in full-time employment and hours worked underpin the RBA’s cautious optimism on the labour market, and in turn, are expected to spark wages growth from current record low levels.”
“Headline employment rose by +27.9k in July, after an upwardly revised +20k in June. The unemployment rate remained at 5.6% as expected, although June was lifted to 5.7%. The participation rate edged a little higher to 65.1% (mkt 65%). Annual employment growth has remained steady at 2%/yr for the past three months, consistent with the leading employment indicators, and we expect a similar pace to persist in the coming months.”
“Waiting for more wage (and CPI) reports adds to our case for RBA patience. We see the first rate hike not occurring until May 2018.”
RBA minutes commentary on private and public business investment sounded quite upbeat and appears to allude to upside risks to the RBA forecasts that are for a “pick up later in the forecast period”, but to remain subdued for now, notes Greg Gibbs, Analyst at Amplifying Global FX Capital.
Key Quotes
“They cite evidence pointing to a faster pickup sooner: strong business confidence, commercial vehicle sales up, non-res building approvals up, public infrastructure flowing to private order books.”
“The RBA minutes noted that business investment had picked up internationally, they said, “In particular, growth in business investment had picked up in several advanced and emerging economies, including the United States, Canada, Japan and a number of economies in east Asia.”
“It is interesting that the RBA is using the international experience to support their forecast of subdued wage growth, but do not appear to be applying the same thought process to business investment. If business investment is happening more globally, and conditions and indicators are pointing to the same in Australia, its further reason to expect a stronger recovery in Australia, sooner.”
“Low bar for labour market improvement
The minutes also talk about the strong labour market this year. But forecast little further improvement in the unemployment rate.
This is a point of risk for AUD bears. The RBA has set a very low bar for the labour market to improve faster than its forecasts. At the end of their forecast period (2+years) they see unemployment only a bit below 5.5%. Unemployment (5.6%) could improve a lot faster if the recent pace of job growth keeps up. Especially if business investment rises faster than forecast.”
US housing starts fell 4.8% m-o-m in July to an annual pace of 1155k, below expectations (Nomura: -3.0% to 1178k, Consensus: +0.4% to 1220k) while June housing starts were lowered to 1213k (previously reported as 1215k), notes the analysis team at Nomura.
Key Quotes
“We think the underlying pace of single-family housing starts remains intact, while multifamily housing starts continued to slow. Housing construction permits were also weaker than expected in July, falling 4.1% m-om to an annual pace of 1223k (Nomura and Consensus: -2.0% to 1250k). The decline in permits was led by an 11.2% m-o-m drop in multifamily housing permits, reverting from the 19.3% increase in June. Single-family housing permits were unchanged. The sharp pullback in multifamily housing permits suggests that the multifamily sector may continue to weigh down overall housing starts in the near term.”
“GDP tracking update: Today’s single-family housing starts and permits data were slightly stronger than we had expected, suggesting that residential investment in Q3 may be greater than we have previously anticipated. While multifamily housing starts came in weaker than expected, considering the difference in construction expenditure per unit between single-family and multifamily homes, and a weak relationship between multifamily starts and actual construction spending which is estimated on an accrual basis, we think that the positive impact from strong single-family starts outweighs the decline in multifamily starts. Thus, we raised our Q3 GDP tracking estimate by 0.1pp to 3.0% q-o-q saar.”
The latest Fed minutes showed that although the debate about inflation remains alive and well (as it does most everywhere), a majority of FOMC participants continue to expect inflation to gradually rise to the 2% target over the medium term, explains the analysis team at ANZ.
Key Quotes
“The main market interest was in comments around the timetable for shrinking the Fed’s QE-bloated balance sheet. With the Fed staff raising their assessment of financial stability risks to “elevated” (from “notable”), it’s a key question. In the end, the door was kept open for a September announcement of a timetable. Settling on one will be quite a challenge, given evidence of robust internal debate on most every topic relevant to the decision. One expects the timetable will be highly conditional with a multitude of escape clauses as the Fed monitors the market response closely.”
Khoon Goh, Head of Asia Research at ANZ, suggests that despite recent improvement in Singapore’s economic growth, they continue to favour staying short SGD as they expect MAS to remain neutral for a prolonged period and see scope for the S$NEER to retrace lower.
Key Quotes
“Our view towards SGD has not changed, even with the S$NEER backing off recent highs. Though Singapore’s Q2 GDP growth was revised up and the Ministry of Trade and Industry narrowed their 2017 full year growth forecast to 2-3% from 1-3% previously, we do not see recent improvements altering the current MAS neutral monetary policy stance.”
“There are no upside pressures on inflation in Singapore, apart from administrative price rises such as the increase in water prices from July, which will push headline CPI higher. The labour market remains weak, despite the headline unemployment rate easing to 2.2% in Q2 from 2.3% in Q1. The headline unemployment rate masks a deterioration in the labour market. Employment contracted for the second consecutive quarter by 7.8k (following a 6.8k contraction in Q1). If we exclude foreign domestic workers, the decline in employment was even larger at 8.4k. The weak state of the labour market mean core inflation pressures will remain subdued, and MAS policy is set to stay neutral for some time. We do not see an exit from the neutral policy stance until there is a substantial improvement in the labour market.”
“GO SHORT SGD VS IDR
To express our SGD view and to partially remove the dollar risk, we recommend going short 3m SGD/IDR forward at 9916 (spot reference 9801), targeting 9700 with stop-loss at 10000. IDR is one of our preferred currencies in the region and offers attractive carry.”
South Korea's president Moon crossed the wires last hour, via Reuters, addressing a news conference marking his first 100 days in office.
Key Quotes:
"I would consider that North Korea is crossing a red line if it launches an intercontinental ballistic missile again and weaponises it by putting a nuclear warhead on top of the missile."
Moon added that Trump has promised to seek negotiations and approval from South Korea before taking any options regarding North Korea.
James Marple, Director & Senior Economist at TD Economics, explains that the Federal Open Market Committee (FOMC) members noted little change to the economic or labor market outlook, but spent a considerable time pondering the "the softness in inflation" and how to react to it.
Key Quotes
“While most members saw inflation returning to two percent over the medium term, "many...saw some likelihood that inflation might remain below two percent for longer than they currently expected, and several indicated that the risks to the inflation outlook could be tilted to the downside."
“Balancing some of the concern around soft inflation was an opposing perspective that financial conditions had eased despite gradual policy tightening.”
“FOMC members largely agreed to the timing of balance sheet normalization. The minutes noted that: "participants generally agreed that, in light of their current assessment of economic conditions and the outlook, it was appropriate to signal that implementation of the program likely would begin relatively soon, absent significant adverse developments in the economy or in financial markets."
“Key Implications
The NZD/USD pair is seen extending their recovery from five-week lows in Asia this Thursday, now looking to take-out key resistances located near 0.7330 levels en route 0.7350 levels.
NZD/USD trades above 10-DMA at 0.7311
The Kiwi remains on the front foot this session, benefiting from broad based US dollar weakness and better-than expected NZ PPI data, which came in at 1.4% in the reported month versus 0.9% expected and 0.8% previous.
The greenback slumped across the board in the US last session, after the FOMC minutes showed that the FOMC members remained divided over the inflation outlook, raising doubts over future rate hike prospects.
Meanwhile, the renewed uptick seen in oil prices after the latest declines, also offered fresh impetus to the resource-linked NZD. Looking ahead, it remains to be seen if the upcoming US macro releases offer some respite to the USD bulls.
NZD/USD Levels to consider
NZD/USD holds above 10-DMA at 0.7311, with 0.7287 (daily pivot) still guarding 0.7250 (psychological levels) and a break back below 0.7189 (100-DMA) are key near-term downside areas. To the topside, a test of 0.7348 (50-DMA) due on the cards, which could open doors towards 0.7382 (classic R2/ Fib R3).
Greg Gibbs, Analyst at Amplifying Global FX Capital, points out that the RBA discussed inflation and commented specifically on market services CPI and the influence of low labour costs.
Key Quotes
“The market services ex-vol items is the lowest underlying measure at the moment at 0.8%y/y in Q2, up from 0.7%y/y in Q1.”
“They mentioned a number of factors that tended to downplay the recent rise in inflation, pointing to tobacco excise and utility price rises that could be considered temporary. And low rent trends in major cities.”
“They forced the exchange rate into the discussion on their inflation forecasts saying that “the forecasts were conditioned on the assumption of no change in the Australian dollar exchange rate during the forecast period, which extends to the end of 2019, and that this assumption was one source of uncertainty.”
“This is just obvious and does not need to be said, but by saying it, raises the exchange rate as a significant policy issue. They planted it there to continue to discourage the market from pushing up the AUD.”
“The sub-target outlook for inflation suggests no rush to raise rates even if the RBA is surprised by strength in the economy.”
“The RBA is trying quite hard by its standards to discourage further gains in the exchange rate, but there is no sign they would consider intervention any time soon, and it is still quite a ways from considering a rate cut to offset further currency gains. At best it seems a higher exchange rate might delay hikes, but these are considered unlikely over the year ahead anyway.”
“Their flat outlook for rates probably prevents a big rise in the AUD/USD.”
“The RBA currency statements are little different than the RBNZ and should have limited bearing on the AUD/NZD cross.”
Justin Smirk, Research Analyst at Westpac, notes that the Australia’s July Labour Force Survey provided the fifth consecutive solid update on the pace of employment growth as the 27.9k gain was above market expectations (20k) but less than Westpac’s forecast for 35k.
Key Quotes
“In July the annual pace of employment growth was flat at 2.0% which is currently consistent with the Westpac’s Jobs Index. We should note, however, that the Jobs Index is pointing to employment growth accelerating to around 2½%yr pace. As such, we are not looking for a slowdown in employment growth until early 2018.”
“In July, total employment rose 27.9k for a 87.5k total gain over the last three months or an average of 29.2k per month. The annual pace of employment growth has lifted from 0.9%yr in February to 2.0%yr in May and it held that pace through June and July. The Australian labour market went through a soft patch in 2016 that was particularly pronounced through August to November when the average gain in employment per month was just 2.2k. We have clearly bounced out of this soft patch with the labour market now holding a firmer trend with an average monthly growth of 33k for the last six months.”
“There was the usual volatility in full-time/part-time employment but over the past few months the results are more indicative of a robust labour market. Full-time employment fell 20.3k following on from a solid 69.3k gain in June. In the year full-time employment gained 197.7k for a 2.4%yr pace which is now exceeding that for the pace of growth in the working age population. Part-time employment rose 48.2k following a –49.3k in June. In the year to July, part-time employment has lifted 41.6k or a 1.1%yr pace.”
“A further sign of consolidation as the 0.8% fall in hours worked following the 0.7%mth bump June which followed a 1.5% surge in May. The annual pace for total hours worked has eased back to 1.9%yr from to 3.3%yr in June which was the fastest pace seen since December 2015.”
“The reported gain in employment was also associated with a 0.1ppt bump up in participation to 65.0 leading to a 29.0k gain in the labour force so it was somewhat surprising to see a fall in the unemployment to 5.6% from 5.7%. However, it would be best to report it as flat as at three decimal places the unemployment rate was 5.650% from 5.654% in June. We believe we have seen the low point for unemployment in this cycle and expect it to hold around 5.6% until it starts to drift higher from end 2017.”
“A consolidation picture comes through in the state date, with soft gains in NSW (+0.5k) and SA (0.8k), falling employment in Vic (–2.2k) and WA (–1.3k) all being offset by a surge in Qld (+27.0k). This mixed employment print was matched in unemployment which rose in NSW (now 5.0% from 4.9%) and Vic (6.1% from 5.9%) while the unemployment rate fell in Qld (6.2% from 6.5%) and WA (5.4% from 5.6%).”
“So while this was a month for consolidation it is still a sound update on the labour market. While we expect the monthly numbers to be quite volatile, the Jobs Index is pointing to total employment growth hitting 2½%yr by year’s end. From a 2.0%yr starting point this estimate is now looking far more plausible.”
In view of analysts at ANZ, NZD is still hostage to USD direction with the Fed minutes, sharp fall in US 10 year bond yields and cessation of Trump’s Manufacturing Council (of 28 CEO’s, 12 had resigned) undermining the greenback.
Key Quotes
“We continue to favour fading strength, backing firmer data signals to ultimately provide support to the USD.
“Support 0.7260 Resistance 0.7360”
EUR/USD found takers at the 20-day low of 1.1681 and ran into rising trend line hurdle after the Fed minutes released in the NY session showed growing concerns among policymakers about weak inflation.
Data heavy day, focus on the ECB minutes
The currency pair closed at 1.1766 and extended gains 1.1790 in the Asian session. The key data due for release are - Eurozone July final CPI at 9:00 GMT, Eurozone trade balance at 10:00 GMT, ECB minutes at 11:30 GMT. Across the pond, weekly jobless claims will be released at 12:30 GMT, followed by industrial production at 13:15 GMT and Fed’s Kaplan speech at 16:30 GMT. Sounds like a data heavy data, although the main event for the day is the ECB minutes release.
ECB minutes - watch out for comments on the exchange rate
The minutes due today are expected to shed more light on the discussion that took place within the governing council on inflation outlook, potential QE taper and the impact of the recent Euro appreciation on growth and inflation.
On the inflation front, the minutes are likely to reiterate Draghi’s view that there are no convincing signs of a pickup in price pressure and that inflation currently stands well below the central bank’s target.
Coming to exchange rate, the minutes are more likely to say that a strong Euro could cap inflation, but is also a sign of growing confidence in the Eurozone economy. Finally, more clues regarding a potential QE taper in September/October could move the EUR pairs as well.
The bulls may regain control of the EUR/USD if the minutes hint at the September QE taper and sound upbeat on inflation and economy. On the other hand, bears may come-in strong if the minutes highlight concerns regarding weak inflation and EUR strength. Moreover, it would mean the ECB could delay the QE taper.
EUR/USD Technical Levels
The daily chart shows a descending triangle formation, which are typically continuation patterns. However, at times the descending triangles have worked as bearish reversal patterns as well.
A break above 1.1812 [triangle hurdle] would open up upside towards 1.1848 [Aug 11 high], above which a major hurdle is seen at 1.1910 [recent high]. On the downside, breach of support at 1.1765 [Asian session low] could yield 1.1687 [triangle support]. An end of the day close below the same signal trend reversal and open doors for 1.15 levels.
In the view of analysts at HSBC, the ECB minutes is likely to provide fresh insights on the ECB Governing Council’s discussion on the recent euro appreciation and its impact on the growth and inflation outlook.
Key Quotes:
“As we had expected, the ECB did not make any change to rates, QE and forward guidance in the July meeting. No indication was given on when a decision will be made on the future of QE after December, other than it will be in the autumn ...”
“With regards to inflation, Mr Draghi reaffirmed that there is "no convincing sign of a pick-up in underlying inflation" in the eurozone and that "inflation is not where we want it to be", backtracking slightly from the statement he made at the end of June in Sintra - which caused some market concerns about a possible early tapering of QE - in which he mentioned that "deflationary forces had been replaced by reflationary ones".
“The minutes should give us more of a flavour of the discussion that took place within the Governing Council, including whether some members were concerned about the implications of the recent euro appreciation for growth, inflation, and the monetary policy outlook.”
The Australian Minister of Justice Michael Keenan said in a press release on Thursday, Australia announced a bill today to strengthen its money laundering laws, Reuters reports.
The bill also brings the bitcoin providers under the remit of AUSTRAC, the government's financial intelligence unit.
Key Quotes:
"The threat of serious financial crime is constantly evolving, as new technologies emerge and criminals seek to nefariously exploit them. These measures ensure there is nowhere for criminals to hide."
"Stopping the movement of money to criminals and terrorists is a vital part of our national security defences and we expect regulated businesses in Australia to comply with our comprehensive regime."
The GBP/USD pair caught a fresh bid-wave in Asia and extended its overnight steady rise to reclaim 1.29 handle. However, the bears continue to lurk above the last amid mixed market sentiment and increased nervousness ahead of the key UK retail sales data.
GBP/USD: All eyes on UK retail sales
In the US last session, the spot found support once again near 1.2845 region and staged a solid comeback from there, after a non-favourable FOMC minutes release weighed heavily on the US dollar and Treasury yields.
Meanwhile, a positive surprise seen in the UK jobs report combined with a slack in the US housing sector also collaborated to Cable’s bounce.
So far this session, the GBP/USD pair struggles to take on the recovery above 1.29 handle, as expectations of a drop in the UK retail sales volumes for July continue to undermine the sentiment around the pound.
Also, a recovery in the US yields across the curve dampens the sterling’s attractiveness as an alternative higher-yielding asset.
Data-wise, the main risk event for the major today remains the UK retail sales, while the US dataflow, including the industrial production data will also have a major impact on the prices.
GBP/USD levels to consider
Valeria Bednarik, Chief Analyst at FXStreet noted: “The 4 hours chart shows quite a limited upward potential, given that technical indicators are barely reconverting from oversold levels but still well below their mid-lines, whilst the 20 SMA maintains a sharp bearish slope well above the current level, capping the upside now around 1.2930. Support levels: 1.2830 1.2795 1.2760 Resistance levels: 1.2910 1.2950 1.2990.”
Gold extended post-Fed rally in Asia as the US 10-*year treasury yield fell by the most in three weeks. Prices clocked a high of $1289.43 earlier today before trimming gains to trade around $1287 levels.
The bullish move gathered steam from the low of $1267.81 after the Fed minutes showed the policymakers are getting increasingly nervous about the weak inflation. This cemented expectations that the Fed would be forced to slow down the pace of the policy tightening. Consequently, the 10-year Treasury yield fell 4 basis points, leading to broad based USD weakness and gold rally.
However, the sentiment in the options market has not improved. The chart below shows the one month 25-delta risk reversal remains largely unchanged around 0.90 and well below the recent high of 1.525.
One-month 25-delta risk reversal
The positive reading does indicate the calls are more in demand as compared to puts. However, the lack of improvement in the metric, despite the rally in the underlying could be a hint of a bull trap.
Gold Technical Levels
The metal is fast approaching the key resistance zone of $1290-1300. Since April, the metal has failed three times near $1295 levels. Thus, an end of the day close above $1300 would signal a failure of the triple top formation and shall open doors for $1337 [Nov 2016 high].
On the downside, breach of support at $1282 [5-DMA] could yield a pullback to $1278 [10-DMA] and $1274 [Aug 1 high].
HSBC analysts offer a sneak peek on what to expect from the UK retail sales report, which will be reported at 0830GMT later today.
Key Quotes:
“UK retail sales held up reasonably well in June, aided perhaps by better weather and lower petrol prices.
For July, early indicators have been somewhat poor: the VISA consumer spending index was down in y-o-y terms for the third consecutive month, while the BRC index was held up only by food sales: discretionary spending was down 0.7% 3m/3m. So, we expect sales volumes to fall in July. And with some strong base effects for July 2016, this could take the y-o-y rate to a new four-year low.”
According to the latest JODI oil data, Saudi Arabia’s crude exports fell by 0.035m bpd (m/m) to 6.889m bpd in June, while the Kingdom’s crude output rose by 190k bpd (m/m) to 10.070m bpd in the reported month.
The bullish move in the AUD/USD pair has stalled around 0.7940 levels this Thursday morning in Asia after the data released in Australia showed the full time jobs unexpectedly declined in July.
Daily chart
Wednesday’s sharp gains mark a rebound from near rising trend line support. This is encouraging sign for the AUD bulls, although the options market isn’t convinced.
Risk Reversal and Vols
The one-month 25-delta risk reversal improved only slightly from -1 to -0.95. Moreover, the negative reading shows the Put options are in demand. Furthermore, the one-month ATM volatility fell to 7.845 today, the lowest level since July 17.
A survey of chief financial officers (CFO) across Britain and Europe conducted by Thomson Reuters revealed the following:
69 percent of businesses had not seen an impact from the vote for Brexit on their strategic planning
"The results suggest a relatively muted response from business so far - not the knee-jerk reaction that some expected," said Laurence Kiddle, managing director for the EMEA Tax & Accounting business of Thomson Reuters
12 percent of CFOs had investigated moving operations out of Britain
34 percent said that they anticipated the number of employees in the UK decreasing
19 percent said that they planned to relocate staff as a result of Brexit
21 percent of all CFOs saying they had have held off from expanding in the UK as a result of the vote
UK FinMin Hammond is more trusted than UK PM May by UK and EU businesses
UK and EU businesses have most confidence in Bank of England (BOE) Governor Carney in generating a positive deal for their industry
The AUD/JPY’s retreat from six-day tops of 87.47 gained further traction, following the release of the Australian employment report, which failed to impress the AUD markets.
AUD/JPY finds buyers near 50-DMA at 87.01
The selling pressure behind AUD/JPY intensified, after the mixed Aus jobs data pushed the AUD/USD pair closer towards daily lows. Australia’s July employment report: Mixed reading, full time jobs drop sharply
Moreover, persisting cautious tone seen in Asia combined with solid Japanese trade data continue to keep the demand intact for the Japanese currency, exerting further downward pressure on AUD/JPY. Japan Merchandise Trade Balance Total above expectations (¥392B) in July: Actual (¥418.8B)
However, the losses appear capped as the spot continues to hold above the key 50-DMA support, having found support from a drop in the US dollar and Treasury yields on less optimistic Fed, while higher commodities’ prices also underpin the sentiment.
Focus now shifts towards a fresh batch of US economic releases for fresh impetus on both the AUD and JPY.
Technical Levels
Higher side: 87.45 (20-DMA), 87.74 (Fib R2), 88 (round number)
Lower side: 86.73/67 (10 & 5-DMA), 85.94 (classic S2), 85.31 (200-DMA)
AUD/USD remains bid, but is struggling to extend gains beyond 0.7950 levels as the data released in Australia showed an unexpected drop of 20.3K in the full time jobs in July.
The economy added 27.9K jobs, beating the estimated figure of 20K. The June figure was revised higher to 20K from 14K. Meanwhile, the jobless rate came-in at 5.6% as expected. The part time jobs registered a growth of 48.2K in July compared to the prior month’s drop of 48.0K.
Bond yield spread remains unchanged
The upbeat headline figure is good news; however, the dismal full time jobs number is playing spoil sport. This is evident from the fact that the spread or the difference between the Aussie 10-year bond yield and the US 10-year Treasury yield remains unchanged at the pre-data level of 42 basis points. Thus, the spot too remains largely unchanged around the pre-data figure of 0.7935.
AUD/USD Technical Levels
A break above 0.80 [psychological hurdle] would open doors for 0.8043 [Aug 1 high] and 0.8066 [July 27 high]. On the downside, breach of support at 0.7886 [5-DMA] could yield a pullback to 0.7839 [Aug 11 low] and 0.7808 [Aug 15 low].
Australian July employment report came mixed, with the employment change at 27.9k vs 20k exp and 14k prior, with full time job creation at -20.3k vs 69.3k (revised higher) last, while part time jobs came at 48.2k vs -48k last. The participation rate ticked higher to 65.1%, while the unemployment rate was 5.6%vs 5.6% exp and 5.7% (revised from 5.6%) last
JULY KEY POINTS
TREND ESTIMATES (MONTHLY CHANGE)
Employment increased 26,000 to 12,196,900.
Unemployment decreased 1,800 to 726,000.
Unemployment rate remained steady at 5.6%.
Participation rate increased by less than 0.1 pts, but remained at 65.0% in rounded terms.
Monthly hours worked in all jobs increased 5.2 million hours (0.3%) to 1,696.4 million hours.
SEASONALLY ADJUSTED ESTIMATES (MONTHLY CHANGE)
Employment increased 27,900 to 12,201,400. Full-time employment decreased 20,300 to 8,342,300 and part-time employment increased 48,200 to 3,859,100.
Unemployment increased 1,100 to 730,600. The number of unemployed persons looking for full-time work decreased 3,800 to 496,400 and the number of unemployed persons only looking for part-time work increased 4,900 to 234,200.
Unemployment rate decreased by less than 0.1 pts to 5.6%
Participation rate increased by 0.1 pts to 65.1%.
Monthly hours worked in all jobs decreased 14.4 million hours (0.8%) to 1,690.4 million hours.
Remarks from the White House Chief Strategist Steve Bannon crossed the wires earlier today, via Reuters, as he expressed his views on China, Korea, and his enemies in the Trump administration in an interview with the American Prospect.
Key Quotes:
"We're at economic war with China."
"It's in all their literature. They're not shy about saying what they're doing. One of us is going to be a hegemon in 25 or 30 years and it's gonna be them if we go down this path. On Korea, they're just tapping us along. It's just a sideshow."
“To me, the economic war with China is everything. And we have to be maniacally focused on that. If we continue to lose it, we're five years away, I think, ten years at the most, of hitting an inflection point from which we'll never be able to recover.”
The People's Bank of China [PBOC] set the Yuan reference rate at 6.6709 vs. Wednesday's fix of 6.6779.
The US 10-year yield fell on Wednesday as the dovish Fed minutes, Trump's decision to disband key business advisory councils and a weak housing starts number boosted demand for the Treasuries.
The benchmark yield fell by 4 basis points to 2.22%; its biggest one-day decline since July 26. The decline marked a failure to hold above the 100-DMA and 50-DMA levels. The daily chart also shows the falling top formation, which indicates further losses could be on the cards.
Treasury prices rallied [yields dropped] after the Fed minutes showed the policymakers are increasingly wary about recent weak inflation and some called for halting interest rate hikes until inflation shows signs of life.
The speculation that the Fed may be forced to slow down the pace of the monetary policy tightening pushed up the Treasury prices.
The curve between the 10-yr yield and the 2-yr yield fell to 89 basis points from 92 basis points. The flattening of the yield curve is dollar bearish.
Currently, USD/JPY is trading at 110.08, down -0.12% on the day, having posted a daily high at 110.24 and low at 109.89.
Summertime market's mood soured by Trump - ANZ
USD/JPY fell from 110.95 to 110.03 overnight after not only the FOMC minutes, but earlier in the session the move commenced after Trump disbanded two business advisory councils following CEO defections, and again after the FOMC minutes. Subsequently, US 10yr treasury yields fell from 2.28% to 2.22%, 2yr yields from 1.36% to 1.32% while Fed fund futures yields slipped, pricing the chance of a December rate hike at around 43% (from 47%), as noted by analysts at Westpac.
FOMC minutes reviewed by Westpac analysts:
"In the FOMC minutes of the July meeting, "most" officials see inflation picking back up to 2% over the next couple years and "many" see recent low inflation as a function of idiosyncratic factors, signalling that the central mass at the Fed continues to favour another hike before the year is out. That said, Fed cohesion on this front seems weaker than previously, the more cautionary group now amounting to "some". They argue the Fed can "afford to be patient", while "several" indicate that the risks to inflation could be tilted to the downside and "many" see some likelihood that inflation could remain below 2% for longer. With this group apparently larger and more vocal than past meetings, markets are reading the minutes with a dovish bias. On the balance sheet, "several" are agitating for a July start but "most" prefer to defer a decision until the next meeting (i.e. Sep 20),"
USD/JPY levels
From a technical point of view, Valeria Bednarik, chief analyst at FXStreet explained that the pair reverted most of its Tuesday's gains, and seems poised to fall further, particularly on a break below the psychological 110.00 threshold. "In the 4 hours chart, the price broke below its 100 SMA with a strong volume candle, while technical indicators pulled back from overbought levels and approach their mid-lines almost vertically, supporting the case of a downward extension for the upcoming hours."
The developers behind Segwit2x have scheduled another hard fork or split in November, which may end up creating the third version of Bitcoin.
As per CoinDesk report, “the Segwit2x team plans to enable Bitcoin's miners to elect to run new software at block 494,784 on the blockchain, a block they expect will occur sometime in November of this year.”
AUD/JPY ran into resistance at 87.44 [50% Fib retracement of the drop from 89.42 to 85.45] yesterday before retreating slightly to 87.18 levels in Asia.
The Aussie data due at 01:30 GMT is expected to show the jobless rate held unchanged at 5.6%. The economy is expected to have added 20K jobs. Traders would also keep an eye on the part time and full time employment numbers.
Australia employment growth has been far stronger this year than in 2015 and 2016. The leading labor market indicators have continued to strengthen. Thus, the bar of expectations has been set high. The demand for the Aussie dollar would spike if the data shows a big jump in the full time jobs number.
On the other hand, an unexpected decline in the jobs number may not be well received by the markets. The AUD / JPY cross was last seen trading around 87.26 levels.
AUD/JPY Technical Levels
A break above 87.44 [50% Fib R] would open doors for 88.02 [Aug 7 high] and 88.23 [Aug 3 high]. On the downside, breach of support at 86.88 [10-DMA] could yield a pullback to 86.67 [5-DMA] and 86.48 [50-DMA].
Analysts at Nomura offered their projection for today's USD/CNY fix.
Key Quotes:
"Our model1 projects the fix to be 16 pips lower than the previous fix (6.6763 from 6.6779) and 192 pips lower than the previous official spot USD/CNY close of 6.6955. The basket implied change is 253 pips lower than the previous official spot USD/CNY close (6.6702 from 6.6955)."
Australian jobs report (July)
Australia's monthly jobs report is back on the cards for Asian markets today. The report will be released at 0130 GMT.
The employment change is expected to be positive by 20K and the unemployment rate to remain unchanged at 5.6%. "Will this report be as strong as previous?" is the question markets are asking. "While the labour market numbers have been particularly strong over recent months, ongoing solid growth in job ads and elevated business conditions suggest that the strength is likely to continue in the near term," argued analysts at ANZ. Meanwhile, analysts at Westpac suggest that the marlet has seen the low in unemployment and they expect it to hold around 5.6% until it starts to drift higher as we move into 2018. "Robust employment growth is drawing workers back into the labour force (and/or holding more in the labour force), lifting participation and preventing any near term dip in unemployment," explained the analysts, adding, " . . . for July, strong employment should again be associated with higher participation. At 65.1% participation should lift the labour force enough to hold unemployment at 5.6%."
How could the data affect AUD/USD?
Anything either side of what is expected throughout the report is likely to have an effect on the price of the Aussie, but it would be expected to rally on an inline report also while based above 0.7820 support. However, anything significantly disappointing could really bring about some damage to the Aussie crosses especially given how weak the dollar is from overnight supply post-Trump politics news and the FOMC minutes that show how divided the policy makers are over the inflationary outlook in the US economy.
While supports come as 0.7920, 0.7880, 0.7832, 0.7818, 0.7807 and 0.7760, only above the 0.8065 level the 0.8162/66 May 2015 peak and 50% retracement can be seen, according to analysts at Commerzbank. "Above there lies the 0.8295 January 2015 high. The longer term outlook is positive. The market has broken higher from a large triangle formation that targets eventually 0.8715 (one year + target)," argued the analysts.
Key notes
FOMC meeting minutes: a robust debate on inflation - Nomura
About the Employment Change
The Employment Change released by the Australian Bureau of Statistics is a measure of the change in the number of employed people in Australia. Generally speaking, a rise in this indicator has positive implications for consumer spending which stimulates economic growth. Therefore, a high reading is seen as positive (or bullish) for the AUD, while a low reading is seen as negative (or bearish).
Analysts at ANZ explained that markets initially traded with a positive tone overnight, though trading was thin, as is typical of this time of year.
Key Quotes:
"However, the mood was soured somewhat by Trump’s move to dissolve two business councils (before they could disband, seemingly), as it was seen as indicating the hurdles for Trump’s business agenda continue to grow. The reaction to the Fed minutes was also mixed.
Equity markets in Europe continued their move higher with the DAX and CAC 40 up 0.7% and the FTSE up 0.7%, but US equities lost steam in response to Trump’s decision and then the FOMC minutes, with the S&P 500 up just 0.1% at the time of writing. Bond markets rallied into the FOMC minutes and then held their highs (see below for Fed commentary).
The benchmark US 10-year Treasury yield is currently down 5bps. Oil was lower (WTI spot -1.5% at USD46.90/bbl at the time of writing) despite EIA reported crude oil inventories being down 8.94m barrels. Gold was up 0.8% to $1282/oz."
Analysts at Westpac offered their outlook for AUD/NZD and rates.
Key Quotes:
"AUD/NZD 1 day: The two-week old rally remains intact, targeting the 1.0900 area next, but today’s AU jobs data poses two-way risks.
AUD/NZD 1-3 month: A retest of the 1.0900 area seen in May is possible if iron ore’s rally since mid-June continues and global risk sentiment remains elevated. (8 Aug)
AU swap yields 1 day: The 3yr should open around 2.04%, the 10yr around 2.82%.
AU swap yields 1-3 month: Our RBA outlook (on hold for some time) is anchoring short-maturity interest rates and should keep 3yr swap rates in a 1.8% to 2.3% range, as long as core inflation remains below 2%. Longer maturity rates will largely follow US rates. (8 Aug)
NZ swap yields 1 day: NZ 2yr swap rates should open down 1bp at 2.17%, the 10yr down 2bp at 3.15%, in response to US interest rates movement overnight.
NZ swap yields 1-3 month: Our RBNZ outlook (on hold throughout 2018) is anchoring is anchoring short-maturity interest rates and should keep 2yr swap rates in a 2.1% to 2.6% range, as long as inflation remains below 2%. Longer maturity rates will largely follow US rates."
Currently, NZD/USD is trading at 0.7309, down -0.07% on the day, having posted a daily high at 0.7317 and low at 0.7309.
NZD/USD has been consolidating the sharp reversal to 0.7318 overnight and targets 0.7350 for the day if the US dollar remains under pressure according to analysts at Westpac.
FOMC Minutes: Policymakers agreed a fall in longer-term inflation expectations would be undesirable
The FOMC minutes gave rise to a weaker dollar and lower yields in addition to Trump who disbanded two business advisory councils following CEO defections. While there are no significant domestic risks ahead, other than PPI, the Aussie jobs report will be in focus today and this event could give rise to some volatility in the antipodeans. That data comes ahead of the July industrial production in the US that is expected to increase 0.3% following a 0.4% gain in the previous month.
NZD/USD 1-3 month:
Further out, the analysts at Westpac argued that if the RBNZ remains firmly on hold, as we expect, and the US dollar rises on tighter Fed policy, then NZD/USD could fall as far as 0.69 by year end.
NZD/USD levels
To the upside, 0.7330 and 0.7370 (9th Aug high) are the first resistance areas on a break of current consolidation below 0.7320. To the downside, 0.7205, the 06 June 22/21 lows and 0.7186 June 15 low along with the 50% of the move up from the 2017 low (May low) at 0.7187 are key areas of support ahead of 0.7150 June 5 high; 0.7127 June 6 low and 0.7100.
Analysts at Nomura explained that the minutes from the July FOMC meeting showed two things about the Committee’s thinking in July.
Key Quotes:
"First, while some members were ready to announce the balance sheet adjustment at that meeting, “most preferred to defer that decision until an upcoming meeting”, i.e. September. This supports expectations of an announcement at the upcoming meeting next month on 19-20 September. Second, the minutes contained a robust debate on how to interpret the recent soft readings of inflation and the inflation outlook.
We think this second development is of higher importance as its resolution will likely determine the future path of the policy rate. Although, the minutes stated that “Most [participants] continued to anticipate that inflation would stabilize around the Committee’s 2 percent objective over the medium term,” concerns over the near-term inflation outlook are becoming high. According to the minutes, "some" participants wanted to see inflation pick up before hiking while "some others" were worried about potential negative outcomes arising from a delay in the pace of raising rates, such as higher inflation. It looks like the Committee was relatively split over the stance toward future rate hikes. The rates-related decision depends on data developments, including inflation data and financial variables such as long-term treasury yields. We maintain our call for a December rate hike but it has become slightly more uncertain, depending on inflation developments and financial conditions."
Analysts at Westpac offered a market wrap.
Key Quotes:
"Global market sentiment: The US dollar and bond yields fell after Trump disbanded two business advisory councils following CEO defections, and again after the FOMC minutes.
Interest rates: US 10yr treasury yields fell from 2.28% to 2.22%, 2yr yields from 1.36% to 1.32%. Fed fund futures yields slipped, pricing the chance of a December rate hike at around 43% (from 47%).
Currencies: The US dollar index is down 0.3% on the day, EUR bounced off 1.1682 to 1.1779. USD/JPY fell from 110.95 to 110.03. Outperformer AUD rose from 0.7840 to 0.7927. NZD rose from 0.7235 to 0.7315. AUD/NZD probed higher from 1.0820 to 1.0868 – a four-month high.
Economic Wrap
In the FOMC minutes of the July meeting, "most" officials see inflation picking back up to 2% over the next couple years and "many" see recent low inflation as a function of idiosyncratic factors, signalling that the central mass at the Fed continues to favour another hike before the year is out. That said, Fed cohesion on this front seems weaker than previously, the more cautionary group now amounting to "some". They argue the Fed can "afford to be patient", while "several" indicate that the risks to inflation could be tilted to the downside and "many" see some likelihood that inflation could remain below 2% for longer. With this group apparently larger and more vocal than past meetings, markets are reading the minutes with a dovish bias. On the balance sheet, "several" are agitating for a July start but "most" prefer to defer a decision until the next meeting (i.e. Sep 20).
US housing starts fell 4.8% in July (vs +0.4% expected). The weakness is mostly a multi/high rise story, that sector down 15.3%. Single family housing starts fell 0.8% after an 8.2% gain in the prior month. Building permits fell 4.1% (vs -2.0% expected)."
Data source: FX Street
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