Forex Week in Review July 3-8

Investors, traders and dealers have suffered from FX whiplash at some point this week. The market has progressed from a potential Greek default, Portugal being downgraded, the PBoC and ECB tightening to end the week with a dismal non-farm payroll release. Not even a pessimist was close to guessing the ‘no’ job growth situation happening in the US. QE2 has ended and the market continues to wait for the positives from ‘that’ Fed initiative to trickle down through the economy. With employment out of the way, markets can refocus on the weak Euro-peripheries and the US debt debate.

Below are some of the highlights of the busy week:

EUROPE

• At the beginning of the week, higher risk appetite pushed the dollar weaker, until a warning from S&P that the French plan for rollover of Greek debt might cause a ‘selective default’.
• FT reported last weekend that Europe’s finance ministers approved the next €8.7b tranche of loans to Greece from the existing aid-program. They have postponed making a decision on a new financing package for 2012/13, possibly until September.
• Euro-zone service PMI’s came in weaker than expected, with the headline revised down from the 54.2 flash estimate to 53.7. Proof that Euro activity has slowed sharply from the strong pace set earlier in the year. The composite PMI is roughly consistent with a +0.5%, q/q, growth rate. Global activity is likely to reaccelerate in the second half of the year.
• ECB will continue to accept Greek debt as collateral as long as at least one of the credit agencies does not put Greece into default. This is proof of the ECB to compromise on private sector involvement along the lines of the French plan for debt rollover. This should bring the timing of a second bailout package for Greece forward.
• Ireland’s finance minister announced that the country has met its target in the first review of the IMF/EU bailout package.
• UK services PMI was slightly firmer at 53.9, better than the consensus forecast for a moderation to 53.5, bringing the UK composite PMI higher to 53.6 from 53 in May. At these levels, the PMI’s are roughly consistent with a quarterly growth rate of +0.3%, still too weak to warrant a BoE rate hike any time soon.
• Sweden’s Riksbank’s delivered a +25bp tightening policy, as expected (+2%). The following statement saw the growth and inflation forecasts revised down marginally, but with the core-inflation forecast left unchanged.
• Moody’s downgraded Portugal 4 notches to Ba2 (junk status), believing that Portugal will need a second bail-out. The second Greek aid package by the EU/IMF will mean that any future aid to Portugal will require costly private market participation.
• Moody’s also cited concerns that banks that roll over Greek debt along the vein of the French plan may face ‘impairment charges’.
• German manufacturing orders unexpectedly rose +1.8%, m/m in May, beating the consensus forecast of a -0.5% decline, fuelled by domestic demand (+11.3%). Prior month was also being revised a touch higher to +2.9%.
• German industrial production rose +1.2%, m/m and +7.6%,y/y, beating expectations. The data remains more in line with the more resilient Ifo expectations measure than the drop in the manufacturing PMI.
• UK industrial production rebounded +0.9%, m/m, in May, a touch below consensus forecasts. Ex-oil and mining sectors, manufacturing production rose a decent +1.8%, m/m. Industrial production still is not delivering a positive net contribution to second quarter GDP. Expect markets to struggle to price for a BoE hike any time soon.
• Swiss headline CPI fell -0.2%, m/m, and rose just +0.6%, y/y, in June. Inflation printed broadly in line with consensus forecasts and the SNB’s projection, implying no pressure for the SNB to move any time soon.
• ECB to maintain tightening bias after hiking rates +25bp to +1.5%.
• ECB will suspend collateral rules for Portugal
• Governor King’s monetary policy diverged further from the rest of Europe as officials kept record-low interest rates (+0.5%) to aid the recovery and guard against threats from the Greek crisis.
• New political risks facing Italy’s Finance Minister Tremonti appear to be an important driver for a sharp widening in Italy-Germany bond spreads, raising perceptions of systemic threats facing the EUR. Italian May production data (-0.6%) also came in weaker than expected, reversing about half of the big bounce seen in April (+1.1%).
• Swedish industrial production rose +2.6%, m/m in May, above consensus forecasts for a more subdued rate of +0.4%. This brought the year-on-year growth rate back above +13% after the decline in April.
• UK, producer output price inflation slowed to +0.1%, m/m in June from +0.2% in May.
• French business confidence lower.

Americas

• US factory orders ‘modestly’ advanced in May, with the increase (+0.8% to $445.3b) being broad based, but less than the +1% that the market had hoped for
• The pace of growth in the US’s non-manufacturing services sector remained sluggish in June (53.3), with new-orders falling (53.6) and employment holding steady (54.1) last month. However, the most prominent concern remains about the volatility of prices (60.9 vs. 69.6).
• Canadian Building permits surprised to the upside (+20.9% vs. +5.9%). The value of permits is a highly volatile data point, but the rebound in May is positive news after a weak April reading (-21.5%).
• US private business added a stronger number of jobs last month than expected (+157k). The consensus had anticipated the ADP to report a job gain of +95k, m/m. The surprise release suggests that US economic recovery may have found a new lease of life in early summer.
• US weekly claims finally improved after a month of similar filing behavior kept the average around +426k to +418k.
• Canadian Ivey PMI advanced to 68.2 from 65.7.
• Canada employment rose +28k last month, above the +15k consensus forecasted. However, most of the increase was due to part-time jobs. Full-time employment was up just +7k.
• NFP added +18k workers in June, less than forecasted and the fewest in nine-months, while the unemployment rate unexpectedly climbed (+9.2%), indicating a struggling labor market.

ASIA

• Asian currencies started the week strongly, led by INR and the KRW, which led to significant intervention by Asian Cbanks.
• AUD Retail sales and building approvals surprised on the downside, falling -0.6%, m/m, and -7.9%, m/m in May, respectively.
• ANZ Jobs adverts bounced back strongly, up +3.7%, m/m, in June. It did not reverse the falls in April and May. Governor Stevens and the market will need to see a big bounce in employment, especially full-time, to regain confidence.
• Chinese non-manufacturing PMI headline, released last weekend, declined -4.9 points to 57.0 last month and remains at a level that is consistent with continued expansion of the service sector. This moderation in growth should not point to a ‘hard landing’ as domestic consumption remains resilient (average fall in June over the past four years is -5.9 points).
• Moody’s issued a report claiming that China’s local government debt is $540b larger than officially reported. This would have negative implications for Chinese banks.
• RBA left rates on hold this week. In their communiqué they made clear that uncertainty over the outlook for the global economy is a key reason for its shift to a less aggressive posture than in May. The statement acknowledges that elements of Australian domestic demand have weakened, with the RBA warning that GDP growth is likely to be below its previous forecast for 2010.
• At the RBA, Governor Stevens noting that wage growth have risen, that underlying inflation will gradually rise and the retention of that last sentence about ‘assess carefully the evolving outlook’ at future meetings, is a return to a bias of hiking rates later this year as global growth re-accelerates.
• China hiked rates by +25bp to +6.56% and adding to global stress. Some market participants are confident that China can achieve a soft landing through gradual tightening.
• Australia employment rose +23.4k last month, more than the +15k consensus forecasted. Importantly, full time employment surged +59k and the employment rate at +4.9% held at just below the estimated full employment rate.
• PBoC’s Zhou says focus should be on monthly inflation rate, not y/y. He seems to be deflecting attention away from a high print this weekend.

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