Forex Market Review And Upcoming News Calendar August 13 ~ 17, 2012

This week’s Forex market was once again uneventful as the trading volumes and scheduled news releases were light. The European market remained in a wait-and-see mode as ECB officials reminded the market that any new ECB bond buying will come after the pending injunction ruling by the German Constitutional Court in mid September, effectively pushing market expectation down a bit for the Euro.  The speculation that Spain will request a bailout from the EFSF/ESM also kept Euro in offered territory throughout the week, although Spanish PM Rajoy, after holding two press conferences since last Thursday’s ECB meeting, was reluctant to make such announcement and said that his government was waiting for more details on the ECB’s bond plans before making any final decisions; but of course, market is expecting Spain to do the right thing eventually, thus making the long-term fundamentals for the Euro brighter than previous weeks. By the week end, EUR/USD was down to the 1.2290 level and the spread between the Spanish 2-year and 10-year government bonds widened out to record levels around 320bps, reflecting market’s sensitivity to Draghi’s focus of new bond buying on the short end of the curve. In other parts of Europea, EU’s Juncker commented that a Greece exit from EMU would be manageable but carried enormous risks but such an event was not likely until the end of autumn, and the German June industrial production declinedslightly on a y/y basis while Factory Orders dropped sharply, canceling any positive sentiments (at least temporarily) lingering from the recent ECB Press Conference…

In the U.S., there were no earth-shattering economic data published, as the highest impact data scheduled for the week was the June Trade Balance, which showed that the trade deficit fell to its lowest levels since the end of 2010, thanks mostly to low oil prices. Fed officials were quiet this week and markets are looking forward to the Jackson Hole conference at the end of August (23 ~ 26) for more hints on the potential for more QE. Fed dove Rosengren reiterated his previous comments and said that the FOMC must act to aid the economy, proposing a new round of mortgage bond purchases to drive rates even lower, and called for a substantial open ended QE tied to economic outcome.

In UK, the week began on a weak note due to speculations that the BOE was to downgrade its growth and inflation forecasts sharply as part of its quarterly inflation report, scheduled to be published on Wednesday. The report was not as dovish as expected, although it did cut 2012 growth to +1.0% from +1.25% prior, better than the consensus expectation of 0.0%. GBP/USD firmed above 1.5640 level after BOE Gov King said a rate cut would harm some institutions while not significantly changing the economic outlook.

In Japan, the yen was firmer ahead of the BOJ rate decision on Thursday. The chances of intervention to weaken the yen appeared to be rising although most analysts believed that it is premature to expect both the BOJ and Japanese government to take drastic measures, which confirmed my analysis the week before where I pointed out that it is very unlikely for BOJ interventions as there aren’t enough justification for such actions… BOJ decided to keep both rates and asset buyings unchanged and JPY remained range-bound throughout the week.

In China, recent economic data portrayed a picture of “soft landing” in its economy, although some harsh critics still have concerns that Q2 GDP may not mark the bottom of the recent slowdown and that China’s shifts in its monetary policy focus might not be enough… Industrial production rose just 9.2% y/y, which was the slowest pace in over three years while Retail Sales growth of 13.1% y/y, at a multi-year low. Trade and lending data were also well below estimates, with trade surplus of $25.1B and new loans at a 10-month low of CNY540B. Markets will certainly be on alert for additional easing by the PBoC this weekend after this latest round of disappointing data, although in my opinion the slowdown in China has been in a controlled manner.

In Australia, the Reserve Bank of Australia decided to hold its Cash Rate at 3.50% for the second meeting straight on the basis that the economy is yet to see the full impact of its prior cuts. RBA also acknowledged China economy has softened but deemed it reaching a more “sustainable pace”, but is anticipating more policy tweak from China… RBA’s quarterly policy statement raised its 2012 GDP target from 3.0% to 3.5% and lowered the full-year CPI target from 2.5% to 2.25%, which changes my view on AUD to a BUY on dip…

In conclusion, I believe that EUR should be a buy on dip currency, as last week served as a consolidation week for the Euro, giving it plenty of room to move upward this week.  Considering the implication of ECB’s involvement and it’s unlimited scope in bond market intervention, and the fact that EURUSD has dropped over 1200 pips since the Greek election, there should be plenty of consolidation for the EURUSD pair (1.2700?) as the market covers its short trades. GBP is likely to follow the Euro, although I would be looking to BUY the EURGBP as the dynamic for the pair is about to shift.  GBP is showing remarkable strength, especially after last week’s Quarterly Inflation Report, although I would not bet the bank on the Sterling just yet, at least not until after this week.  JPY is likely to remain range-bound, although I believe we could see some weakness in the JPY as we may see a resumption of the risk appetite sentiment this week.  My money is on selling JPY, which means LONG on EURJPY, AUDJPY, and GBPJPY.  CAD is gaining on the back of hawkish statements from BOC, but Friday’s employment data is painting a different picture.  I would stay away from CAD longs as the market could turn on the CAD quickly.  AUD and NZD should remain in demand, so we should look to buy on dips.  AUDNZD could move to retest the highs again as there is a strong contrast in policy stances between both central banks.  I’d not be selling the AUD against any majors, that’s just my opinion.  CHF could gain this week and USDCHF should resume its declines down to the 0.9400 level.  USD is likely to remain range-bound as the market awaits Bernanke’s Jackson Hole speech the week after.

Here’s the list of tradable releases for the week:

1. Mon August 13, 2012 – 6:45pm EST – NZ Retail Sales q/q
2. Tue August 14, 2012 – 4:30am EST – UK CPI y/y
3. Tue August 14,2012 – 8:30am EST – US Core Retail Sales
4. Wed August 15, 2012 – 4:30am EST – UK MPC Meeting Minutes
5. Wed August 15, 2012 – 8:30am EST – US Core CPI
6. Thu August 16, 2012 – 4:30am EST – UK Retail Sales
7. Fri August 17, 2012 – 8:30am EST – CA Core CPI m/m

 

Thanks,