FX Daily, August 09: Sterling Slips to a Four-Week Low, EUR/CHF still trending up

Swiss Franc

The upwards tendency of the euro against CHF continues.
The 100 day EMA of 1.0901 has passed.

FX Rates

In an otherwise uneventful foreign exchange market, sterling’s slide for its fifth consecutive session is the highlight. It was pushed below $1.30 for the first time since July 12. Initial resistance for the North American session is seen near $1.3020, while the $1.2960 area corresponds to a minor retracement objective.

Sterling has been sold-off since the middle of last week. Today’s data may have simply provided a little more ammo for what the market was already doing. There were three reports today, BRC sales, industrial production, and the trade balance. The BRC sales figures are for July, while the other two reports cover June.

The BRC sales for stores open a year was an unexpected pleasant surprise.  Sales for 1.1%, the most since January. Expectations were biased for a second consecutive decline. This report seemed to contradict the CBI survey. Price cuts and favorable weather were cited as drivers for the BRC gains.

The other reports disappointed. Industrial output rose 0.1% in June, but the May series was revised to a 0.6% decline rather than a 0.5% fall. And manufacturing itself failed to recover, falling 0.3% after a revised 0.6% drop (from -0.5% initially).

United Kingdom

Separately, the UK reported its largest merchandise trade deficit (GBP12.4 bln) since March 2015, and the May series was revised to show a GBP11.5 bln deficit instead of GBP9.88 bln. The trade deficit with non-EU countries widened to GBP4.16 bln from a revised GBP3.56 bln, which is about a billion pounds larger deficit than initially reported.

It does seem that at least initially, since the referendum, there have been a few dozen foreign acquisitions mooted. However, at least some of those deals seemed to have been made more attractive by sterling’s slide. A further depreciation of sterling may be needed to continue to attract direct and portfolio capital.

China

Another economic feature of the session was the Chinese inflation reports.  Consumer prices rose 1.8% in the year through July. This was in line with expectations and down from 1.9% in June. Last July it stood at 1.6%.  Food prices rose 3.3%, while non-food prices rose 1.4%. Urban inflation was slightly faster than rural consumer inflation (1.8% vs. 1.5%).

For the understanding of the Chinese CPI basket see here.

Chinese stocks appeared to like the news and extended yesterday’s gains.  The Shanghai Composite is in five of the last six sessions. However, the easing of producer price deflation did not stop the bond market rally in China. The 10-year yield is at its lowest level (2.75%) since early 2009. Meanwhile the dollar trading in narrow ranges against the yuan for the second consecutive session, just below the 20-day average (CNY6.6670).

Eurozone

European shares are edging higher with the Dow Jones Stoxx 600 gaining 0.4%, led by energy and telecoms. Financials are matching the market’s performance, though banks are outperforming. It is the fifth session that the Dow Jones Stoxx bank shares are advancing. Recall the banking index fell the first two days after the July 29 stress tests results, but has rallied since, and now is at the best level since July 22. It is the fourth session that Italian banks have rallied, but an index of them remains below the July 29 level, which was flattered by a nearly 4% rally the day of the stress test results. Lastly, we note that Spain’s 10-year yields have maintained yesterday’s break of the psychologically important 1.0% threshold.

Germany

In addition to the UK and Chinese data, Germany reported that its trade surplus edged higher in June (24.9 bln euros from 21.0 bln), but exports were disappointing.

United States

The US calendar features include Q2 productivity and unit labor costs. These are derived from the GDP figures and the weaker than expected growth warns of downside risks to productivity and upside risks to unit labor costs.