Previous post Next post

FX Daily, July 13: Sterling and Antipodeans Trade Higher

Swiss Franc

The Euro has risen by 0.13% to 1.1032 CHF.

 

EUR/CHF - Euro Swiss Franc, July 13

(see more posts on EUR/CHF, )
EUR/CHF - Euro Swiss Franc

- Click to enlarge

FX Rates

The US dollar is mostly consolidating yesterday’s move. Sterling is pushing back through $1.29 as the hawks on the MPC may not have been dissuaded by disappointing PMI readings and the softer earnings growth.  The table is being set for another 5-3 vote at next month’s MPC meeting.

The Australian and New Zealand dollars are up about 0.6%, gaining nearly twice as much as sterling.   The risk-off sentiment, softer yields in the US and Europe, and strong Chinese import data are among the drivers. The Australian dollar surged through the $0.7700 level to challenge a 15-month down trendline that is found near $0.7725.  The high for the year was set in March at
$0.7750.

FX Daily Rates, July 13

FX Daily Rates, July 13

- Click to enlarge

The euro has built a shelf over the last four sessions ahead of $1.1380.  A break of this area is needed to signify anything of importance.  It could spur a test on $1.13.  About 600 mln euro options struck at $1.14 are cut today and another 1.2 bln euros at $1.1445.  Softer US interest rates are offsetting the benefit of rising stocks for the yen.  The dollar is unable to recover from yesterday’s slide against the yen. The JPY113.50 area offers initial resistance, with support near JPY112.75.  There are around $700 mln in options stuck between JPY112.70 and JPY113 that expire today.

Sterling is extending yesterday’s recovery.  The $1.2950 area represents a 61.8% retracement of this month’s decline.  Roughly GBP215 mln $1.30 option expires today.  Sterling gains seem to be mostly a function of the cross rate adjustment.  Yesterday, the euro reversed lower after surging to almost GBP0.8950.  It finished yesterday near GBP0.8860, and today is testing GBP0.8800.  The near-term risk extends toward GBP0.8750.  The UK government presents the Great Repeal bill that begins the process of converting EU law into UK law.  This begins a protracted debate, and without an outright majority in Parliament, the government will be challenged from all sides.

Two elements are politically charged.  The first is China’s steel and aluminum exports. Steel exports slipped to 6.81 mln tons from 6.98 mln in May.  Unwrought aluminum and aluminum product exports were unchanged at 460k tons. The second is a trade with North Korea. Chinese figures point to an 11.3% decline in imports from North Korea in H1, which includes the period before sanctions were implemented.  Chinese exports to North Korea rose by nearly 30%, but note that not all goods are sanctioned, and these are consumer goods, like textiles.

FX Performance, July 13

FX Performance, July 13

- Click to enlarge

China

China reported a 17.2% year-over-year increase in imports. The median forecast in the Bloomberg survey was for a 14.5% pace after 14.8% in May.

China Imports YoY

(see more posts on China Imports, )
China Imports YoY, June 2017

Source: Investing.com - Click to enlarge

Exports rose 11.3%, up from May’s 8.7%, and stronger than expected.

China Exports YoY, June 2017

(see more posts on China Exports, )
China Exports YoY, June 2017

Source: Investin.com - Click to enlarge

The trade surplus rose by more than a third from a year ago to $42.8 bln.  China’s surplus with the EU is 60% larger at $11.4 bln, while the trade surplus with the US is nearly 90% larger at $25.4 bln.

China Trade Balance, June 2017

(see more posts on China Trade Balance, )
China Trade Balance, June 2017

Source: Investing.com - Click to enlarge

Spain

Spain Consumer Price Index (CPI) YoY, June 2017

(see more posts on Spain Consumer Price Index, )
Spain Consumer Price Index (CPI) YoY, June 2017

Source: Investing.com - Click to enlarge

Germany

Germany Consumer Price Index (CPI) YoY, June 2017

(see more posts on Germany Consumer Price Index, )
Germany Consumer Price Index (CPI) YoY, June 2017

Source: Investing.com - Click to enlarge

United States

In addition to the second leg of Yellen’s testimony, investors will get the latest weekly jobless figures and the June PPI from the US.  Canada reports house prices. Tomorrow the US reports CPI and given the larger context, are particularly important.  There is a reasonable chance that core inflation snapped its four-month down draft.

U.S. Producer Price Index (PPI) YoY, June 2017

(see more posts on U.S. Producer Price Index, )
U.S. Producer Price Index (PPI) YoY, June 2017

Source: Investing.com - Click to enlarge

U.S. Initial Jobless Claims, June 2017

(see more posts on U.S. Initial Jobless Claims, )
U.S. Initial Jobless Claims, June 2017

Source: Investing.com - Click to enlarge

Many observers looked at the decline in US bond and note yields and concluded Yellen was dovish.  However, we note that the best guide for Fed policy is not the coupon curve but the short-end.  The cleanest is the Fed funds futures.  The September contract was unchanged for the third consecutive session.  It is unchanged since the US jobs data last Friday, and the implied rate is half a basis point lower than it was at the end of June.  It is also at the same level it was at from June 16 through June 29.    There has been no real change in the market’s expectation.

The December contract tells the similar story of stable expectations. The implied yield on the December contract finished June at 1.26%. For the past two sessions, it finished at 1.245%. It was unchanged yesterday. The claim in the media that Yellen signaled that the Fed would not rush to tighten policy is misdirection.  She and the Federal Reserve have never implied anything but a gradual increase.

Other reports said she emphasized the uncertainty over inflation. It did not seem emphasized to us, but in the context of her remarks, was used as an example of the uncertainty in that she said was always present in macroeconomic forecasts.  The FOMC minutes were clear on this.  Most officials saw the softer core inflation readings as temporary.    That said, of course, Fed officials would feel more comfortable if core prices began slowly rising again, especially if spurred by stronger wage growth.

However, through the cycle, the Fed has not been in a hurry.  It can take its time now too.  It has hiked rates twice this year and anticipated three.  There are four meetings left in the year, and two of them are live for all practical purposes (Sept and Dec).  Official comments suggest a greater consensus has emerged to begin reducing the balance sheet before hiking rates again.  We see this most likely being announced in September, leaving a rate hike for December.  The idea that year-end considerations deter the Fed from acting then has been refuted over in both 2015 and 2016.

Brazil

Lastly, we note that the Brazilian real reacted positively to the news that former President Lula was convicted for graft and money laundering. The apparent logic is that it removes his chances of running for president again.  The political situation in Brazil remains fluid, but emerging markets and high yields remain very much in vogue for many investors.

 

Graphs and additional information on Swiss Franc by the snbchf team.

Full story here
Marc Chandler
He is Global Head of Currency Strategy of Brown Brothers Harriman (BBH). He has been covering the global capital markets in one fashion or another for 25 years, working at economic consulting firms and global investment banks. He regularly appears on CNBC and has spoken for the Foreign Policy Association. In addition to being quoted in the financial press daily, Chandler has been published in the Financial Times, Foreign Affairs, and the Washington Post. BBH provides specialist services and innovative solutions to many Swiss asset managers that include a global custody network of close to 100 markets, accounting, administration, securities lending, foreign exchange, cash management and brokerage services. Feel free to contact the Zurich office of BBH
Previous post See more for FX Trends Next post
Tags: ,,,,,,,,,,,,,,,

Permanent link to this article: https://snbchf.com/2017/07/13-fx-daily-chandler-sterling-antipodeans-trade-higher/

Leave a Reply

Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>