Forex Market Update: Risk Currencies Poised But Failing To Break New Highs

China data indicates a slowing economy but inflation pressures easing – the best mix?

MAJOR HEADLINES – PREVIOUS SESSION

US Jun. Import Price Index out at -1.3% m/m, +4.5% y/y vs. -0.4%/+5.3% y/y vs. revised -0.5%/+8.7% prior resp.
US Jun. Advance Retail Sales out at -0.5% m/m vs. -0.3% expected and revised -1.1% prior
US Jun. Retail Sales ex-Autos/Gas out at +0.1% m/m vs. flat expected and revised -1.0% prior
US May Business Inventories out at +0.1% vs. +0.2% expected and +0.4% prior
NZ Jun. Business PMI out at 56.2 vs. revised 54.4 prior
AU Jul. Consumer Inflation Expectation out at 3.3% vs. 3.4% prior
AU Jun. New Motor Vehicle Sales out at -1.2% m/m, +8.2% y/y vs. revised -3.9%/16.5% prior
China Q2 Real GDP out at 10.3% y/y vs. 10.5% expected and 11.9% prior
China Jun. PPI out at +6.4% y/y vs. 6.8% expected and 7.1% prior
China Jun. CPI out at 2.9% vs. 3.3% expected and 3.1% prior
China Jun. Retail Sales out at +18.3% y/y vs. 18.8% expected and 18.7% prior
China Jun. Industrial Production out at +13.7% y/y vs. 15.1% expected and 16.5% prior
China Fixed Asset Investment out at 25.5% vs. 25.2% expected and 25.9% prior
JP BOJ leaves rates unchanged at 0.1%

THEMES TO WATCH – UPCOMING SESSION

Sweden Avg. House Prices (0730)
Norway Trade Balance (0800)
UK BOE Housing Equity Withdrawal (0830)
Swiss ZEW Survey (0900)
CA New Vehicle Sales (1230)
US PPI (1230)
US Initial Jobless Claims (1230)
US Empire Manufacturing Index (1230)
US IP/Capacity Utilization (1315)
US Philadelphia Fed Index (1400)

Market Comments

The moribund nature of yesterday's Asian session extended into the early overnight session with risk currencies lacking the ability to press higher and equity markets placid. EURUSD held close to the 1.27 mark with a slight dip later in the session on (unfounded) rumours of a Spain downgrade by Fitch. GBP rallied following better than forecast employment numbers while the JPY was supported by more weak US economic data. The USD slid against the index and closed below the 100-day MA.

On the data front, US retail sales fell 0.5% m/m in June, slightly worse than expected, while the non-auto sales were down 0.1% m/m, as expected. Import prices fell by 1.3% m/m in June, marking the first back-to-back decline since January 2009. The FOMC minutes highlighted a more cautious outlook for the economic recovery with committee members revising down their forecasts for both GDP growth and core inflation over the next two years. As a result of the weaker data, stock markets lacked upward momentum on the day and, without any major earnings releases to ignite, were mostly flat on the day.

The main focus for the Asian session was the slew of China economic data releases mid-morning. As usual we had the rumours/leaks beforehand and, yet again, these proved to be mostly on the button. The exception was the CPI data which came in well below forecast, and even the leak. Consumer prices rose only 2.9% y/y and was probably the catalyst that gave risk a quick run-up post-data. Other data signaled an expected slowing economy but overall still seen on a more sustainable path.

Prior to the data risk was struggling to stay afloat as investors focused on a Fitch report, mentioned in the WSJ, suggesting Chinese banks are increasingly engaging in complex transactions that hide the size and nature of their lending and possibly masking a pending wave of bad real estate and infrastructure loans. It also stated that the actions of the banks had likely caused regulators to significantly under-report credit growth and credit exposure in the first half of the year. However, that was soon pushed to the back-burner post-data.

As we head into Europe, data releases include Sweden's house prices, Norway's trade balance and the Swiss ZEW survey. The US session is a busy one on the data front with the weekly US jobless claims data, PPI, empire manufacturing, Philly Fed index and industrial production/capacity utilization along with Canada's new vehicle sales and manufacturing sales.

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