| Daily Forex Fundamentals | Written by Lloyds TSB | Jul 17 08 07:01 GMT | | |
| Overview & economic commentary Focus will remain on the US today, with some important housing and labour market figures due. Despite renewed credit market tensions and continuing fears of recession, the prospect of lower US interest rates was dealt a serious blow yesterday after the news that headline CPI inflation surged to 5% in June - a 17-year high. We believe there is a real risk US interest rates are raised later this year, particularly if long-term inflation expectations spiral higher. However, a rise in 2009 looks more likely. Prospects for consumer spending will be key to whether the US economy can avoid recession and so today's data should be informative. We forecast housing starts slowed to an annual pace of 970,000 in June, the lowest for 17 years, with permits also down compared to May. However, the risk is of a sharper downturn as confidence remains fragile. Another major influence on consumer spending will be the performance of the labour market. Although we look for a rebound in initial jobless claims in the week ended 12 July, the series average will remain some way short of recession levels. Weekly claims averaged about 415,000 during the last recession in 2001, compared with 362,000 so far this year. The latest Philly fed survey will attract extra attention after the strong rise in official industrial production in June. It is a relatively quiet day for non-US economic data, with Canadian international securities transactions in June the main highlight. The Bank of Canada publishes its Monetary Policy report update and the Fed's Kroszner takes to the stage in the afternoon. Currency commentary Currency markets were relatively quiet overnight, catching their breath after a rollercoaster session yesterday. With equity markets dictating flows in fx and fixed income, earnings by JPM, Black Rock and BoNY before the NY open are likely to make an impact on dollar majors and yen crosses. $/Y broke back above 105.0 on the recovery in equities in the US. Follow through buying in Asia, led by financials, pushed the Hang Seng and Nikkei up by over 1%. US housing starts and building permits are due this afternoon and should confirm that the weakness in construction was still very acute at the end of Q2. Weekly claims are also due and could well be the biggest mover, depending on whether they confirm last week's drop of 58,000, or whether they spike back up. In emerging markets, fears of risig inflation pushed u[ $/won back above 1,000 overnight. This will keep the central bank on alert. The squeeze in $/rand below 7.60 could trigger a move to 7.50 if US claims stay low. Major data and events today
Chart: US housing starts and building permits have fallen sharply from an unsustainable level, but a floor may be near if 1980/1990 are a guide
Lloyds TSB Bank | |
Thursday, July 17, 2008
Daily Financial Market Outlook
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