Forex Market Update: JPY Stronger Despite Negative Japan GDP Figure. Time For USD To Consolidate Some Of Its Gains?

Written by Saxo Bank | Aug 13 08 06:55 GMT |


EURNOK approaching big support ahead of key Norges Bank rate meeting. BoE Inflation Report on tap.
MAJOR HEADLINES - PREVIOUS SESSION

* US Weekly ABC Consumer Confidence fell to -50 from -49 last week
* Japan Q2 GDP (Annualized) out at -2.4% vs. -2.3% expected
* Japan Jun. Adjusted Current Account Total out at ¥1290.7B vs. ¥1085B expected
* Australia Aug. Westpac Consumer Confidence rose 9.1% vs. -6.7% in Jul.
* Australia Q2 Wage Cost Index out at 1.2% vs. 1.0% expected
* China Jul. Retail Sales out at 23.3% vs. 22.4% expected

THEMES TO WATCH - UPCOMING SESSION

Key event risks today (all times GMT):

* Norway Jun. Retail Sales (0800)
* UK Jul. Jobless Claims (0830)
* UK Jun. Avg. Earnings (0830)
* EuroZone Jun. Industrial Production (0900)
* UK BoE Quarterly Inflation Report (0930)
* Norway Norse Bank announces deposit rates (1200)
* US Jul. Import Price Index (1230)
* US Jul. Advance Retail Sales (1230)
* US Weekly Crude Oil and Product Inventories (1430)
* New Zealand Jul. Business PMI (0000)
* Australia Aug. Consumer Inflation Expectations (0100)
* China Jul. Industrial Production (0200)
* New Zealand Jul. Non-resident Bond Holdings (0300)

Market Comments

Yesterday saw the smallest US Trade Deficit since last summer. The most important aspect of US trade that has helped keep the trade deficit from spiraling completely out of control has been a strong rise in exports, but now with the rest of the world showing signs of distress, the export figures may begin to look less impressive (a stronger USD is no help either) in the quarters ahead. Fortunately for the US, the crude oil price has dropped heavily, so these factors may help cancel each other out. The ex Petroleum trade deficit was a 'mere' 20 billion dollars for June, nearly matching the highs from when data collection began for this data series in 2001. The trend of smaller deficits is critical for the future of the USD, but also shows how heavily the energy component weighs in the calculus.

Caroline Baum wrote an excellent piece over at Bloomberg describing why it is way too soon to start calling the end of the credit crunch/financial woes/recession risk etc. While the Fed has done everything in its power to keep banks from disintegration, the key factor remains that the US economy long ago became a credit-addicted financial economy that requires steady and ever-larger doses of credit to stay on a growth path. This credit will simply not be available for some time to come as she points out (banks are tightening credit across the board even as consumption weakens), and as is clear from other articles describing the continued woes faced by banks dealing with home foreclosures and the increasing burden of other credit defaults. Also, as she so rightly points out, the tax revenue problem generated by a weaker economy means that the public sector, a very significant player in the economy, also suffers shortfalls and must rein in spending. State governments are most at risk, with the state of New York and New York City already predicting acute and imminent budget crunches. What all of this adds up to is a reminder that the US economy is still very vulnerable and that the path of USD appreciation is not likely to be a simple one. If looking for a tactical way to play on potential USD consolidation back to the weak side, the best bets might be USDJPY and USDCHF shorts. Today's US Retail Sales could also possibly serve as an ugly reminder of the state of the US economy after the surge in June sales was likely driven mostly by the recent US tax rebate check.

Japan's Q2 growth registered a weak -2.4% on an annualized basis, slightly worse than expected, and despite a GDP deflator of -1.6% (meaning that in absolute JPY terms, the number looks even worse) so in nominal yen terms, the growth number looks even less impressive. As is often the case, the JPY counter-intuitively rallied rather than selling off, as the focus was perhaps on negative equity markets and the decelerating global growth picture helping the low yielders at the expense of the higher yielders. Have a look at an AUDJPY chart, for example....

Today will be a key day for GBP, as the BoE is set to release their quarterly inflation report, which will show their views on the trajectory of inflation and the broader economy. This report will help the market decide whether GBPUSD is overdone to the downside at these levels or whether there is no floor for the moment for GBP. The default/consensus expectation is perhaps that the BoE will highlight the dire growth risks and adjust down its forward expectations for growthb(one would certainly hope so in light of recent data), but still declare itself handcuffed on inflation. If the BoE shows signs of caving in to growth pressures sooner rather than later (as they should!) in terms of moving forward anticipated rate cuts, we may see further short term weakness in GBP. EURGBP already strongly rejected an attempt through support yesterday and GBPCHF could sell off further if the pair falls through 2.0500.

Charts: EURNOK and GBPCHF

EURNOK is poised at key levels ahead of the Norges Bank meeting today. Yesterday's inflation number was far beyond expectations and NOK doesn't seem to respond to oil prices the way it has done in previous regimes as the focus is perhaps more on its high yield. A hawkish message from Norges bank and a break of the 7.9800 support could open up the downside. Note the 200-day moving average also coming in close below support and the dominant old rising trendline which also served as recent resistance.

GBPCHF is poised closed to key support ahead of the BoE. A move to risk aversion in equity markets and a dovish message from the BoE could push this one lower and open up for a chunky move lower.

Saxobank

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