Weekly Market Update 24/07/16-29/7/16
Last week the US dollar gained ground against all the currencies in the major group. Oceanic currencies were the worst performers against the Greenback, with NzdUsd down 114 pips to 0.7001 (-1.61% weekly); AudUsd slid 121 pips to 0.7455 (-1.60% weekly). Canadian dollar lost 161 pips against the US dollar with UsdCad up 161 pips to 1.3122 (+1.22% weekly). UsdJpy rose even Bank of Japan Governor Kuroda excluded the possibility of permanent monetization of sovereign debt, also called “Helicopter Money”. UsdJpy gained 121 pips to 106.01 (+1.14% weekly). UsdChf went above the most relevant moving averages and it may test the parity soon. The rate closed at 0.9866 (+0.51% weekly), up 51 pips. The banking crisis in Europe had an impact on the shared currency. The European Central Bank kept interest rates unchanged but welcomed the intervention of governments to recapitalize banks. The European Commission and the German Government do not like this solution but it seems the only way to avoid defaults and contagious effects. A default in Italy could lead to negative consequences in Germany as well as that, counterparty risk could lead to high funding costs in the money market. Probably German Finance Minister Schäuble will understand that austerity payoff can be very low for banks in his country. Government bailout of Landesbanks started during the 2008 financial crisis thus is not something new to politicians. The problem is a deterioration of fiscal discipline that could lead to higher debt to GDP ratio. In the medium term it seems more understandable the bearish view on the Euro, in the long term the trend of EurUsd will depend on the policies adopted by the next US Presidency. EurUsd slid 56 pips to 1.0972 (-0.51% weekly).
The British Pound, even though it lost against the Greenback as well, outperformed other currencies in the major group and GbpUsd lost 64 pips to 1.3109 (-0.49% weekly). The rate retraced less than 38.2% of the bearish wave triggered during the Brexit event, meanwhile the FTSE100 not only retraced 100% but made also a new 2016 top recently. Many companies in the index will have positive effects from a weak currency thus is explained the bullish sentiment in the local market. In the medium term would be interesting to understand the asset liability currency mismatch of British Financial institutions and the impact on the real estate market, especially for leveraged developers and investment funds. Also, in case Crude Oil would increase and the exchange rate would remain unchanged, there is the risk of a temporary stagflation, and given the high dependence of the financial system to low rates, seems very unlikely that the Bank of England would rise rates with negative GDP growth. This checkmate condition can be avoided if the new conservative Government can restore optimism both in the domestic and the foreign market in a short time frame. The British Pound cannot afford to lose the reserve status as it will be very costly in volatility terms. The International Monetary Fund SDR, a basket of currency used by the IMF as its unit account, is very slow to change its weights and few goods and services are priced in SDRs (the Suez Canal is one Example). The Chinese Yuan joined recently this basket and it may get market shares from the British Pound in the medium term. This may happen when the Yuan will be more easily trade-able in the international currency market. In US the S&P500 closed at record high at 2,1675.03 ( +0.69% weekly) and seems very likely a test of 2,200 in a short time window as buyers are in control during intraday drops. In the commodity market Crude Oil slid 5.12% weekly as its rally started the first quarter of this year seems finished. Gold slid 0.4% weekly but overperformed Silver, down 2.36% weekly. On Monday at 07:30 GMT RBNZ Wheeler will hold as speech and the European session will kick off with German IFO data at 08:00 GMT. On Tuesday in US the S&P/Case Shiller at 13:00 GMT would be precious to understand the health of the housing market. At 14:00 GMT will be the turn of US Consumer Confidence and New Home Sales data. On Wednesday at 01:30 GMT Australian CPI data will be the most relevant data of the Asian session and then at 08:30 GMT will be released the UK GDP data, expected at +2.1% YoY. At 12:30 GMT US Durable Goods Orders and then at 14:30 GMT the EIA Crude Oil Stocks Change. At 18:00 GMT the Federal Reserve will decide the interest rate level, and now seems unlikely a rate hike, given the wealth effect that a recent policy shift gave to the stock market. If the FED will rise rates on Wednesday risk appetite could decrease sharply in the short term. On Thursday the BoJ will hold a press conference and at 12:30 as usual , will be released the US Jobless Claims data. On Friday at 01:00 GMT the Bank of Japan will decide the interest rate level and will release a Monetary Policy Statement as well. At 09:00 GMT would be the turn of Eurozone GDP, expected at +1.6% YoY, and Consumer Price Index data as well. At 12:30 GMT will be released the Canadian GDP data and at 17:00 GMT the Baker Hughes US Oil Rig Count would be the last event in the calendar.
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