- USD may strenghten further as traders bet on the Fed tightening before end of year
- Despite better than expected Japanese data, markets are focusing on the mounting probability of more monetary stimulous from BoJ
- CHF may go further south as investors dump safe haven assets with USDCHF heading to 0.9950
- UK: Although having been on tenterhooks since the Brexit vote, data has surprised in recent weeks and shows no signs of slowing in activity
- In our view, Brexit fears have been largely overestimated, especially as the UK’s adhesion to the EU was already subject to many conditions which will not dramatically change the future of the island
- We feel the BoE is likely to stay on hold at its next meeting to be held one week before the Fed meeting
- The cable has further upside room to appreciate and we do not expect the pound to go below 1.30 dollars
The US dollar gained continued strength on Tuesday as traders put their money on the Fed resuming its tightening cycle before the end of the year. The greenback extended gains against most of its peers as the dollar index rose 0.20% to 95.76 in Tokyo. Within the G10 complex, the Japanese yen was the worst performer as USD/JPY rose 0.35% to 102.25 in spite of unexpectedly strong economic data.
Japan’s jobless rate fell to a 21 year low, reaching 3% in July, down from 3.1% in the previous month. 200k jobs were filled in July, while the number of unemployed people fell by 70k as the total labour force rose by 130k. Separately, retail sales increased 1.4% m/m in July, beating expectations of 0.8% and were above an upwardly revised figure of 0.3% in the previous month. However, on a year-over-year basis, retail sales are down 0.2%, while the market was expecting a contraction of 0.9%. Initially, USD/JPY fell to 101.76 before bouncing back to 102.25 as traders discounted the positive news to focus on the mounting probability of more monetary stimulus from the Bank of Japan.
In Switzerland, USD/CHF continued to race toward the 0.9950 level as traders returned to riskier assets and sold their long CHF positions. The dollar is currently is currently taking a breather at around CHF 0.98, slightly below the 0.9850 resistance level (multi high). Further north, a key resistance can be found at 0.9950 (high from July 27th), while on the downside a support can be found at 0.9650, then 0.9537 (low from August 18th).
Precious metals continued to move south as investors dumped safe haven and bought equities. Gold was down 0.20% to $1,320.75, while silver slid another 1% to $18.70. Palladium and platinum were down 0.26% and 0.29% respectively. In the equity market, most Asian regional markets were trading in positive territory, with the exception of Japanese stocks, which edged down 0.07%. In mainland China, the Shanghai and Shenzhen Composites were up 0.10% and 0.13% respectively. Offshore, Hong Kong’s Hang Seng rose 0.86%. In Europe, equity futures are mostly higher, with the exception of the Footsie, which is down 0.26%.
Yann Quelenn, market analyst: “UK PMI set to bounce back: Tomorrow, the Markit UK PMI for August will be released and data is expected to come in higher than the July release. Yet the indicator should again remain below 50 for the second consecutive month. Although having been on tenterhooks since the Brexit vote, UK data has surprised in recent weeks and shows no signs of slowing in activity.
In our view, Brexit fears were and are still largely overestimated. UK adhesion to the EU was, before the vote, already subject to many conditions which will not dramatically change the future of the island. From our vantage point, the BoE is likely to stay on hold at the September meeting, which will be held one week before the Fed meeting. Indeed, UK GDP rose 0.6% in the second quarter and the central bank will likely await additional data before further easing. The cable has further upside room to appreciate and we should not see the pound go below 1.30 dollars. The Brexit vote has been positive in terms of helping the BoE to devalue the currency. As a result, policymakers have gained some time to further adjust their strategy.
Politically speaking, it would be a very bad move, from Theresa May to now trigger any fear that a Brexit will not happen as it is in the country's interest to hold on to their weaker currency. This is why the UK prime minister continues to hold firm on her position that the Brexit vote result must be respected. We remain skeptical however and will only believe it once article 50 is triggered.” ---
Today traders will be watching the CPI report from Spain and Germany; retail sales from Italy; mortgage approval from the UK; consumer confidence from the euro zone and the US; Federal Reserve Vice-Chair Fischer will also provide an address.