Forex Investment and Currency Trading

Switzerland The July ZEW survey of investor confidence in Switzerland revealed significant deterioration. The economic expectations reading dropped to a record low (since the series began in June 2006), with -76.9% of respondents having a negative outlook on the next six months versus -63.8% in June. The current economic situation reading declined to +41.0% from +53.2% in June.

Japan USD/JPY held the 38.2% retracement of the upward move from the March low to the June high (at 103.70) and rebounded. EUR/JPY held the 55-day moving average support and rebounded. The JGB yield curve bear steepened on higher equities and US yields although the results of the 30-year JGB auction were in line with market expectations with no change in the tail (11 cents). Business conditions continued to deteriorate in July. According to Reuters’ Tankan, the business conditions judgment diffusion index (DI) for major manufacturers plunged from -2 in June to -10 in July, the lowest since April 2003, paced by deterioration in the transportation equipment industry and food manufacturing. The DI for major nonmanufacturers dropped from -2 to -3, the lowest since December 2003. While the unsustainable real GDP growth surge of 4.0% saar in 1Q naturally suggests a high probability of modestly negative growth in 2Q, the latest business conditions data suggest a downside risk to 3Q forecast of marginally positive, nearzero growth and growing risks of recession.

Turkey The CBT will announce the base rate today. Market expects a 50-bp hike, while the market is pricing in 40bp. Meanwhile, the rapporteur judge appointed in the Constitutional Court trial of the governing AKP party recommended not to close the party. If the court followed this recommended, it would be good news for political stability. However, market notes believe that the court will follow the recommendation. The baseline remains that the court bans the AKP and a period of political uncertainty that is lira-bearish ensues. Market expects the verdict for the first week of August.

Hungary Wage growth surprisingly decelerated in May to 9.6% yoy from 10.6% in April (consensus 10.8%). In particular, the NBH’s closely watched private sector ex-bonus component slowed to 7.4% yoy from 9.1% previously. While the data are quite volatile and remain at elevated levels, softer May wages, coupled with lower June CPI report and a strong HUF, will likely see the NBH comfortably leave rate on hold at 8.50% on July 21. Nonetheless, market still sees the need for further monetary tightening, with a 25-bp hike likely in August when an update of the May Inflation Report is published.

Philippines The BSP hiked the overnight borrowing rate by 50bp to 5.75%, as expected. However, the BSP Governor’s comments post MPC were more hawkish than expected, as he cited that inflation control is the central bank’s foremost priority instead of the usual “price stability” comment. The central bank raised this year’s CPI forecast significantly 9%-11% from 7%- 9% and that of 2009 forecast to 6%-8% from 4%-6% and Governor Tetangco signaled more rate hikes by saying that more decisive action is necessary, though he expects inflation to peak in October. At the same time, the BSP appears to be managing expectations about growth prospects by saying that 5% GDP growth is “robust enough.” With policy inclination leaning on interest rate hikes and not via currency appreciation, market expects USD/PHP to track oil prices trajectory and retain its upward bias toward
46.0 by end-3Q08.

China According to the National Bureau of Statistics, 2Q GDP moderated to 10.1% yoy vs. 10.6% in 1Q. The agency’s spokesman said that 10% GDP growth for this year is “most appropriate,” suggesting that the authorities expect further growth moderation in 2H from 10.4% growth in 1H. June CPI rose 7.1% yoy, moderating from 7.7% growth in May and lower than 1H08 growth at 7.9%. The major influence for headline growth in 1H08 was understandably food prices, which rose 20.4% and contributed 6.6% point to overall growth. Moreover, June PPI growth remains alarmingly high at 8.8% and represented an acceleration from the 8.2% rise in May, implying firm inflationary pressure going ahead. Meanwhile, economic activities maintained a healthy pace, with June IP rising 16% yoy, unchanged from last month and urban FAI outperformed with 26.8% yoy growth vs. 25.6% in May. In addition, consumer demand remained resilient amid rising prices, with retail sales growth maintaining uptrend at 23% yoy vs. 21.6% in May. The latest slew of data suggests that amid pockets of weakness (external sector), overall economic growth slowdown has been modest and could potentially dampen the calls for an adjustment in macro controls or a shift in the tight monetary policy stance to an “appropriately loose” one. Firm inflation pressure will likely remain a key policy challenge and portends continued CNY appreciation going ahead.

Singapore June non-oil domestic exports (Nodx) came in below market expectation at -10.5% yoy, unchanged from previous month and well below consensus of a mild 2.8% decline. Electronics shipment extended its contraction to the 17th consecutive month at 14.6% yoy, down from -8.5% in May. Non-electronics exports also eased 7.9% on broad-based weakness in petrochemical and biomedical shipments, though part of the weakness can be attributed to maintenance shutdown at a major crude oil distillation unit. Pharmaceutical exports slipped for the fourth consecutive month at 22% yoy, suggesting a weak June industrial output (due July 25). Overall, the June trade numbers suggest a downward bias to the already sluggish preliminary 2Q08 GDP growth of 1.9% released earlier this month.

Brazil BRL IGP-10 inflation, which measured consumer prices from June 11 to July 10, was 2.00%, slightly higher than expectations of 1.86% and the previous print of 1.96%. Consumer goods inflation slowed to 0.65%mom from 0.93%mom due to lower food inflation. However, wholesale goods inflation increased to 2.54%mom from 2.21% due to higher raw materials and agricultural products inflation. Core finished goods was 0.58% mom down from 1.08% previously, but core intermediate goods inflation accelerated to 2.50% from 2.02%. Overall, it was a mixed inflation report with tentative signs of lower processed food inflation, but also higher agricultural and raw materials inflation. FIPE CPI and IGP-M data due out next week should provide further information regarding the evolution of the inflation outlook in July.

Mexico June’s tightening move confirmed Banxico’s determination to act according to its own balance of risks assessment. Amid very poor market liquidity, inflation risks ahead have kept fuelling market concerns, reflected in a continued upward correction in local interest rates. As doubts have increased as to whether inflation may effectively converge to the 3% official goal by the end of 2009, the central bank is likely to hike the overnight lending rate by 25bp to 8% on Friday. An additional tightening move sooner rather than later should help to anchor inflation expectations and contain a further upward correction of the local yield curve once market participants are convinced that inflation has stabilized and began a gradual decline toward year-end. As the central bank has emphasized, inflationary pressures in Mexico are rooted in international factors–high food, energy and other commodity prices– and do not originate from the domestic demand side, thus limiting the effectiveness of monetary policy. Therefore, after last month’s hike and another 25-bp hike this Friday, market would expect Banxico to remain on hold but vigilant — closely monitoring the evolution of inflation expectations in the months to come.

Commodities
Energy The petroleum complex sold off again on Wednesday, pressured by a bearish weekly inventory report from the EIA. Crude oil inventories surprisingly built 2.95mb over the week ended July 11 (BBG: -2.2mb), as imports were 8.7mb higher. Stocks fell 540kb at Cushing, but grew over 2.0mb in PADD3. Overall crude oil supplies remain 55.2mb below a year ago, and 20.9mb below the 5-year average. Refinery utilization rose 0.33%, to 89.5%, but is still 1.55% lower than last year. The unexpected crude oil supply increase pushed crude below its recent trend line, and almost below the 55-day moving average of $131.39. August WTI dropped to $132.00 intraday Wednesday, the lowest in about three weeks, and settled 3.0% lower, at $134.60. Despite gasoline imports being 1.0mb lower on the week, supplies increased 2.5mb (BBG: no change) as production rose. Y-o-y demand on a 4-week average basis remained 2.9% lower. Days of demand cover increased to 22.9, the highest for this time of year since 2003. Overall gasoline supplies are 10.9mb above a year ago, and for the corresponding week, have not been this high since 2001. Gasoline closed below both its recent trend line and 55-day moving average. The prompt month contract fell another 3.1%, to $3.2794. Distillate supplies built 3.2mb (BBG: +2.0), as stocks of ULSD grew 1.2mb. Imports were 56kb higher than the prior week. Heating oil dropped 2.0% Wednesday, to $3.841. After dropping to $11.113 Wednesday morning, natural gas settled just 0.7% lower, at $11.398, which is the lowest in almost two months. US electric output increased 5,912 GWh last week, to 88,047 GWh, while nuclear generation rose 1,274 MW, to 97,311 MW. Thursday’s storage report is expected to show an injection of 88 Bcf.