Forex Investment and Currency Trading

EURO The July PMI manufacturing was revised down slightly. The weakness came from Spain, Italy and France, pointing to stagnation at best, and recession risks at worst. Meanwhile, the German PMI held up marginally above the boom-bust threshold, confirmed at 50.9 in July from 52.6 in June. German retail sales were weak in June versus consensus. In fact, after the outsized 1.5% surge in German 1Q GDP, market looks for 0.5% contraction in 2Q as a natural correction, with weakness in retail sales indicating downside risk to that call. Despite the bad news, EUR/USD has managed to hold trend line support from the August low, now coming at 1.5528.

Sweden 2Q GDP came in below expectations. Although the 2Q result was depressed somewhat by the early timing of Easter holiday, this remains a bad outcome, the lowest yoy growth rate since mid-2001. The GDP details show that weakness was caused by drop in exports, while household consumption was still strong. As a small export-dependent economy the global, and in particular Eurozone, slowdown is hitting Sweden hard. In addition, household consumption is likely to lose some steam soon given high inflation and oil prices. Separately, but also painting the same picture, the PMI contracted for the first time in five years in July, as the export orders index plunged. Despite the hawkish statement at the July rate-setting meeting, soft GDP, coupled with an already split view within the central bank, will likely tilt the balance for the Riksbank towards leaving rates on hold. Yields fell, with the rate on the December FRAs dropping 8bp, but EUR/SEK remained relatively unchanged following the data.
UK The PMI manufacturing fell to a decade low of 44.3 in July, highlighting that the economy was at best grinding to a halt. Still, there were further signs of severe pipeline inflation pressures, with the output price index rising to another series high in July.  Companies reported that sustained upward pressure in costs, mainly oil and commodities, more than offset any deflationary influence from weaker demand. The negative growth data helped GBP/USD break below the 55-day moving average (1.9783). The pair now appears headed towards support formed by the early July low of 1.9649.
Japan New motor vehicle registrations (excluding mini vehicles) unexpectedly rebounded yoy in July. However, seasonally adjusted housing starts in floor space dropped by 5.0% qoq in 2Q, consistent with the view that the recovery in housing investment will probably lose momentum over the summer. Major banks’ profitability reportedly deteriorated in 4Q, suggesting that banks will probably become more cautious towards more lending, and have little choice but to invest their idle funds in the JGB market. With lower equities, JGB yields were lower, particularly in the 5-year sector.

Australia Weak economic data fueled market speculation of an RBA rate cut. The Performance of Manufacturing Index remained below the boom-bust line of 50, slipping to 46.9 in July from 47.0 in June and from 51.2 in May. The new orders index dropped to 47.l1 in July. Monthly experimental CPI inflation slipped to 4.6% yoy in July, lower than our expectation. This is the first drop in yoy inflation reading since August 2007. The rate on the September 2008 bank bill futures contract declined by 14bp to 7.52%.