Forex Investment and Currency Trading

GBP/USD selling paved the way for further broad USD strength early in the London session today (see GBP/USD below), though USD has subsequently retraced gains to stand only marginally higher than the North American close against most of the majors. JPY and CAD are outperforming. Weaker commodity prices are again supporting USD, with crude trading to a low of USD111.64/bl and gold back below USD800/oz (sport USD790). Global stocks are taking their cues from the weak US close, with losses of 1-2% across Asian and European markets. The July US PPI and housing starts are the main US data risks today. The consensus are forecasting a print of 0.2%m/m for the ex-food and energy component of PPI, The consensus are forecasting a print of 940K for housing starts. Fed’s Fisher speaks on the US economy.

GBP/USD fell to a low of 1.8538 as comments from the MPC’s Besley were interpreted as softening his generally very hawkish tone. The wires reported Besley to have noted that rates must be kept at a suitable level until the inflation threat has passed (implying rates on hold for now) whereas the actual quote gives little, if any, indication of a retreat from the possibility of rates heading higher from here. In noting his concern over wages rising in response to price rises, Besley comments that this “spiral has to be nipped in the bud and that means having interest rates at a suitable level until the threat of higher inflation has passed”.

USD/CAD pushed higher on the back of USD strength, but CAD is out-performing on key crosses. June wholesale sales are the only data risk today, with a monthly increase of 0.7% expected. Market reaction is, however, likely to be limited ahead of much more important retail sales and CPI reports alter in the week.

EUR/USD initially followed GBP/USD lower, touching a new six month low of 1.4631. EUR was, however, already drifting higher by the time a stronger than expected German ZEW survey was released. The headline ZEW index came in at -55.5, above the consensus expectation of -62.0, but below earlier rumours of a -50 reading. The survey has been a poor indicator of the more important Ifo survey in recent months.

AUD/USD: The RBA Aug Meeting minutes were balanced and consistent with a likely 25bp cut at the 2 September meeting. With the markets having toyed with the possibility of 50bp, some disappointment was evident post minutes. Market expects the RBA to deliver a 25bp cut in September, followed by another similar move in October or November (partly dependent on how much the banks pass through to key lending rates). Arguing against a more aggressive easing profile in the coming months is the still elevated level of inflation, decline in petrol prices (worth conservatively around one 25bp cut), and some stability in equity markets.

NZD: Q2 PPI input prices jumped 5.6%q/q, the largelest quarterly increase in the history of the survey underpinned by power, fuel, and transport costs. Output prices also posted a notable 3.5%q/q rise. NZ producer margins have consequently been squeezed even further.