* Weaker USD trend to remain intact
The recent rise in US treasuries failed to be interrupted by Wednesday’s weak US CPI data and Empire Manufacturing survey. The latest data from the US suggests that action from the Fed in September remains likely despite better-thanexpected July payrolls, retails sales data and industrial production data. Particularly as while the data show an inkling of improvement, the underlying trend remains weak. We expect that expectations for QE should remain in place (our economists see a 65% probability that the Fed will pursue QE in September) and that investors will continue to sell the USD. We favour selling USDCAD (targeting 0.98) and buying EURUSD (targeting 1.28). Fed President Kocherlakota, a relatively more hawkish member of the FOMC board, spoke on Wednesday night but provided little indication of the stance that Bernanke may adopt at his upcoming, high anticipated, speech at Jackson Hole at the end of the month. Kocherlakota suggests that the Fed was discussing the impact of cutting the interest rate on reserves, but also commented that monetary policy easing can several years to impact the real economy. US data releases on Thursday include Housing Starts, Initial Claims and the Philly Fed manufacturing survey. The Philly survey has the largest scope to drive the USD today, both our economists and the market expect a rebound in last month’s dismal release. A failure for such a rebound should is likely to support QE expectations and drive a weaker USD.
* UK retail sales provide the GBP with a boost
Thursday’s stronger-than-expected release of UK retail sales has provided the GBP with a boost. Ex-fuel retail sales were flat in July (consensus: -0.2% m/m) but the largest surprise was the upward revision to the June data to 1.1% m/m from 0.3%, pushing the y/y growth rate to 3.3%. This data follows from Wednesday’s better than expected July unemployment data and from the July BoE minutes having provided no indication of a discussion amongst the MPC as to whether a rate cut would be counter productive, as Governor King commented last week. We therefore expect that UK economic data will be remain an important for sterling – since the Inflation Report press conference the likelihood of a rate cut prices into markets has fallen from 80% to 50%, providing further scope for GBP to recover if the pricing out of rate cuts continues. BoE’s Fisher commented that more QE would be a better tool than a reduction in interest rates, but QE does not appear to be such a strong driver for sterling weakness as an outright rate cut. Further GBP strength rebound is better pursued on crosses (GBPJPY and GBPUSD are trading slightly below their 200-dma); EURGBP, instead, could remain driven more by broader EUR sentiment.
* China concerns over economy should lead to more stimulus response
China’s Premier Wen remarked that while China’s economy faces significant headwinds but that the sharp decline in inflation and suggested that this gives Beijing greater leeway to manoeuvre on the monetary policy front. With growth still a concern for policymakers in China, we would expect to see a policy response in the upcoming weeks either on the monetary or fiscal policy side. Concerns about growth in China and a reversal of portfolio inflows have been weighing on global risk appetite. Hence there is scope for risk appetite to be boosted by policy action in China. We expect this to provide further support for commodity currencies, particularly the AUD. The health of the Chinese economy will also be an important factor for the RBA’s policy decisions over the months ahead.
BNP Paribas