Tight ranges from overnight ensured a steady start to the Asian session but as the session wore on we felt a distinct bias towards risk-off. There was no particular news or data item to force the shift, but a positive start for equities soon changed to being in the red and currencies responded accordingly.
The NZD took an early hit as New Zealand’s Fonterra cut the forecast payout to farmer-shareholders for the 2012/13 season by 30 cents compared to its previous forecast in May, a 5.5 percent decline. The dairy cooperative blamed the stubbornly strong currency, whose recent gains have wiped out any improvement in global dairy prices, for the adjustment. The NZD was sold down to session lows versus the USD before a mild recovery.
The Japanese government downgraded its assessment of the economy for the first time since October 2011. Overall, the economy is seen enjoying a “moderate” recovery, still led by the rebuilding efforts after the earthquake. However, the EU debt crisis and further possible slowdowns in the US and China forced the government to cuts its assessment on exports, imports, industrial production, personal consumption and housing construction. There was no impact on currency markets.
On the data front, Australia’s new home sales were weaker in July, falling 5.6 percent from a month earlier giving back most of the gains made over the past 3 months. Weakness was evident in both detached and multi-unit dwellings, despite the recent RBA cuts, and reinforces the view of a broader slowdown in the non-resource/mining economy and is likely to keep the AUD under pressure.
Australian Treasurer Swan was also on the wires, saying that the government will bring its budget back into surplus “as promised, on time”. On commodity prices, he commented that most of the recent declines had been pre-empted in the budget, though the fall in spot iron ore and coal prices was slightly steeper than envisaged. Budget forecasts would be updated in the mid-year budget review later this year, he added. In the May budget, Swan forecast a budget surplus of AUD1.5 bln or 0.1 percent of GDP in the year to June 2013.
Yesterday’s price action across currency pairs was understandably subdued given the UK holiday. There was muted response to the soft German IFO surveys – business climate indicator slipping to 102.3 from 103.2 (the fourth straight month decline in a row), the current situation easing to 111.2 from 111.5 and the expectations index down to 94.2 from 95.5.
On the US front, the Dallas Fed manufacturing activity index showed some improvement in August, although the index remained in negative territory for the second consecutive month. The index came in at -1.6, better than the -13.2 in July, with a sharp increase in the inventories sub-index contributing to the improvement. All other sub categories (production, capacity utilization, new orders, volume of shipments) all noted a deterioration from last month.
Both Fed-speakers, Evans and Pianalto, came out in favour of more easing, with Evans perhaps the more vocal. He doubted that the unemployment rate would fall below 7 percent before 2015 at the earliest and urged for more easing immediately, saying that the economy was “well past the threshold for additional action”. He advocated buying more bonds until a decline in the unemployment rate was evident (2 or 3 quarters) and should only change course if there was evidence of a pickup in inflation above 3 percent. Evans will have a vote on next year’s FOMC panel.
Pianalto was more balanced, saying she supported actions that provide economic benefits with manageable risks. She added “There are benefits to further monetary policy actions, but we have to be realistic about what those benefits will be, how large those benefits will be, and how other factors will help or hinder the effectiveness of those benefits.”
Data Highlights
US Aug. Dallas Fed Manufacturing Activity Index out at -1.6 vs. -6.5 expected and -13.2 prior
AU Jul. HIA New Home Sales out at -5.6% m/m vs. +2.8% prior
Upcoming Economic Calendar Highlights
(All Times GMT)
JP Small Business Confidence (0500)
GE GfK Consumer Confidence (0600)
Swiss UBS Consumption Indicator (0600)
Sweden Trade Balance (0730)
EU Euro-zone M3 Money Supply (0800)
US S&P/CaseShiller House Prices (1300)
US Consumer Confidence (1400)
US Richmond Fed Manufacturing Index (1400)
Andrew Robinson,
SAXO BANK