Short Note On FX Market

The general scenario we outlined in our weekly outlook and reiterated yesterday anticipated follow through selling of the foreign currencies at the start of the week before corrective pressures emerged near mid-week.  That is essentially what is happening today.  

Moreover, today's corrective price action is happening despite a continued poor news stream.  The German IFO was considerably worse than expected and reinforces the sense from the flash PMI that the euro zone's biggest economy has lost its momentum.  The UK reported a 0.7% quarterly contraction in Q2 GDP which was below even the most bearish forecasts in the Bloomberg survey.  

The Australian dollar is recovering from the cent slide in North American yesterday after flirting with resistance near $1.0320 despite a underlying inflation reading in Q2 that at 1.95% was the lowest in over a decade.  Although the data would suggest that the RBA has room to cut rates further as early as next month, the upbeat commentary from top Australian officials has prompted the market to downgrade the odds of a cut to 30% from 60% at the start of the week.

There as some more positive news, but of secondary importance to these three reports.  The UK CBI industrial trends saw the total order balance rise to -6 from -11 and expectations for for additional deterioration.  The order book is now the highest since February.  The unit labor cost measure fell to 0 from 19.  Disappointingly, exports remains weak (-9 from -4).  Italy's consumer confidence unexpectedly rose to 86.5 from the record low of 85.3 in June.  Lastly, Japan reported surprised by reporting its first trade surplus since February.  The JPY61.7 bln surplus contrasts to the consensus that had expected a JPY135 bln deficit.  Exports were not a weak as expected, while imports were weaker than forecast.  

The resilience in the major foreign currencies coincides with a better performance of the peripheral bond markets and European equities after the disappointing Apple earnings weighed and  the third consecutive tripe digit loss for the Dow Jones Industrials in NY yesterday, saw Asian equities slump.  

On one hand the fact that the downside momentum in the foreign currencies has broken, short-term momentum players may be at an immediate disadvantage.  This may produce some near-term consolidation.  However, the underlying fundamentals have not changed and this should encourage players to sell into strength.  

The pressure that has been evident in the capital markets in recent days has in the past elicited some kind of policy response.  Isn't that the pattern?  The capital markets pressure European officials who respond with some initiative which buys some time until the pressures build again.  

Similarly, in the US the continued stream of poor economic news suggests that the world's largest economy is stalling and this has also typically led to a policy response.  That a major financial paper is claiming the Federal Reserve is moving closer to a policy response (but unsure of whether the response will be in at next week's FOMC meeting or in September) demonstrated a firm grasp of the obvious and did not tell the market anything it did not already know--hence the muted reaction.