Firmer UK inflation has helped sterling recover from yesterday's decline. Resistance seen near $1.5700 has been overcome making $1.58 the next technical target. Poor US housing
starts data, after a heady 9.8% increase in June, with permits unwinding 7.4%
rise could provide better fundamental cover to push sterling higher.
Headline CPI fell 0.2% in July. The consensus was for a 0.3% decline.
This saw the year-over-year rate rise to 0.1% from zero. It has moved between
-0.1% and +0.1% since February. What also caught the market's attention was the
jump in the core rate to 1.2% from 0.8%. This is the highest in five months.
The consensus was for a 0.9% increase.
Recall that the UK measure of core inflation excludes not only food and
energy, like the US, but also drops alcohol and tobacco prices. ONS
explained that the firmer than expectations inflation reflected the small
decline in clothing prices and smaller discounts in summer sales than a year
ago. The 1% increase in the RPI will translate to 1% increase on average next
year for regulated rail fares under the government's five-year freeze on real
rail fares.
The implied yield on the June 2016 short sterling futures has been
flirting with the lower end of the four-month trading range near 90 bp prior to
the inflation report. It rose four bp and has scope to rise another
5-10 bp in the coming days, especially if Thursday's report on July retail
sales shows the modest strength (0.4% headline and excluding petrol) that the
consensus expects.
The Australian and Canadian dollar are under pressure. The RBA
minutes largely repeated what the central bank had said in its quarterly
monetary policy statement. Interest rate policy is on hold, and at the
needed accommodation can be delivered through the weaker currency.
Separately, Australia reported a 1.3% decline in July auto sales. It was
the third monthly decline over the past four months.
The Australian dollar stalled near $0.7385. It is the fourth
session of lower highs. The session low, just above $0.7330 is a
three-day low. Support is seen in the $0.7215-$0.7325 band. The US
dollar recovered from the intra-day decline to CAD1.3060 yesterday, perhaps
encouraged by news that foreign investors bought CAD8.5 bln of Canadian
securities in June, whereas the consensus expected a CAD6 bln liquidation and a
small decline in the US two-year interest rate premium. The US dollar
recovery to almost CAD1.3130 today, but the upside momentum has
stalled.
Of the dollar-bloc, the New Zealand dollar is faring best. The
market is cautious ahead the GDT auction. Fonterra has signaled a
reduction of supply of whole milk powder by as much as a third, partly
reflecting a change in the product mix.
The central reference rate for the yuan was little changed at
CNY6.3966. The dollar finished the Shanghai session a little softer
at CNY6.3942. It was the fourth consecutive close with a CNY6.39
handle. The range was the widest in three sessions
(CNY6.3871-CNY6.4160).
The yuan’s stability contrasts with
the biggest drop in Chinese shares in three weeks. The Shanghai Composite slid 6.2%. More than 600 companies fell the daily limit
of 10%. There were two main catalysts that many
investors less sure of government support for prices. First was news that July house prices rose
for the third month, paring the year-over-year decline to 3.7%. House prices rose in 31 of the 70 cities
tracked; an improvement from June. The possibility that the Chinese economy is stabilizing
was echoed by the Reserve Bank of Australia’s minutes that assessed the
downside risks to the Chinese economy had receded somewhat. The better house prices and the large
liquidity injection via seven-day reverse repos (CNY120 bln vs CNY90 bln
maturing) seemed to signal no imminent rate cut or reduction in reserve
requirements.
Separately, the key regulator that is
coordinating support for the stock market, the China Securities Finance Corp (CSF)
was sidelined. The three-week rally
that ended with today’s drop had brought the Shanghai Composite toward the
middle of the perceived approved range (3500-4500), and before the weekend,
CSF had warned that it would reduce its operations as volatility fell. It seeming failure to step in today
exacerbated the sell-off.
In Europe, the focus is on the German
parliament vote on the Greek aid package tomorrow. It will be approved. The only question is how many CDU/CSU will
vote against the government. This, along
with a couple of other parliaments’ approval, will allow the check to be cut
that will allow Greece to pay its creditors, including the 3.2 bln euro payment
to the ECB tomorrow.
Then the focus will shift to a
possible vote of confidence in the Greek parliament. The left-wing (fundis) of the Syriza
coalition is expected to support the government pending the special party
conference next month. The traditional
two parties that have support the government through the negotiations (PASOK
and New Democracy) are likely to return opposition and not support the government
in a confidence vote.
The euro has slipped to a five-day
low near $1.1050. Support is seen in
the $1.1025-35 area. We note that the
100-day moving average comes in just below $1.1050 today. We are more inclined to see some modest
upside pressure that could lift the euro toward $1.1100-$1.1130.
Firmer Inflation Lifts Sterling, Chinese Stocks Stumble, Yuan Steady
Reviewed by Marc Chandler
on
August 18, 2015
Rating:
Reviewed by Marc Chandler
on
August 18, 2015
Rating:
