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Forex Blog - Morning Report (Westpac)
Morning Report Monday 26 July 2010
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Risk markets nudged higher. Ending the week on a positive note, US equities marked time until the release of the European bank stress tests, pushing above last week's resistance levels to close up 0.8% on the day. On the face of it, that only seven out of 91 banks failed the tests and the aggregate capital shortfall was only EUR3.5bn was impressive, and most markets gained to some degree, but skepticism over the severity of the tests may see markets proclaiming the exercise a whitewash and selling risk later this week. Commodities consolidated Thursday's surge, oil down 0.4% and copper up 0.7%. US 10yr treasuries rose 6bp in yield to 2.99%, steepening the 2-10yr curve by 4bp.
The US dollar was volatile but changed little on the day. EUR bounced on the German IFO report, then sagged on negative rumours ahead of the stress tests, falling from 1.2966 to 1.2794, the results then helping push it to 1.2930 during the two hours afterwards. Safe-haven yen underperformed the majors, USD/JPY rising from 87.00 to 87.70.
AUD traded sideways between 0.8900 and 0.8970, the stress tests seeing it close the day at the upper end of the range.
NZD similarly trade between 0.7230 and 0.7290, closing around 0.7270. AUD/NZD was volatile but directionless around 1.2300.
German IFO survey jumped to a three year high of 106.2 in July and posted a record monthly gain of 4.4 points. Both the current assessment (106.8 from 101.2) and the expectations (105.5 from 102.5) components posted unexpectedly large increases. The survey is further evidence, after yesterday's positive PMI surveys, that growth in the eurozone, or at least Germany, may not be as weak as originally expected over the next quarter.
UK GDP came in much stronger than expected 1.1% in Q2 versus expectations of 0.6%. The driver of the move higher was services. In particular, all major categories saw rises (business services, finance and construction). Construction bounced 6.6% for this quarter but the source of construction for GDP is a new monthly business survey (rather than the old outputs survey), which makes for comparison from 2009 and 2010 difficult. On the production side for the quarter, mining and electricity et al deteriorated, agriculture saw a small rise, while manufacturing rose 1.6%. Westpac's expectations are for this to be the peak for the year in GDP. A higher starting point, however, reduces the negative output gap. This, in turn, should put some upward pressure on the level of the BoE's inflation forecasts. Despite this, we do not anticipate the BoE will adjust rates anytime soon but this report will no doubt further the debate within the MPC.
Canadian CPI fell 0.1% in June taking the annual rate down to 1.0%. The core rate also fell by 01% on the month. The headline rate was weighed down by a fall in gasoline prices which fell for the first time since October 2009. The slightly softer inflation report combined with the weaker than expected retail sales data earlier this week are in line with the Bank of Canada's modest reassessment of their outlook for the next two years as reported in the Monetary Policy Report on Thursday.
AUD/USD and NZD/USD outlook next 24 hours: Asia and Europe have yet to price the stress test results, so further gains are possible, although strength in both currencies is waning. AUD may initially challenge 0.9000 overhead, a later correction the possible to the 0.8860-0.8900 area. NZD's parameters are 0.7200 and 0.7300.
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