Complex Made Simple

FX Weekly Report (13-07-12) Risk sentiments remain squarely on the back foot

Currency markets were mixed this week as the most recent FOMC meeting minutes left markets disappointed and a key run of growth figures from China extended doubts of the fragility of the global recovery and kept risk sentiments squarely on the back foot.

By: Gaurav Kashyap, Head of DGCX desk at Alpari ME DMCC

China’s surprise cut to both their one-year benchmark lending rate and their deposit rate a week before a key run of economic figures were to be released was skeptical to say the least. The timing of the PBoC’s announcement was almost as if they were warning the global economy of the impending slowdown, and this past week’s figures reinforced that notion – inflationary pressures have eased (Act 2.2%, Exp 2.3%, Prev 3.0%), year-on-year exports out of China fell to 11.3% (Prev 15.3%) while imports also dropped to 6.3% (Prev 12.7%), industrial production and retail sales slipped to 9.5% (Prev 9.6%) and 13.7% (Prev 13.8%) respectively, and to cap off the torrid flow of numbers, the headline Chinese GDP reading came in at 7.6% (Prev 8.1%), it’s slowest growth in three years.

But the data didn’t avail only doom and gloom – the bright spot was the sixteen percent increase in new loans in China which came in at 919.8 bn (Exp 880.0 bn, Prev 739.2 bn) which reflects a clear sign of easing liquidity conditions, a positive outcome following the recent actions by the PBoC.

Although Premier Wen Jiabao warned that China’s economy faces “relatively large” downward pressures, the weaker readings leave the door open to additional accommodative policy for the world’s second largest economy. Next month’s figures will without a doubt be key in determining how successful China is in engineering a soft-landing.

The US Dollar was in a bullish mood for the majority of the week in large part to the release of the FOMC meeting minutes late Wednesday night. Following the sluggish NFP reading the week before, the markets anticipated a more accommodative view from the FOMC towards introducing additional easing measures and instead, they were left disappointed. The FOMC maintained a rather cautious tone and noted that “a few members expressed the view that further policy stimulus likely would be necessary to promote satisfactory growth in employment and to reinsure that the inflation rate would be at the committee’s goal.” Two members were more vocal in their calls for additional bond purchases, but the majority in the FOMC are clearly concerned about the after effects as a result of additional easing. And with that, commodities sank and the US Dollar index hit a record two-year high at 83.829.

The index pared some of its gains to settle the week below 83.50 levels as Friday saw equities; commodities and higher yielding currencies close the week on a rather positive note. With the recent slowing Chinese data leaving the door open for more accommodative policy from the PBoC, markets also took confidence from JP Morgan’s strong earning report which kick started the US equity session and saw US stock markets snap a six session losing streak. The bank reported earnings per share of $1.21 and revenue of $22.9 billion, trumping analysts’ expectations and despite the fact that the bank reported a trading loss of $4.4 billion in risky derivative bets.

Elsewhere around the globe, South Korea surprised markets when they unexpectedly cut their benchmark seven-day repurchase rate by 25 basis points to a revised 3%, the first such cut in three years. In a pre-emptive move, the Bank of Korea hopes to kick start growth which has fallen to 3.3%, well below the projected growth rate of 3.7%. Also cutting their rates this week, albeit unsurprisingly, was the Central Bank of Brazil who cut the benchmark “Selic” to 8%.

It was the eight consecutive rate cut from the bank. And Down Under, the Aussie Dollar was weighed down earlier in the week on deteriorating employment data which showed that -27.0K jobs were lost during June, taking the unemployment rate up to 5.2%, from 5.1% previously. Coupled with weaker Chinese numbers, AUDUSD dropped to an intraweek low of 1.0139 levels before staging a recovery on Friday to close the week above 1.022.

And finally, in a week which seemed to be void of any European market moving developments (or another EU Summit for that matter), the EURUSD continued to weaken on deteriorating risk sentiment and a stronger US Dollar. Following the previous weeks close below 1.23 levels, EURUSD snapped through 1.22 levels to post a two-year of 1.2166. However Friday’s boost in risk appetite saw the pair close above 1.22 – a refreshing close for technical analysts eyeing an upward move in the cross. The Sterling also had a strong closing on the week, boosted by improving appetite on the earlier announcement that UK lenders would have improved liquidity access from the BOE which was well received by the markets.

The trading week ahead promises to bring more volatility to the markets as Fed Chairman Ben Bernanke delivers his semiannual report to the US Congress on Tuesday and Wednesday. Although we don’t expect Bernanke to spring any surprises following the release of the FOMC minutes, markets are sure to remain volatile during his testimony. The Bank of England and the Reserve Bank of Australia are set to release their meeting minutes and also on the calendar are the inflation readings from the Euro-zone, the UK and the US.