Soc Gen Market Talk: FXWW

From the FXWW Chatroom: On the one hand, those solid US retail sales figures yesterday are just what the doctor ordered for the dollar and the ‘let’s talk about balance sheet reduction’ crowd. On the other, 2.27% in 10s and 48bp in 10y TIPS doesn’t exactly get me leaping off my sunbed. The 17 currencies that are deemed to be ‘major’ are in a 0.33% range of each other overnight, and I can’t get it much wider even by including the INR, down a bit more and bizarrely not worthy of major status. The AUD is the overnight ‘winner’ but only because it’s bouncing after yesterday’s fall. The Q2 wage price index, as expected at 1.9% y/y, was the only data of note overnight, and it wasn’t rally noteworthy….Overnight equity moves range from -0.1% on the NKY to +0.6% on the Hang Seng, commodity markets have settled into ranges, the standout bond yield is 10yr JGBs, now under 4bp. There has been no overnight data worthy of comment and the headlines are about US politics. The day ahead offers up confirmation of euro area GDP, another set of low wage, solid employment UK jobs data, US housing starts and the the ‘piece de resistance’ the FOMC minues at 8pm continental European time.
As for moves…. trading sterling weakness is still better achieved with shorts in GBP/SEK and GBP/NOK than staycationing in the British weather, for those with a choice. I haven’t lost faith in longs in AUD/JPY or EUR/JPY but those TIPS yields need a really big lurch higher to get USD/JPY anywhere enar 115, let along 120. And Ken Veksler’s warning Northern hemisphere folks that that we’re not paying enough attention to the fragulity of Australia’s government. As for EUR/USD, it’s still way too high when looked at through the lens of any kind of yield diferential, still has 1.1610 as potential chart support. Despite all that I still think it’s just quietly summoning up the energy for a push to 1.20 to make the ECB’s return next month a little more painful, though it too, needs yield support. Finally, US HY remains on the watch list as we await clues as to the timing of Fed balance sheet reduction, though the chance tha they deliberately kicked this topic into the long grass until Jackson Hole, at least, isn’t insignificant. EMFX, broadly, will wait for the Minutes as a cue but there would be a bigger reaction to little/no discussion of BSR, than the opposite.
Market participants will scour the July FOMC Minutes to see if the start date for the normalisation of the Fed balance sheet was discussed, or even decided upon. In Europe, the latest growth numbers suggest that the positive momentum is not yet fading. At the margin, this could support higher bond yields. Some selling pressure might have been created after the German Federal Constitutional Court opened the case of the PSPP programme.
Housing starts data may have slipped modestly in July to 1.190 million, but market participants are likely to look past that reading and focus instead on the July FOMC Minutes. Given that a September announcement on the balance sheet reduction looks all but certain, we will watch to see if there are clues about how long officials will wait to implement the reduction in their holdings
Stronger than expected July retail sales combined with upward revisions to the May data spurred a sell-off in bonds on Tuesday. A 0.6% rise in the control group is a positive for 3Q growth. The minutes of the July FOMC meeting due on Wednesday will likely shed light on the timing of balance-sheet unwind and the committee’s thoughts on inflation.
On Tuesday, the German Federal Constitutional Court (GFCC) opened the case of the PSPP programme. As for the OMT programme, it is doubtful that the ECJ will argue against the ECB. The GFCC probably hopes that the ECJ will place limitations on the PSPP programme as it did for the OMT programme. Moving to today’s data, we expect euro area GDP growth to be confirmed at 0.6% qoq in 2Q17 on the back of strong consumer expenditure. Looking at Italy, leading indicators point to a GDP growth rate of 0.4% in 2Q, but risks remain high mostly on the political front. In the UK, the unemployment rate should keep decreasing (SGe for June is 4.4%). Elsewhere, in Poland there should be minor changes in GDP growth data, while in Czech Republic sound GDP growth figures are expected for 2Q.
In Australia, we look for another solid labour market report in July after an exceptionally strong four-month run. We expect a trend-like employment gain of 15k, up slightly from the 14k recorded in June. Moreover, the statistical factors from sample rotation suggest risks to this forecast are skewed to the upside.
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