Intraday Market Thoughts Archives

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German CPI revised higher; UK PPI input prices fell; Canadian labor market deteriorated. Chatter of a Greek report doing the rounds. Ashraf's BNN interview on why Fed's Twist Operations shall shall fail t prop the euro.

USD is higher across the board amid high risk aversion and weak equity markets. The selloff in the Euro continues and EURUSD fell to 1.3788 even as German final CPI was revised up to 0.0% after earlier estimate of -0.1% (2.4% y/y). Even French Industrial production that unexpectedly rose and showed a robust 1.5% growth in July failed to underpin the euro.

UK PPI input prices dropped 1.9% in August after 0.5% in July experiencing the largest decline since April 2009. On annualized basis they grew 16.2% after 18.3% previously. GBPUSD dropped to below 1.59 but has since recovered a part of the loss.

Japanese Finance minister Azumi said during today's G7 meeting in France that he continues to monitor exchange rates and will take bold action if there are excessive moves. Interventions will undoubtedly be discussed during the G7 meeting as Canadian Finance minister Jim Flaherty said that he was concerned about unilateral actions of Japan and Switzerland that intervened in the currency market to weaken their respective currencies. Should Japan reach a consensus, Japanese Monday morning might be the ideal time for such an intervention to occur. Japan spent almost USD 60 bln during August failed intervention.

Canadian employment fell by 5.5K in August after a July rise of 7.1K, with the

unemployment rate up 0.1% to 7.3%. Ashraf's Premium trade to short CADJPY remains in progress. http://www.ashraflaidi.com/products/sub01/access/?a=490

August Canadian Housing starts fell to 184.7K in August from 205K vs exp 200K.

Ashraf's 7-minute interview on the set of BNN, discussing intermarket dynamics, euro outlook, gold, silver, oil & Fed policy http://watch.bnn.ca/#clip528927

UK Producer Prices set to slip back, German CPI, Italian Q2 GDP, China inflation remains sticky, Japan Q2 GDP (Final). Obama's speech helps Asian risk appetite with bigger than expected growth plan after Bernanke's disappointing speech remained muted on action. Ashraf's Thursday Premium trades had 5 winning trades, while 4 remain in progress. None were losing trades. Stick around for Friday's ideas. Ashraf's DAY 2 in Toronto on Friday.

The decision by the Bank of England to hold rates and keep the asset purchase program unchanged should have been no surprise to our readers given the reasons outlined yesterday. It will however be interesting to see who else joins Adam Posen in the QE corner when the minutes are released in a couple of weeks time.

Today’s release of producer prices for August could well see a month on month decline of input prices of 1.5% bringing the annualised rate down from 18.5% to 16.8%. Output prices which are much lower on an annualised basis are expected to remain unchanged at 5.9%. It would be a mistake to expect inflationary pressures to start to slip back as we look ahead to next weeks CPI numbers.

On the same inflation story yesterday’s press conference by Trichet was about as dovish as it could be as he downgraded the banks growth forecasts for the European economy for 2011 and 2012 as well as highlighting that “downside risks to euro area have intensified”.

Trichet didn’t indicate that a rate cut was on the horizon, but he did indicate that there was little likelihood of any further fiscal tightening in the foreseeable future, given the troubling economic environment. Going as it did hand in hand with the growth downgrade, the outlook for Europe gets darker by the day, something the G7 meeting starting today in Marseille will not be able to solve in a hurry.

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With that in mind today's German CPI for August becomes somewhat of an irrelevance with expectations of it coming in at 2.4%, unchanged from last month and just above the banks target rate.

Given the problems in Italy right now and the political manoeuvring in getting the new austerity budget passed it would be helpful if that latest Q2 GDP numbers gave any indications that the economy is growing at a healthy rate. In an event it is likely that the numbers will show growth of 0.3% for the quarter, unchanged from the previous reading.

In signs that the recent rate tightening cycle in China could well be on pause for now, CPI inflation for August slipped back from 6.5% in July to 6.2%, though food prices continue to be a concern, however producer prices look to be a little bit more sticky rising slightly more than expected to 7.3%, above estimates of 7.2%, but still below July’s 7.5%.

Japan’s Final Q2 GDP continues to show no signs of significant improvement, coming in at -0.5% from 0.3% previously, amidst concerns about the high value of the yen and a slowing global economy. The new Prime Minister has certainly got his work cut out to get the Japanese economy moving again against a backdrop of a country struggling to get back on its feet after the widespread devastation caused by the earthquake and subsequent tsunami.

Ashraf's 7-minute interview on the set of BNN, discussing intermarket dynamics, euro outlook, gold, silver, oil & Fed policy http://watch.bnn.ca/#clip528927

When all said and done, Trichet's dramatic press conference served as the fundamental catalyst for our euro stance recurring in our Premium trades. The revised down 2011 GDP growth to (1.4% to 1.8%) from the previous (1.5% to 2.3%) as Trichet talked about intensified downside growth risks". Gold and silver are racing higher in line with our bullish call yesterday in the face of Tuesday's noisy panic. Here are our latest Premium trades for the day http://ashraflaidi.com/products/sub01/access/?a=490 To subscribe, click here: http://ashraflaidi.com/products/sub01/ I will be at the World Money Show in Toronto Thurs, Frid & Sat.

BoE, ECB both unchanged, with no new QE from BoE. Market turns to ECB and Trichet's press conference at 8:30 EST. US Trade Balance and Canadian data also due.

The Bank of England held rates steady at 0.5% and kept Asset Purchase Facility unchanged at GBP 200 bln. Sterling spikes on the announcement across the board and sends EURGBP premium trade deeper into money.

In other news, Swiss unemployment rate remained unchanged at 3% in August and June German Trade surplus narrowed slightly from EUR 11.5 bln to EUR 10.1 bln.

EUR is under pressure after the EU commission said that there is no possibility that Greece would receive further funds unless it fulfills its commitments.

The New York session will start at 8:30 am ET with ECB press conference. In light of rapidly slowing growth, high unemployment and declining inflation it is possible that J. C. Trichet could hint a rate cut which would punish the Euro.

US Trade balance also due at 8:30 EST is seen narrowing to USD -50.6 bln in July from -53.1 bln month earlier. Unemployment claims are still seen above the important 400K mark.

8:30 am EST will also bring Canadian Building permits and Trade balance. Building permits are expected to grow 0.2% in July from 2.1% and trade balance is seen at CAD -0.8 bln from previous CAD -1.6 bln. Canadian trade deficit has been widening steadily over the past four months.

Volatility could also increase at 1:30 pm ET when Fed chairman Bernanke speaks at the Economic Club of Minnesota Luncheon where he delivers a speech about the US economic outlook. Considering that the next FOMC meeting is less than two weeks away, Bernanke will be cautious and is unlikely to provide any surprising details regarding the possibility of a further easing.

Today's key central bank decisions from the Bank of England and European Central Bank shall draw scrutiny market. Both set to remain unchanged, but the ECB could adopt a more dovish outlook at its press conference. Australian unemployment rises, Japan trade surplus shrinks.

Recent lacklustre economic data in the UK has prompted a lot more dovish speculation as to the next steps that the Bank of England might take with respect to additional stimulus measures for the UK economy.

Yesterday’s disappointing manufacturing and industrial production data for July has reinforced perceptions that Q3 growth could well contract, and prompted further calls from arch dove Adam Posen for further stimulus measures of around £50bn to help stimulate the UK economy.

While the calls for these measures are starting to become more strident and audible, including a call from the Institute of Directors, they are unlikely to happen today given the mathematics involved on the committee, but also due to the current high level of inflation.

Not only four members would have to become dovish, but also switch over to actual rate cuts. Yet, given that inflation in the UK could well rise further given that energy prices rises have yet to filter through, it could well prove unwise to risk further price rise pressures by weakening sterling and pushing imported inflation higher.

On the other hand, the committee could well think that higher inflation is a price well worth paying, however it is by no means certain that further fiscal measures would work, given the forces at play in the UK economy.

Later on the European Central Bank also starts its deliberations on interest rates and like the Bank of England it is also likely to keep policy unchanged. Recent deteriorations in economic conditions in Europe has highlighted the folly of the previous ECB rate hikes this year in precipitating recent upward pressure in bond yields across peripheral Europe, as well as choking off economic growth.

The markets focus is going to be more on President Trichet’s press conference in light of his comments at Jackson Hole, about reviewing the pressures on price stability the focus will be on how dovish he is in his language, and the likelihood of possible hints about rate cuts by year end.

In Australia the latest employment report for August showed that unemployment rose by 9.7k, confounding expectations of a drop of 10k and the unemployment rate rose unexpectedly to 5.3% as recent market turmoil appears to have hindered jobs growth in the Australian economy.

In Japan the latest trade balance numbers unexpectedly shrank sinking to a surplus of 123.3bn yen from 149.1bn yen in June, showing that the economy continues to struggle to recover from the effects of the events of earlier this year in all likelihood due to its a stronger currency. To reinforce concerns exports were down 2.3% from July 2010, while imports were up by 13.6%.

Australian employment unexpectedly contracted and the unemployment rate rose in August, sending AUD sharply lower. Market moves have been mild so far in Asia after the large risk rally on Thursday. The ECB decision will be a highlight of the European session.

Australia lost 9.7K jobs in August compared to the 10K gain expected. The unemployment rate rose to 5.3% from 5.1%, no change was forecast. There was no change in the participation rate and full-time jobs decreased 12.6K, so there was no silver lining in the report. AUD/USD immediately fell 50 pips to 1.0590 and has given up half the gains from Wednesday's session. It's not the first time Australia has posted a surprisingly weak report but the numbers are often volatile so we won't draw any conclusions. The RBA statement and separate comments from Stevens yesterday pointed to a central bank that's comfortably on the sidelines.

Gold has rebounded $35 in early Asia-Pacific trading after falling $80 on Wednesday. The German court decision not to block Eurobonds took some of the sovereign fear bid out of gold but the price action so far shows once again that buying interest in strong immediately after any selloff.

The $300 billion jobs stimulus program set to be announced by Obama on Thursday was been frequently cited as the reason for the rally in risk. That may have been overstated as a short-squeeze looked to be evident and the German court and Italian parliamentary news was more important. In any case, the risks are high that the plan will get bogged down or transformed by partisan US politics.

Early feedback from the first real Republican debate showed Rick Perry will be the likely candidate to face off against Obama next year. It's far too early for the race to have any impact on markets, although others may try to spin it that way.

Ashraf's thoughts on the Bank of Canada decision, CAD and his latest trading ideas are in the premium section. Members click here http://ashraflaidi.com/products/sub01/access/?a=489 NON members can click here: http://ashraflaidi.com/products/sub01/

I will be with Ashraf at the TORONTO WORLD MONEY SHOW from Thurs-Sat. Attendance is free so stop by to chat about markets.

The highlight of the European session are the rate decisions from the ECB and BOE. The Bank of England is first at 11 GMT but no action is expected and, in that case, there will be no statement released. There is some talk about further easing but the core of the MPC appears to be strongly opposed.

The ECB decision comes 45 minutes later and will be followed by a press conference from Trichet. We expect to see, at minimum, an incremental shift to a more dovish stance. Expect him to exclude, or tone down the “very closely monitoring” phrase from the previous meeting. Any action or strong dovish hints will weigh heavily on EUR.

Canada's Aug PMI jumped 12 pts but the Bank of Canada did not mince its words in today's policy statement. Readers may be surprised by today’s Premium trades but carefully read the technical & fundamental rationale for each. Meanwhile, both gold and silver showed their obligatory pull-back in order to sustain the current run-up. Fundamentals have not changed; central banks are expected to either continue easing or to revert to easing mode. Even the RBA & BoC are now finessing their way back to easing mode. Members click here http://ashraflaidi.com/products/sub01/access/?a=489 NON members can click here: http://ashraflaidi.com/products/sub01/

Ashraf

German Constitutional Court rules that Ezone bailout is legal, UK manufacturing and industrial data were mixed. German Industrial production pushed higher. Market turns to BoC rate decision, Canadian Ivey PMI and Fed'ss Beige Book. Also details on Ashraf's appearance in this week's TORONTO MONEY SHOW below.

Euro bounced almost a full cent after German Constitutional Court ruled that German involvement in Eurozone bailouts is legal and rejected all lawsuits that were aimed at blocking country's participation in the financial assistance. However, the court said that the Parliament must have a say in decisions, which burdened Germany's budget. The bounce proved to be short lived as EURUSD retraced all gains and currently trades below the pre-release level.

German Industrial production rose by 4.0% in July after it declined by 1.0% in June which to some extent confirms Angela Merkel's earlier comments that Germany will continue to be Europe's growth locomotive and that so far "there are no signs of a recession in Germany".

In the UK, Halifax House Price Index fell 1.2% in August after a 0.2% rise in July. Manufacturing production rose 0.1% in July after dropping 0.4% in June (+1.9% from 2.1% y/y) and Industrial production declined 0.2% after unchanged print a month earlier (-0.7% from -0.3% y/y). The weak print is blamed on oil and gas rigs maintenance.

Recently, the data from the UK mostly disappointed which reinforces the removal of hawkish votes within the Bank of England's MPC

The New York session will bring Bank of Canada Overnight Rate decision and statement; due at 9:00 am ET. Analysts expect rates to remain unchanged at 1.0%. The accompanying statement is likely to point out concerns about the state of the global economy and declining growth.

At 10:00 am ET Canadian volatile Ivey PMI is due and it is seen slightly higher in August at 46.7 from July's 45.4. Despite the anticipated improvement, this would be a second reading in a row below the 50 level which indicates continued sector contraction.

At 2:00 pm ET the Fed releases its Beige Book that provides insights into the economic condition of each of the 12 Federal Reserve districts.

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German constitutional court set to rule on bailout legality, UK industrial and manufacturing data could prompt further dovishness, Australia Q2 GDP, Bank of Japan leaves rates unchanged.

The crisis in Europe remains at the forefront of investors concerns today as the German constitutional court begins its deliberations in ruling on the legality of the Greek and other bailouts in 2010.. Any ruling that that states the bailouts are illegal would throw Europe into absolute chaos. The expected outcome is likely to be along the lines of attach a number of firebreaks or safeguards to any new bailouts by way of giving the German parliament stringent vetoing rights with respect to the release of any new bailout funds. But even the best case scenario will no doubt complicate further an already cumbersome mechanism.

Ashraf's LATEST PREMIUM TRADES on EURUSD, EURGBP & GBPUSD can be accessed directly here: http://ashraflaidi.com/products/sub01/access/?a=488 Non-subscribers can go here: http://ashraflaidi.com/products/sub01/access/

In the UK, despite last night's speech by the Chancellor reassuring that the UK recovery remains on track despite recent weak data, concerns remain about the state of the UK economy, as evidenced by yesterday’s disappointing BRC retail sales numbers. These fears are likely to increase this morning if July manufacturing and industrial production data show further signs of slowing down or contracting further in the case of the industrial production data.

June’s industrial production data came in flat on a monthly basis and down 0.3% year on year and though July’s number is expected to rise 0.2% the year on year number is expected to slip further to -0.4%. Manufacturing production is set to be slightly more positive improving on a monthly basis from -0.4% to 0%, though the annual figure is expected to slip from 2.1% to 1.9%.

Weak numbers will once more increase the pressure on the Bank of England to embark on more QE at tomorrow’s rate meeting, an outcome which at this moment seems unlikely despite some speculation to the contrary.

Australia Q2 GDP has continued to recover after the negative figure in Q1 and has been able to shrug off all the declines from the Queensland floods. The number appears to support yesterday’s actions by the RBA in keeping interest rates on hold for the time being, as Q2 GDP rose 1.2%, above expectations of a 1% rise while the previous figure was also revised up from -1.2% to -0.9%. These figures suggest that the Australian economy remains a touch more robust than had been initially feared.

The Bank of Japan left rates unchanged as expected, early this morning as the yen gained some ground overnight after the surprise intervention by the Swiss National Bank caught markets on the hop. The amount of stimulus was left unchanged as the bank looked to assess the effect of the measures taken at the last meeting. Yesterday’s yen weakness on the back of this move appears to have been a reaction to fears that the Bank of Japan may well follow suit.

With the market still reeling over the enormous moves in CHF, a key indicator on the US service sector showed unexpected strength. The CHF fell at least 8.5% against all the majors, NZD was the second-worst performer; USD and CAD led the market. With one safe haven currency now on the sidelines, the market is now mulling JPY intervention. Latest Premium trades are now up, with latest USDJPY longs close to hitting today's target.

The SNB continue to throw strong words at the market after putting a floor of 1.20 under EUR/CHF, saying its looking for a substantial and sustained decline. There was a frenzy of trading in EUR/CHF slightly above 1.20. The pair edged as low as 1.2010 in late European trading but it has since drifted to 1.2075. Were not sure the floor will hold over the long term but were extremely confident that the SNB will defend the 1.20 area in the short term and see EUR/CHF longs as an easy trade at these levels.

Overall sentiment looked to be taking a dive on European worries and the FHFA lawsuits but an upbeat ISM non-manufacturing report improved the mood. The index rose to 53.3 compared to the 51.0 expected and 52.7 prior. The S&P 500 opened down 30 points at 1142 but shortly after the ISM data stocks began to pare losses and the index closed down 0.7% at 1165.

The euro was a major mover as it CLOSED BELOW 1.40 AND BELOW THE 200-DMA. The declines inflicted significant technical damage but the trendline from the 2009 low has so far halted the fall. Italy is debating its austerity budget and German courts will render a decision on Eurobonds on Wednesday. The results will spark a rebound or breakdown in EUR.

The intervention in CHF has sparked talk that a round of currency devaluations, or even that a currency war may be near. If so, its believed the next domino to fall will be Japan. The Ministry of Finance, not the Bank of Japan, dictate FX intervention so todays BOJ meeting is not the event risk that some claim. The move higher in USD/JPY on Tuesday is due to this misplaced speculation and is likely to be unwound unless the BOJ take some other major policy initiative (unlikely). We dont expect an immediate move on JPY. Even if they have been inspired to act, it will take time.

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Nothing has changed since yesterday's RBA decision so chances are the talk will not be market moving. One exception is talk about AUD valuation. The market will now be overly sensitive to hints at intervention. If anything, Stevens will exploit that sensitivity to talk down AUD.

Better than expected US services ISM has helped risk appetite stabilize as was alerted in our Tweets earlier in the morning based on the fact that services ISM has always fallen below 50 AFTER manufacturing entered contraction territory. Our rationale was that as long as services ISM avoided a sub-50 level, markets were likely to trigger a relief rally including a bounce in USDJPY. Our Latest Premium trades “Intermarket Insights” can accessed directly here: http://www.ashraflaidi.com/products/sub01/access/?a=488

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SNB rocks markets by fixing EURCHF at 1.20, EURCHF +10% in 80 minutes, RBA drops after rate hold, US services ISM is next. Ashraf’s Premium trades will be unveiled later at the opening US bell. EURUSD bounced off its 200 dma.

The Swiss National Bank rocks the markets by setting a minimum exchange rate at 1.20 against the Euro. EURCHF soars more than 10% in 80 minutes. SNB said it will enforce this level with utmost determination and it will buy foreign currency in unlimited quantities in order to achieve a substantial and sustained weakening of the CHF.

EURCHF reached a low today at 1.1019 and jumped almost 10% after the announcement to 1.2160. USDCHF gained from 0.7840 to 0.8572. The resulting rally in euro extended into EURUSD as the pair bounced off its 200 DMA of 1.40.

One factor possibly forcing the SNB decision is today’s Swiss August CPI showing -0.3% after -0.8% in July may have contributed to SNB’s decision. Italy’s budget announcement may also have pushed the SNB into acting ahead of another disappointing program.

The SNB said that strong Franc posed an acute risk to the economy and carries a risk of deflation. Should deflationary pressures continue, the SNB is ready to take other further steps to protect and support the economy.

The ECB said that the SNB had informed it about their intentions and that it made their decision under its own responsibility.

Japanese Yen that is sensitive to any chatter about the possibility of an intervention has weakened as well but only about 100 points.

Gold fell in reaction to SNB announcement to 1861 (silver to 41.70) but it has since recovered about half of its losses.

In other news, Eurozone GDP was not revised and stayed at 0.2% q/q. Yearly figure was revised down to 1.6% from 1.7%. German July manufacturing orders fell by -2.8% after they grew by 1.8% a month earlier. In the US, the US 10 year treasury yield fell below 2% for the first time in 60 years when it reached 1.975%.

The New York session will bring August ISM Non-Manufacturing composite index that is seen at 51.0, down from 52.7 a month earlier.

This morning's RBA rate decision left interest rates unchanged at 4.75%, and given the uncertain outlook for growth it remains unlikely that the bank will raise rates any time in the near future. While some economists are forecasting a rate cut by the end of the year, it appears that recent weak economic data is more likely to set the tone, and suggests that for now the bank remains fairly relaxed with rates at current levels due to concern about the global growth outlook, and recent turmoil in financial markets due to the debt situation in Europe.

Yesterday's not unexpected drop in services PMI data in the UK has prompted some fears with respect to further QE by the Bank of England this Thursday. This morning's disappointing BRC retail sales numbers won't have done anything to alter that perception, no matter how misguided the perception might be. The services PMI data did drop sharply, however given the events in August and the fall-out from the riots that shouldn't have been a surprise. In the wake of events in Europe and the high levels of inflation it is unlikely that the Bank will move this Thursday, despite some economists suggesting they might

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Labour Day holidays did not mean a quiet market on Monday as sovereign and financial worries sparked another round of risk aversion. CHF and USD were the best performers while the commodity currencies lagged. The market will shift its attention to Australia in the upcoming session as the RBA renders a rate decision.

EUR/USD gapped lower on banking worries after closing last week at 1.4202 and tracked as low as 1.4060. The huge US mortgage security fraud charges announced late Friday triggered a rout on European stocks with Germanys DAX falling 5%.

The worries were compounded by the resignation of the CEO of embattled bank Dexia. Rumours of a sovereign credit rating of Italy by Moodys also spread as leaders there failed to reach a consensus on how to reduce deficits. In Germany, Merkels party suffered a rout in regional elections, weakening the governing party. EUR/USD has fallen in five straight sessions after hitting a seven-week high last Monday.

Cable broke below the mid-August lows to the lowest since July 18. Commodity currencies all lagged with NZD falling below 0.8300 after trading above .8500 on Friday. Gold touched above $1900.

At 0130 GMT, Australian home loans data is expected to show a 1.6% increase in July after a flat reading the month before. The report will have minimal impact on markets ahead of the RBA decision and statement at 0430 GMT. With Mondays fall, AUD/USD looks vulnerable down toward 1.0465, especially if the pervasive worries that started the week continue to build. For more on the upcoming RBA decision see Patrick Urbans earlier preview.

USD extends robustness across the board amid heightened risk aversion. Labor Day holidays in the US and in Canada will mean narrow trading ranges and low liquidity with the risk of erratic moves. This week will bring interest rates announcements from several major central banks. Ashraf's Premium Insights return tomorrow. All 4 trades shorting EUR have hit their limits so did the gold longs.

AUD has been declining ahead of the upcoming RBA announcement that is due on Tuesday at 12:30 am ET. All 25 economists surveyed by Bloomberg News expect that Australia Cash will stay steady at 4.75%. This notion is supported by RBA governor Stevens who earlier mentioned that while there is some turbulence in the financial markets, monetary policy will not be changed. The implied probability of an interest rate cut surged after disappointing labor market data four weeks ago, but this probability decreased and currently stands at around 18%.

The Bank of Japan will announce rates on Tuesday night as well and their Overnight Call Rate is also seen unchanged at below 0.1%. Market participants have started to price in further easing by the BOJ and many expect that the BOJ will follow the FED in their actions.

Wednesday will bring the Bank of Canada rate statement and the Overnight Rate is also likely to stay unchanged at 1%. While lower rates are not expected, many analysts now predict that next rate hike will come at the end of 2012 or beginning of 2013.

Thursday should prove to be an exciting day for FX traders as both BOE and ECB will announce their rate decisions. The BOE will publish theirs at 7am ET and the rates should stay unchanged. The opposition to further QE seems to be still strong but in light of deteriorating fundamentals, new QE is becoming somewhat more possible. Watch for the Asset Purchase Facility that currently stands at GBP 200 bln. Last week Adam Posen a Monetary Policy Committee member was quoted by Reuters that G7 countries should provide more easing in order to support growth. It will be interesting to see whether he was able to convince other MPC members.

The ECB announces its rate decision at 7:45 am ET and even the European rate is anticipated to stay at 1.5%. However, keep in mind an article published by Bloomberg last week that quoted the CEO of PIMCO Mohamed El-Erian who believes the ECB may be forced to cut rates as the risk of a recession in the Eurozone has increased to 50% in his view. Even if rates are kept steady, watch for ECB press conference at 8:30 am ET for any dovish comments.

DETAILS ON ASHRAF's TORONTO APPEARANCE Sep 8-10

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