Choppy waters

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Since EUR/USD’s 1.3172 peak at the beginning of last week, the pair has fallen in six of the past eight sessions and the single currency has proved to be the weakest of the major currencies vs. the dollar so far this week. There are a number of factors behind this move, but one of them relates to the perception surrounding Spain and the way ahead.

The glow from the ECB announcements earlier this month has waned, to be replaced by a vacuum in which Spain has to ask formally for assistance before the ECB can come and do “whatever it takes”. This, together with regional unrest in Spain, forced bond yields higher yesterday, moving towards 6.00% on the 10Y. Another emergency budget will be announced today, the second undertaken by Prime Minister Rajoy since he took office. For FX, this could be a choppy end to the week, given the US data released later today and month/quarter-end positioning tomorrow.

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Commentary

Is the UK recovering? This could be the debate if today’s GDP numbers are revised higher. From one standpoint, an upward revision from -0.5% to -0.4% on the quarter should be neither here nor there. But the weakness in the second quarter was, in part, down to the extra bank holiday that was seen during this time, which the Bank of England estimated could have taken up to 0.5% from GDP growth. So this could mean that, was it not for the Queen being on the throne for 60 years, the economy would have grown modestly in the second quarter. It’s something that may excite the media and analysts more than the currency, but still worth keeping an eye on nonetheless. Sterling has continued to do well against a more tired-looking single currency of late, allowing EUR/GBP to push below the 100d moving average at 0.7964 yesterday.

Month-end volatility. There is an increased risk that markets will become more volatile in the coming two days. Today will be more related to data and the spread of US releases. Tomorrow relates to the fact that it is month and quarter-end, which also falls on a Friday, together combining to increase the risks of greater volatility as positions are liquidated and altered and money managers adjust their benchmarks.  Today’s data consists of the final reading of second-quarter GDP, together with durable goods orders for August. The usual Thursday initial claims data are also released, together with pending home sales at 14:00 GMT.  GDP revisions and durable goods data are more pure-event risks. The housing and jobs data are more relevant for recovery hopes, especially with some more solid signs of stabilisation in housing data of late.

Tokyo’s Turmoil.  Tokyo seems to be in another pickle over how to respond to the recent firmness in its currency. Jun Azumi, now the ex-finance minister (he is leaving the post to become the Acting Secretary General of the DPJ), recently issued the most vociferous threat yet, stating that he would not be intimidated by the actions of speculators. The yen has strengthened despite the surprise actions of the BoJ last week when it announced a JPY 10trln increase in the asset-purchase fund, recent signs that the economy probably contracted during the current quarter and significant disruptions to trade with China. Meanwhile, USD/JPY drifted progressively down to near the 77.60 level yesterday, close to the 7mth low of 77.13 achieved two weeks ago. Those who have been prepared to play USD/JPY from the short side are likely calculating that the MoF will not instruct the BoJ to act until at least the 77 level is broken. At the end of October last year, the MoF finally relented when USD/JPY fell below 76. With safe-haven flows again in evidence, we are likely to see 76.50 on USD/JPY before too long

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