The bears were back in control of North American equity markets yesterday, as a lack of catalysts allowed momentum from the previous two sessions to carry stocks lower for a third day in a row. Continued taper chatter from Cleveland Fed President Pianalto didn’t help risk appetite, and a large spike in the VIX to almost 14 (before settling back to just under 13 at the close) revealed equity hedgers were prevalent throughout the session. The big dollar remained weak, bucking the usual “taper-on” trade, however one must take into account the large carry unwind seen in the USDJPY over the last four sessions, and is one of the reasons the DXY has been under pressure.
The yen finished the North American session on much stronger ground, as the USDJPY pair closed below the 61.8% Fibonacci retracement level from the mid-June to early July rally. The Bank of Japan released their monetary policy statement overnight, and as expected did not make any changes to its current policy, leaving the targeted yearly increase for its monetary base at ¥60-70trn. The economic assessment was left as is, stating a modest recovery is on the horizon, and inflation expectations are on the rise. Kuroda’s press conference didn’t offer anything to really shock markets, although he did say it was too early to discuss an exit strategy for monetary policy, and that it would be vital for the Government of Japan to proceed with fiscal consolidation in an effort to tackle its deficit. Even though Kuroda seems to be campaigning for the government to proceed with the planned sales tax hike, he stated that this was already built into the BoJ’s forecasts, and that it would still be possible for Japan to achieve better than expected growth even after the tax hike. USDJPY was slightly higher after the press conference, however has since consolidated those gains and is essentially unchanged in the low 96s.
Turning our attention on the antipodes, the Aussie initially weakened against the USD on a worse than expected employment report, one that showed the region shed just over 10k jobs during the month of June. Economists had been expecting the Australian economy to add 5k new jobs, and the miss increases concerns more interest rates cuts could be on the horizon. Although the jobless rate remained at 5.7% on forecasts of a rise to 5.8%, almost 7k full-time jobs were lost, while the participation rate sank to 65.1%; numbers that do not instill confidence in the quality of the unemployment rate. AUDUSD sank below the 0.9000 handle after the release; however, this was before the Chinese trade data hit the wires.
Piling on with the macro headlines, solid Chinese trade numbers saw offers lifted for high-yielding currencies, especially those in the commodity bloc like the CAD and AUD. The Aussie jumped half a cent against the USD after trade data showed Chinese exports increased by 5.1% y/o/y, besting estimates of only a 3.0% increase. Imports also had a solid gain in July, advancing 10.9% over the preceding 12 months to leave a trade surplus of only $17.8bn, much narrower than the $26.9bn that had been forecast. We will continue to get July economic data from China this evening when they release CPI, new loan numbers, and industrial production; however, the positive trade data bodes well for what looks to be stabilization in the world’s second largest economy. The Shanghai Composite ended slightly lower on its session, while the Aussie has gathered momentum and is currently making a play to retake the 0.9100 level against the USD.
After a busy Asian session, the economic docket is essentially devoid of tier-one data other than weekly unemployment claims in the US. European bourses are well in the green as we head into the North American cross, with the FTSE, Dax, and Stoxx up by 0.38%, 0.84%, and 0.75% respectively. The EUR is again on an upward trajectory, continuing with its strengthening pattern from mid-July and shaking off the worse than expected unemployment numbers in Greece to push itself into the mid-1.33s against the USD. The Greek jobless rate rose to 27.6% in May from the 27.0% that was registered in April, and more than twice the Eurozone average that was seen in June. Another troubling statistic for the region, the next generation continues to struggle in their quest to find suitable employment, as the youth unemployment rate rose again, now standing at 64.9%.
Heading into the North American open, the rosy Chinese trade data overnight has helped boost investor confidence, and equity futures are telegraphing we could see a green open. Despite the optimism carrying over to equities and high-yielding currencies, hydrocarbons are displaying a little weight, as front-month WTI slides south of $104/barrel. Gold is clinging to just below the $1,300/ounce level, finding some modest bids to help the yellow metal recover a portion of its losses from yesterday. The amount of workers applying for unemployment benefits last week in the US came in essentially on target according to what economists had expected, but confirms the labour market is making progress as the rolling 4-week average fell to its lowest level since November 2007.
The Loonie is slightly stronger against the USD this morning, boosted by positive Chinese trade data and firm equity future performance. USDCAD strength was met with profit-taking selling pressure at key resistance levels in the 1.0430 region, which has capped Loonie weakness for the time being. Tomorrow we will get unemployment numbers for the Canadian economy, and after what was essentially a flat print in June, the July figures are forecast to show the economy was able to muster a gain of 6.2k. One of the bright spots of yesterday’s disappointing Ivey PMI reading was that the seasonally adjusted employment index moved back into expansionary territory with a print of 50.4, but we’ll have to see if information from the purchasing managers is representative of the entire economy. A better than expected print could help generate some bids for the Loonie, with initial support for USDCAD coming in around 1.0340, which if broken, would open up the 1.0300 level as the next target for Loonie bulls.
Further reading:
Jobless Claims: 333K, within expectations, not enough to help the USD
EUR/USD Aug. 8 – at two month highs on dollar weakness, strong German data
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