Greenback returns as safe haven destination

Euro remains stable, sterling pound extremely volatile throughout the week

United States

With several global risk events unfolding lately, the US Dollar is looking as the sweet spot in terms of safe havens destination. Add on this, a specter of deflation looming in Asia accompanied by a continuously weakening of the Chinese Yuan, and finally a continuing solid US data since the beginning of June, investors are running out of arguments to shun the US dollar.

Moreover, the fact that the probability of the Fed moving interest rates higher remains extremely low according to market expectations; whether 8% in July or 45% in December, investors have started to realize that if the spillover of the “Brexit” vote remain contained and a global catastrophic event is avoided, the Fed could start changing its tone and decide to increase interest rates prior to yearend.

If this scenario unfolds, the US Dollar is likely to continue moving higher even if the Fed has continuously and relentlessly tried to slow its ascend. The interest rates differentials with other reserves currency are likely to dictate the path of investors in search of yield or safety.

In summary, on the currency front, the Euro opened the week at 1.1034 and managed to remain stable throughout the week. The ECB meeting on Thursday was also a nonevent as Draghi advocate a wait and see approach. After reaching a low of 1.0956, the currency ended the week at 1.0977

The Sterling Pound remained extremely volatile throughout the week. After report on Wednesday stating that the Bank of England saw no evidence of a sharp slowing of activity after the “Brexit” vote, investors took the message of a light of optimism and took the Sterling Pound to as high as 1.3290. However, the dismal PMI report on Friday seems to have shaken up investors’ confidence and the currency followed through. The Pound ended the week at 1.3109

The situation in Japan also remains uncertain with the BoJ rejecting the idea of Helicopter money for now. The volatility continued with rumors that the Abe government has been pressuring the Ministry of Finance to satisfy expectations for a bold new shot of the first arrow of Abenomics fiscal spending. According to the report, the package could be as large as 30 trillion Yen. The Yen closed the week at 106.13

On the commodities side, oil prices were also under pressure this week with crude oil ending the week at 44.19. The inventories data published this week showed a surprise build in supplies of the gasoline inventories despite forecasts of American drivers hitting the road in record numbers this summer.

In a report released this week, the International Monetary Fund downgraded its global growth forecast for this year and next to 3.1% and 3.4% respectively from the April forecasts. The Fund highlighted that the new forecast assumes that UK and EU officials negotiate a deal that does not lead to a large increase in economic barriers. The report however put the blame on the UK for the downgrade.

Moreover, The Fund forecasted growth this year to drop to 1.7% from 1.9% in the previous forecast and to 1.3% in 2017, from 2.2% in the previous report.

One of the major leading indicators, the Leading Economic Index increased 0.3% to 123.7 in June. Economists expected the index to rise 0.2% in June, after falling 0.2% in May. The index has ten components including manufacturer’ new orders, stock prices, and average weekly initial claims for unemployment insurance. Improvements in initial claims for unemployment insurance, building permits, and financial indicators were the primary drivers of the increase.

According to the report, while the index continues to point to moderating economic growth in the U.S. through the end of 2016, the expansion still appears resilient enough to weather volatility in financial markets and a moderating outlook in labor markets.

US existing home sales rose again in June. This was their strongest pace in nearly a decade mainly pushed by low mortgage rates and an improving economy. The pace of existing home sales increased 1.1% last month from May to a rate of 5.57 million. This represents the highest level since February 2007. Sales for May were revised to 5.51 million from 5.53 million. Expectations were for June sales to decrease 0.9% to 5.49 million. The housing market has been boosted by a continuation of job growth, improving wages and historically low mortgage rates.

On a different front, the Federal Housing Finance Agency house (FHFA) price index rose in May slightly below market expectations at +0.2%. On a yearly basis, prices rose 5.6%. The improving job market and low mortgage rates are fueling competition for housing and driving up values. The inventory of previously owned homes fell 5.7% from a year earlier at the end of May. It seems housing inventory will likely remain tight, a fact that will keep boosting home prices and constraining affordability in the US for now.

US initial jobless claims continue to stay at low levels coming at 253k for last week down 1k from the week prior and taking the four-week average down to 258k.

On a different front, the Philly Fed manufacturing survey was slightly disappointing coming at -2.9 against expectations of +4.5. That represented a 7.6 points decline from June although there was a noticeable improvement in both new orders and shipments components. Details of the Philly Fed report were less concerning. Indeed, the index for new orders rose to 11.8 this month from negative 3 in the prior month. The shipments index increased to 6.3 in July from negative 2.1. And more manufacturers in the Philadelphia region expect business to be better six months from now with the index for future general activity rising 4 points to 33.7.

Europe & UK

During the ECB meeting this week, the governing council did not announce any changes to its monetary policy. Nonetheless, the ECB emphasized on its readiness, willingness and ability to act using all available instruments if need be.

Draghi also stressed that the ECB would assess the impact of recent events including “Brexit” on the outlook for the real economy, inflation outlook and the transmission of ECB’s monetary policy to the banking sector over the next few months. Furthermore, he left the door without pre committing on any additional stimulus.

Even though markets have removed the probability of any additional stimulus anytime soon, it remains that analysts still expect an extension of the timeframe of the QE programme and an expansion of the eligible assets for the programme.

On a different front, Draghi seemed concerned about Italian banks by suggesting that a state backstop was a “very useful” way of dealing with non-performing loans. He suggested that there was room to offer aid, hinting that a deal can be struck in regards to recapitalizing Italian banks.

Overall, the ECB meeting was a nonevent in terms of market actions, however it seems that the September’s one will be closely watched for additional measures.

This week, we saw the release of the European Commission’s flash consumer confidence report for July. According to the report, the Euro zone consumer morale decreased by 0.7 points to -7.9 in July from a revised -7.2 in June. Expectations were for -8.00 this month. The marked drop in July follows a slight fall in June and two consecutive rises in April and May. However, the estimates released by the Commission confirm the post-Brexit vote downward confidence trend that has taken place in the Euro zone.

The German ZEW institute released its economic sentiment index, showing a drop to -6.8 points in July from 19.2 in June. According to the report, economic sentiment in Germany has plunged to the lowest level since 2012 resulting from their concerns over “export prospects and the stability of the European banking and financial system” in the wake of the UK’s vote to leave the EU. This month’s data was the lowest level since November 2012.

The report also showed the current assessment of business conditions in Germany falling to 49.8, down from 54.5 in June and below expectations of a reading of 51.8. The assessment of the Eurozone economic sentiment also fell to -14.7, down from 20.2 in June. This month’s reading was the biggest monthly drop ever. It’s worth noting that the survey period was July 4th-18th and so post-Brexit

On a separate topic, the latest ECB Bank Lending Survey demonstrated a continued easing of lending conditions in Q2 2016, along with further loosening expected in Q3. The report mainly saw no negative shock seen from the “Brexit” vote on credit supply or demand. Also, the report saw unchanged corporate lending standards in Q3, with slight easing for households. Despite Banks’ margins narrowing in Q2 for housing loans, more banks have reported that the ECB TLTROs are making a positive contribution to their own profitability.

The UK’s unemployment rate dropped to 4.9% in the three months to May, a sign that labor market has continued to strengthen prior to the “Brexit” vote. Expectations were for unemployment to remain at 5.0%. According to the report, the average earnings including bonus rose by 2.3% on a yearly basis, its highest rise since October 2015 and following a rise of 2.0% in the previous month.

In a separate report, the Bank of England survey indicated that, despite an increase in business uncertainty after last month’s Brexit vote, there were no signs of a slowdown in economic activity in UK. It also revealed that expectations for investment spending lowered and demand for credit was easing.

The picture since the vote to leave the European Union has become bleak. In an article in newspapers, policy maker Kristin Forbes said that ‘given the substantial uncertainty and likelihood that growth slows, there is a valid case to ease monetary policy to support demand’. She did however go on to say that “until more hard data is available, I believe this is a good time to keep calm and carry on”.

According to the flash PMI report released this week, services and manufacturing sectors have both suffered a big hit this month, contracting at the fastest pace since 2009, as output and new orders have fallen across the sector. According to the report, many firms blamed uncertainty caused by June’s EU referendum. Moreover, the report suggests that the UK economy is shrinking, at a quarterly rate of 0.4%. “The downturn, whether manifesting itself in order book cancellations, a lack of new orders or the postponement or halting of projects, was most commonly attributed in one way or another to ‘Brexit’.

In details, UK PMI Composite Output Index came at 47.7 against 52.4 in June, representing an 87-month low. Services PMI Index came at 47.4 from 52.3 in June and Manufacturing PMI came at 49.1 against 52.1 in June.

Earlier in the week, Martin Weale, member of the Bank of England MPC, spoke in regards to the uncertainty stemming from Brexit and said that “this uncertainty points to the argument that we should wait for firmer evidence before making any policy change and least in the absence of any strong arguments for an immediate change”.

With this weak PMI report, the

Currencies

EUR GBP JPY CHF

Bank of England will have the arguments to act during the next meeting on August 4.

This week, the Reserve Bank of Australia released minutes of the July meeting when interest rates were unchanged at 1.75%. Minutes highlighted the central bank policy is not on a preset course and reiterated the data dependency of the central bank. The Board repeated its warning than an appreciating exchange rate could complicate the outlook for the economy.

Members also said that any future moves would be data-dependent, especially since inflation remains below the target range. The minutes said that “further information on inflationary pressures, the labor and housing market activity would be available over the following month and that the staff would provide an update of their forecasts ahead of the August meeting in order to make the appropriate changes if any.

Lastly, the RBA highlighted that all measures of inflation expectations were below average.

Attention this week turned again to Bank of Japan Governor Kuroda who rejected the idea of helicopter money. Given the current institutional setting, at this stage there is “no need and no possibility for helicopter money” Kuroda said in a radio interview. He said “at this moment, the Bank of Japan has three options with quantitative and qualitative easing with negative interest rates. These current policies can be expanded if needed and there are no significant limitations to further monetary stimulus.”

However, Friday morning, it was reported that Japanese Prime Minister Shinzo Abe’s government is currently putting pressure on the Ministry of Finance to satisfy expectations for a bold new shot of the first arrow of Abenomics fiscal spending. According to the report, the package could be as large as 30 trillion Yen. Bank of Japan meets on July 29.

The USDKWD opened at 0.30265 on Sunday morning.

Rates – July 24, 2016 Previous Week Levels

Open

1.1034 1.3192 104.88 0.9827

Low

1.0956 1.3065 104.88 0.9811

High

1.1084 1.3315 107.49 0.9907

Close

1.0977 1.3109 106.13 0.9871

Asia

Kuwait

This Week’s Expected Range

Minimum Maximum

1.0830 1.2970 104.60 0.9740

1.1130 1.3270 107.60 1.0040

3-Month

Forward

1.0997 1.3285 107.40 1.0010