Dol­lar lower; euro higher de­spite ECB


Kuwait Times - - BUSINESS -

KUWAIT: The US dol­lar con­tin­ued to trade in a sub­dued man­ner against most of its ma­jor coun­ter­parts last week on the back of height­ened un­cer­tainty sur­round­ing the fu­ture of the Fed’s rate path. Ad­di­tion­ally, con­cerns over Trump’s abil­ity to push his agenda in the White House helped push the green­back lower. The lack of con­fi­dence in the mar­ket is clearly re­flected in US 10-year trea­sury yields which traded at 3-week lows. Mean­while, eq­ui­ties main­tained re­cent gains on the back of a gen­er­ally pos­i­tive earn­ings sea­son and prospects of a less ag­gres­sive Fed in­ter­est rate pol­icy.

The mar­ket con­tin­ued to be dic­tated by cen­tral banks and their agen­das with re­gards to the with­drawal of their huge quan­ti­ta­tive eas­ing pro­grams. Last week, the Eu­ro­pean Cen­tral Bank meet­ing and press con­fer­ence took cen­ter stage as in­vestors were ea­gerly await­ing any hint on when the ECB would start ta­per­ing. How­ever, the Eu­ro­pean Cen­tral bank left its ul­tra-loose mon­e­tary pol­icy un­changed and did not even dis­cuss re­duc­ing back stim­u­lus, which sug­gested it may de­lay an in­evitable de­ci­sion on ta­per­ing as­set pur­chases un­til the lat­est pos­si­ble mo­ment.

The BOJ had a sim­i­lar story as it kept its mon­e­tary pol­icy un­changed and has ex­tended the time­frame for reaching its 2% in­fla­tion tar­get to fis­cal year 2019. Re­gard­less of whether the BOJ ac­knowl­edges that in­fla­tion won’t reach its tar­get as ex­pected, Gover­nor Haruhiko Kuroda won’t get any­where near a pol­icy exit be­fore his five-year term ex­pires in April, Hideo Hayakawa, said in an in­ter­view with Bloomberg last week.

On the for­eign ex­change front, the US dol­lar de­clined by 1.42 per­cent last week. The dol­lar in­dex opened the week at 95.088 and reaching as high as 95.348 but the dol­lar lost all mo­men­tum and slipped to 11month low of 94.180. The mar­ket has started to lose faith in “Trumpfla­tion” as the pos­si­bil­ity to pass the Repub­li­can health care re­form bill ap­pears even dim­mer. Three Repub­li­can Se­na­tors voiced op­po­si­tion to the pro­posed bill and it does ap­pear that the bill won’t have enough votes to pass, cast­ing fur­ther doubts on Trump’s in­flu­ence on the White House poli­cies.

Even af­ter a dovish Draghi in the ECB press con­fer­ence, the Euro was the big­gest win­ner last week gain­ing 2.13 per­cent on the back of solid eco­nomic fig­ures and weak­ness in the dol­lar. The cur­rency opened the week at 1.1462 and rose as high as 1.1677 on Fri­day. The euro closed the week at 1.1658.

The pound ster­ling had a dif­fer­ent story than the euro as mixed re­tail and in­fla­tion data hit the mar­ket. Fur­ther­more, the softer in­fla­tion fig­ure had de­pressed ex­pec­ta­tions of an in­ter­est rate hike in the short-term. The ca­ble opened the week at 1.3099 and reached a high of 1.3125 but quickly lost all gains and fell to a low of 1.2970. The cur­rency closed the week at 1.2992.

The safe haven yen traded in a rel­a­tively nar­row range open­ing the week at 112.49 and reached a low of 111.46 de­spite mixed eco­nomic data and a cau­tious BOJ state­ment. The yen con­tin­ues to gain against the green­back as dif­fer­en­tials con­tinue to drop on the back of lower US yields. The cur­rency closed the week at 111.10.

In the com­modi­ties com­plex, oil prices had a volatile move­ment in­creas­ing by up to 3.89 per­cent as Brent Crude reached a six week high of $50.19. US crude oil in­ven­tory de­creased by 4.7 mil­lion as the re­finer­ies pro­duced 125,000 bar­rels per day less than the pre­vi­ous week’s av­er­age. How­ever, Brent closed the week at $48.06 due to fore­casts of a rise in OPEC pro­duc­tion for July de­spite the group’s pledge to curb out­put.

The hous­ing mar­ket reg­is­tered the fastest an­nu­al­ized pace in four months ac­cord­ing to the Com­merce Depart­ment data re­leased last Wed­nes­day. Hous­ing starts in­creased by 8.3 per­cent to 1.22 mil­lion an­nu­al­ized rate up from 1.12 mil­lion reached in May. While build­ing per­mits, a proxy for fu­ture con­struc­tion, climbed 7.4 per­cent to a 1.25 mil­lion an­nu­al­ized rate up from May’s fig­ure of 1.17 mil­lion. De­spite three in­ter­est rate hikes since De­cem­ber 2016 and in­creased in­fla­tion, the hous­ing mar­ket keeps on ex­pand­ing at a con­sid­er­ably fast pace, which may po­ten­tially deem alarm­ing in the near fu­ture.

The Philly Fed Man­u­fac­tur­ing in­dex de­creased from a read­ing of 27.6 in June to 19.5 this month. The in­dex has been pos­i­tive for 12 con­sec­u­tive months, but July’s read­ing is the low­est since Novem­ber. Thirty-seven per­cent of the firms in­di­cated in­creases in ac­tiv­ity in July, down from 42 per­cent last month. The ship­ments in­dex de­creased 16 points, while the new or­ders in­dex fell 24 points. Nearly 31 per­cent of the re­spon­dents re­ported a rise in new or­ders this month, down from 45 per­cent in June. Both the delivery times and un­filled or­ders in­dexes were pos­i­tive for the ninth con­sec­u­tive month, sug­gest­ing longer delivery times and in­creases in un­filled or­ders.

The Eu­ro­pean Cen­tral Bank left its bench­mark re­fi­nanc­ing rate un­changed at 0.00 per­cent, as ex­pected, on Thurs­day. Pres­i­dent Mario Draghi also said the ECB would con­tinue its monthly as­set pur­chases at the cur­rent rate, 60 mil­lion eu­ros a month, un­til De­cem­ber 2017 or be­yond, if nec­es­sary. Fol­low­ing are high­lights of ECB Pres­i­dent Mario Draghi’s com­ments at a post-pol­icy meet­ing press con­fer­ence. On po­ten­tial changes to the QE pro­gram he said “We need to be per­sis­tent and pa­tient be­cause we aren’t there yet.”

Draghi also added that “We also were unan­i­mous in com­mu­ni­cat­ing no change to the for­ward guid­ance and also we were unan­i­mous in set­ting no pre­cise date for when to dis­cuss changes in the fu­ture - in other words, we sim­ply said that our dis­cus­sions should take place in the au­tumn.” The ECB’s pres­i­dent em­pha­sized that we need to think and gather lots of in­for­ma­tion as there is lots of un­cer­tainty around. He also stressed that the Gov­ern­ing Coun­cil doesn’t want to be forced to take de­ci­sions in an ab­sence of full in­for­ma­tion

Eu­ro­zone an­nual CPI holds firm

Euro area fi­nal an­nual in­fla­tion fig­ure came at 1.3 per­cent for June, match­ing the mar­ket’s ex­pec­ta­tions yet lower than the re­vised 1.4 per­cent May fig­ure. It is worth men­tion­ing that in June last year in­fla­tion was at 0.1 per­cent, but with the ECB’s loose mon­e­tary pol­icy and as­set pur­chase pro­gram helped lift the in­fla­tion to a de­cent 1.3 per­cent a year later.

How­ever core CPI ex­clud­ing en­ergy, food, al­co­hol and to­bacco strength­ened to 1.1 per­cent y/y com­pared with 0.9 per­cent in May. Of fur­ther com­fort to the cen­tral banker would be the core in­fla­tion ex­clud­ing en­ergy & pro­cessed food but in­clud­ing to­bacco & al­co­hol ,ECB’s pre­ferred mea­sure of core in­fla­tion, came in 1.2 per­cent y/y high­est in over two and half years.

UK re­tail sales

UK’s in­fla­tion un­ex­pect­edly slowed down year to year in June. The 2.6 per­cent was lower than ex­pec­ta­tions by 0.3 per­cent and thus re­mov­ing some pres­sure from the BOE as price growth was get­ting out of hand. This fig­ure marks the first drop in an­nual CPI rate since Oc­to­ber of last year. Economists had fore­casted that the data would hold at the four-year high of 2.95 reached last month. The data un­der­mines ar­gu­ments for the im­me­di­ate in­ter­est-rate hike that a mi­nor­ity of pol­icy mak­ers sup­ported at the last BOE de­ci­sion as in­fla­tion looked set to veer fur­ther above the 2 per­cent tar­get. There are also signs eco­nomic growth is cool­ing as con­sumers, the en­gine of growth for the past year, start to rein in spend­ing.

In ad­di­tion, the quan­tity of goods sold in stores and on­line rose by 0.6 per­cent, more than economists fore­cast, fol­low­ing a 1.1 per­cent de­cline in May, fig­ures from the Of­fice for Na­tional Statis­tics showed Thurs­day. Sales rose in al­most ev­ery cat­e­gory last month. Spend­ing on clothes helped lift sales at depart­ment stores by 2.7 per­cent and house­hold goods rose 3.3 per­cent. Food sales fell 0.5 per­cent, partly due to weaker al­co­hol de­mand.

In its July meet­ing min­utes, the RBA again stated that de­vel­op­ments in the la­bor mar­ket war­rant care­ful mon­i­tor­ing. In the de­tail of the min­utes the bet­ter growth data (the flow of jobs) is con­trasted with high lev­els of un­der­em­ploy­ment (to stock of spare ca­pac­ity). It is no­table that the RBA char­ac­ter­ized the la­bor mar­ket im­prove­ment as re­mov­ing “some of the downside risk in the Bank’s fore­cast of wage growth”.

China’s GDP ex­pands

China’s econ­omy ex­panded faster than ex­pected in the sec­ond quar­ter of 2017, as tra­di­tional growth sec­tors con­tin­ued to un­der­pin the econ­omy. The Na­tional Bureau of Statis­tics said gross do­mes­tic prod­uct (GDP) ex­panded at an an­nu­al­ized 6.9 per­cent in the sec­ond quar­ter, un­changed from the pre­vi­ous quar­ter and well within the gov­ern­ment’s tar­get range of 6.5 per­cent to 7 per­cent.

Over the past four quar­ters, the Chi­nese econ­omy has re­lied on gov­ern­ment spend­ing and ac­cess to cheap credit to fuel a faster than ex­pected ex­pan­sion. At the same time, ef­forts to curb a red hot hous­ing mar­ket have largely come up short amid a resur­gence of de­mand. Buy­ers an­tic­i­pat­ing fur­ther re­stric­tions on hous­ing have flooded the mar­ket af­ter author­i­ties in­tro­duced curbs back in March. Fur­ther­more, In­dus­trial pro­duc­tion, the broad­est mea­sure of fac­tory out­put, ex­panded 7.6 per­cent in the 12 months through June. That was well above the pre­vi­ous month’s 6.5 per­cent growth pace sig­nal­ing a health­ier and more solid econ­omy.

BOJ pol­icy un­changed

Bank of Ja­pan’s meet­ing last week was un­event­ful as ex­pected by mar­ket par­tic­i­pants. The cen­tral bank kept the in­ter­est rate un­changed at -0.10 per­cent and 80 tril­lion yen QE pro­gram in place as well as the 10-year JGB yield tar­get at about 0.00 per­cent. In ad­di­tion, the BOJ ad­mit­ted de­feat of de­fla­tion and de­layed the tim­ing of reaching their 2 per­cent in­fla­tion tar­get to fis­cal year 2019.

Fi­nally, Bloomberg In­tel­li­gence econ­o­mist Yuki Ma­su­jima warned that a big risk ahead for BOJ af­ter two board mem­bers leave this week is tun­nel vi­sion. Takahide Ki­uchi and Take­hiro Sato rou­tinely chal­lenged the pol­icy board’s con­sen­sus, and their suc­ces­sors are less likely to op­pose Kuroda.

Kuwait Kuwaiti di­nar at 0.30215

The USDKWD opened at 0.30215 yes­ter­day morn­ing.

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