Tuesday, July 19, 2011

The Murdochs and The BoC - 19 July 2011

FX majors have recovered well having closed in London yesterday pretty much at their lows. The recovery was in line with the recovery in US equities; down 1.5% at one stage, US stocks managed to close down ~0.8%. Reports of a potential modest and temporary tax on European banks as a compromise solution and IBM reporting after the close with profits beating expectations helped to underpin sentiment modestly (S&P futures up 0.25%). Nonetheless, FX majors remain within tight ranges and the bigger picture is still one of broader risk reduction amid ongoing European and US debt concerns- the VIX is back above 20%, precious metals are forging higher (Gold above $1600/oz) and CHF is hitting successive record highs.

Day ahead: The main highlight will be the BoC rate decision. Before then, the German ZEW is expected to moderate from 87.6 and -9.0 to 85 and -12.5 for the current and economic sub indices. In the US, housing starts (cons: 575,000) and building permits (cons: 595,000) are out. Here in the UK, THE event of the day will be the televised testimony by THE Murdochs and assorted characters before Parliament to answer ‘questions’ pertaining to the News of the World’s telephone hacking from 1500CET.

JPY: Despite early talk in Asia of downside risk to Cross/JPY, verbal intervention from various Japanese officials kept a lid on the JPY. BoJ’s Yamaguchi highlighted the need to ‘remain vigilant’ on the negative impact of the strong JPY and will take appropriate measures versus the strong Yen if needed. USD/JPY nudged up from under 79.00 toward 79.15.

AUD: The RBA Minutes were balanced with dovish overtones as the RBA highlighted the increasing downside risk to global growth from the European crisis. Members noted the flow of recent information suggested there was more time to assess the likely strength of inflationary pressures in Australia and that it would be prudent to use that time. CPI is the next key piece of data and is due July 27th. Perhaps more important will be the RBA’s quarterly Statement on Monetary Policy on August 5th. Lastly, Governor Stevens is due to deliver a key speech on July 26th.

CAD: The release of the June leading indicators (cons; 0.8% m/m, previous: 1.0% m/m) will be ignored given the BoC’s rate decision 30 minutes later. The BoC is universally expected to leave rates at 1.0%. A modest trimming of the growth outlook for 2011, seems possible, and an upward revision to the inflation forecast is warranted given the overshoot so far in Q2. More important, however, will be the Bank’s estimate for when the output gap will be closed (last pegged in mid-2012), as well as inflation expectations. In the Business Outlook Survey, 80% of respondents expected inflation above the 2.0% target for the next 2 years. While domestic considerations would typically warrant a more forceful statement, the BoC will likely maintain its (eventual) bias to hike and spare details in the face of the fluid policy environment in the US and Europe.

Published: 19 July, 2011
written by: Bill Hubard , Chief Economist at Markets.com