Financial markets begin to “melt” after the last week’s stress-test results’ publication in Europe...
Financial markets begin to “melt” after the last week’s stress-test results’ publication in Europe, as well as the release of decent corporate reports in the US. Such inferences are based on the situation around the US Treasury market, where the yield for the 10-year treasury notes has hit record highs for the last two weeks and is now more than 3%. Naturally speaking, we have seen a stable decrease in demand for the risk-free assets recently, which ultimately means an overflow of investors’ funds into equities, corporate bonds and other assets. To our mind, on FOREX this means another slump for US dollar. The target at 1.3200 on EUR/USD is still in force.
Speaking of the weak macroeconomic data (it became known on Wednesday that DGO in June in the US has dropped by 1%, instead of rising by 0,9%, as was estimated by the analysts) the following idea is currently dominating overseas. On the one hand, the block of weak macro-data is compensated by the flow of strong corporate reports from overseas (83% of all reported companies from S&P500 have beaten expectations). However, on the other hand, the slowdown of economic growth in the US is being interpreted not as a step towards economic recession, but more like as a signal that the FRS will maintain the liquidity on the current high level for a very long time.
Another good indicator is the dynamics of futures on federal funds rate. At the beginning of the month the probability of increased rate in the US by 0,25% by April 2011 was around 55%; now it’s only 44%. Another interesting indicator – is the current sentiment at the money markets, where the 3-months’ LIBOR rate slumped to 0.4812% by the end of July, the minimum since the middle of May. This can already be interpreted as the interest rates’ differential between Eurozone and the USA being increased, which is negative for the greenback. We should also pay attention to the situation with CDS, on the debt of American (CDX North American Investment Grade Index) corporate sector and the European (Markit iTraxx Europe Index) one. If in the midst of crisis we had the Index of European CDS being 23 basis points above American, which spoke for the high probability of default sequence in Europe, then now such premium has almost dissolved. To compare, European Markit iTraxx Europe Index is currently at 103.625, the American is quoted at 102.92. It appears to be that the debt crisis in Europe has withdrawn, if not ended.
There is also an idea that the major part of currency market’s participants who sells US dollars, as well as some certain group of investors who are currently buying stocks, devoutly believe in the further expansion of quantitative easing policy in the US or the launch of the new stimulus packages. That’s why they go long on EUR/USD with the target at 1.32 and S&P500 at 1130. In this regard particularly significant is the Fed meeting on August 10th, although, we look forward to the publication of the July US Nonfarm payrolls, which will be published on August 6th. We want to add that, having this idea in mind, it is advised to play out on the high-yielding currencies, by buying AUD/USD or NZD/USD.
GBP
Speaking of GBP/USD, after passing the resistance at 1.55 there are risks to see a follow-up increase in the rate as well as resistance test at 1.58. The only obstacle here is the news background coming from the UK. Aggressive impulse of buyers in GBP \ USD on July 28 could weaken the statements made by representatives of NIESR (National Institute of Economic and Social Research), from which it follows that you cannot fully trust seemingly excellent UK GDP data, which is advised to consider as "blip".
If we talk about real GDP growth rates of Great Britain, then NIESR is estimating a figure of 0,1% figure in 3q10 and 0,3% in the 4th quarter. The estimates for the whole current year has been increased from 1% to 1,3%, whereas the estimates for 2011 were lowered from 2% to 1,7%.
Despite that, sterling could have been negatively affected by the comments of the Bank of England Chairman, Mervyn King, who thinks that it will take some time before the CB will return the interest rates to normal levels. Namely, it is a reminder to all that the Bank of England is currently focused exclusively on the downside risks in the UK economy, and will not change anything in the next two meetings.
Konstantin Bochkarev, currency strategist
of company Admiral Markets.
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