By DailyFX – Todays rebound in the financial markets has everyone hoping that we have hit a bottom. Stocks,… … carry trades and bond yields are all up
sharply, but given the strong selling that we saw last week, a recovery
is hardly surprising. There was no US economic data released today but
stronger earnings from Tyson Foods and Verizon helped to draw back some
optimism. Even the VIX index, the measure of volatility in the stock
market has retraced, but this does not mean that risk appetite has
returned. The new record high in the Shanghai stock index suggests that
even though global investors are nervous, they are not nervous enough to
dump their Asian exposure. Although it may be tempting to hope that
August should bring us a calmer market, it is not time to become
complacent. Another major announcement of losses could easily send the
Dow and high yielding currency pairs tumbling once again. The market
has shrugged off news that American Home Mortgage, which commands 2.5
percent of the mortgage market has to delay its quarterly dividend
because of major write-downs. AHM specializes in prime and near prime
loans, which means that bad loans are extending beyond subprime lenders.
Tomorrow we will get a better look at how consumers are bearing the
pain. Personal income and personal spending are due for release along
with the PCE deflator, Chicago PMI and consumer confidence. A sharp
drop in confidence as well as a widening gap between spending and income
will resurrect talk of an end of the year interest rate cut. Fedwatcher
John Berry claims that it will take more than a few days of market
volatility to change the Feds stance, but there is a great deal of
economic data this week could affect the Feds bias. This includes
manufacturing ISM, service sector ISM and non-farm payrolls.

Euro Rebounds on Dollar Weakness, Shrugging Off Softer Economic Data

The Euro rebounded today despite weaker economic data. Both French
producer prices and retail PMI for July deteriorated, providing further
evidence that the strength of the Euro is finally weighing on the
economy. That does not seem to matter however as speculators talk about
the possibility of a surprise press conference by the ECB this week.
They are expected to leave interest rates unchanged, but if the market
is pricing in a good chance of a September rate hike. If the ECB plans
on delivering one then, they will have to find an opportunity to
reintroduce the words strong vigilance. Now that the EUR/USD is
close to 200 pips off its highs, the economy may be able to handle
another rate hike. However we still think that a surprise press
conference is unlikely given the recent comments by ECB officials. Last
week, ECB member Stark said the strong euro was hurting exporters while
Quaden indicated that the central bank was against abrupt and excessive
currency moves. Looking ahead we are expecting German retail sales,
unemployment and Eurozone confidence. Switzerland on the other hand
will be reporting their UBS consumption index which is barometer of
consumer spending.

British Pound Unchanged Despite Stronger Mortgage Data

The British pound is unchanged for the day despite stronger housing
market and mortgage approvals data. The lack of reaction in the
currency may be due to the fact that the rise in approvals was related
to the planned introduction of home information packs on August 1.
These HIPS contain legal documentation with title information and an
Energy Performance Certificate detailing how energy efficient the home
is. Sellers are now obligated to supply this information to buyers
rather than buyers obtaining the information themselves. The cost to
the seller is nominal, but the effort is substantial. Overall, the
housing market is still performing well despite a recent decline in
prices. We will get more insight on how that has affected consumer
confidence tomorrow with the release of the GfK survey. The CBI
industrial trends survey is also due for release

Yen Weakens after Japans LDP Loses Majority

The Japanese Yen was dealt a double blow with a LDP defeat and a
rebound in equities. Prime Minister Abe is fighting to save his job
after the LDP party lost its upper house majority. This means that any
policies and reforms that Abe wants to pass in the future will probably
be met with stiff resistance. The impact on the currency should be only
short term however as long as Abe is not forced to resign. The longer
term driver of carry trades will be the global growth outlook and with
liquidity conditions. Unfortunately August is never a good month for
liquidity because of summer holidays. It is earnings season in the US
right now, so keep watching the corporate calendar for more good or bad
news. After tonights Japanese economic releases, there is nothing
of consequence for the remainder of the week. We are expecting Japanese
overall household spending, labor cash earnings, PMI, personal income
and the jobless rate. Usually spending and earnings is the most
important because they represent the weakest part of the Japanese
economy. Retail trade last week was particularly weak. The lack of
recovery in both is one of the primary reasons why the Bank of Japan has
not been able to raise interest rates.

Mixed Data Leads to Mixed Performance in Commodity Currencies

High yielding currencies like the Australian and New Zealand dollars
licked their wounds today. Economic data released overnight was mixed
with home sales in Australia decreasing but business confidence
increasing. New Zealand saw a drop in money supply growth but an
increase in building permits. Even Canada was faced with mixed reports;
industrial product prices fell last month while raw material prices
increased. Even though more data is due for release from Australia and
New Zealand tonight we do not expect much more clarity until Wednesday
when we get the Australian trade balance and retail sales figures.
Canada has GDP due for release tomorrow. Strong retail sales and trade
balance figures suggests that growth in May could have been strong.

DailyFX Research Team
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: research@dailyfx.com

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