Bottom drops out of GBP after dovish BoE report. Consolidation of USD strength so far very modest as USDJPY bounces from big support.
Carry trades finally bounce a bit on oil price surge and rise in bond yields. Oil and geopolitics should be back on the radar with renewed US-Russia confrontation over ജോര്ജ്ജിയ
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Market Comments The market is reacting very little to the surprisingly hot confrontation between Russia and the US over Russia's behavior in Georgia as the US is launching an airlift to supply humanitarian goods. While oil rose sharply, government bond yields were barely changed on the day and carry trades bounced strongly into the close. It seems that the market has completely forgotten about the concept of geopolitical risk, wrapped up as it is in the latest news of financial writeoffs this and resilient consumer that. The market should be paying more attention: this is serious stuff and may represent a paradigm shift in international politics. Some articles claim that Russia may actually be attempting to bomb the key pipeline running through Georgia from Azerbaijan and yesterday Ukraine (some say Russia's next target) restricted access to its Sevastopol port to the Black Sea Fleet. Stay tuned.... The BoE Quarterly Inflation report was largely as expected on the growth side, as King and company noted the economic weakness and considerably lowered their estimates of economic growth going forward - some said that the bank was surprisingly negative on growth, but this negativity was a must considering the stark data trends of the last quarter. The more important language was on the inflation side, where the market perhaps expected the BoE to continue to express the idea that it is handcuffed on easing rates by the continued high inflation levels. Instead, while King specifically projected that the CPI could climb as high as 5% in the coming months, he also said that inflation would likely head back lower to below the bank's target within two years time. This willingness to try to see through current high inflation levels was the "gotcha" that put the GBP to the mat and saw the market moving sharply forward its projections of potential for BoE easing. Several banks announced that they saw a rate cut coming at the November meeting after previously saying that rates would be lowered further out. Our question is: why not cut rates at the next meeting in early September or at least October? After all, credit markets have already served to perform a de facto tightening on the ailing British economy and rate cuts only begin to take effect with a six-month+ lag, so it's time for the BoE to get moving. A move sooner rather than later would certainly be justified if oil remains below 125 dollars and the data continues to show an economy in dire straits. The US Retail Sales were perhaps a bit stronger than expected considering the fading effect of the tax rebate checks and we have yet to see the US consumer fully capitulating outside of automobile purchases. Some of the strength in the numbers is likely due to underestimation of inflation, but the data is still impressively resilient considering the general picture of credit tightness and the huge energy spike. Less impressive are the weekly jobless claims, which seem to be reaching a crescendo of late similar to the one at the end of 2001 and are a reminder that the coming 3 or 4 months of job reports are likely to see the US unemployment rate spiking over 6.0% for the first time since 2003. We expect the unemployment peak in this cycle to far outreach the 6.3% high reached last time around in 2003. Watch out, therefore, for the jobless claims number this afternoon as this is becoming a more important number of late as it was for a time in the previous cycle. But the story right now is that the rest of the world is finally moving into line with the easing path established long ago by the Fed now that "inflation has been defeated" and forward interest rate projections see collapsing interest rate differentials between the rest of the world and the US, particularly in the higher yielders. While we could see some short term and sharp consolidation at any time in the USD's strength, it seems that this theme of the US being at the head of the cycle of weakness and therefore also potentially the first to recover could continue to burn for a while, barring the potential for geopolitics to suddenly intrude on the scene (non-negligible odds there...) and/or an oil price spike. The German GDP number for Q2 was out a bit stronger than expected, though still negative and the EuroZone CPI and GDP numbers are out later this morning and could serve as a short-term sentiment test on the current levels for EURUSD. The US CPI is also out later today. It seems that the market would rather look at oil as their current inflation gauge rather than these official releases, however. | ||||||||||||||||||||||
FX USDJPY to test resistance... | ||||||||||||||||||||||
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