The Big Picture

Risk premium falls, dragging USD down The story on Friday was all about risk, or rather disappearing risk. The US bombing in Iraq was seen as increasing the chances for the Kurds to regain the upper hand, while headlines saying that Russia is ready to mediate between Ukraine and the separatist rebels, plus reports that Russian warplanes had ended drills, brought hope that the turmoil there could be winding down as well. As a result, the safe-haven yen, gold and Brent oil prices fell, while stocks rose. The dollar generally weakened, which perhaps reflects its safe-haven aspects in the face of global turmoil.

As confidence returned to carry trades, EM currencies came roaring back, with the dollar weakening against all the EM currencies that we track. The dollar is still higher over the last week against BRL, RUB and the Eastern European currencies, plus MXN and TRY, which suggests that those currencies might be worth looking at if the rebound in risk appetite continues.

NZD was the worst-performing G10 currency over the last week. All of its decline came on Wednesday, when dairy prices collapsed to the lowest level since 2012 along with slowing employment growth sent the currency down sharply. It’s been recovering slowly since then and could gain further this week as there are no major indicators due out to derail its progress.

CAD was the second-worst G10 currency. Most of the decline came on Friday and followed disappointing employment figures: net employment in July rose only by around 300 people as a 60k increase in part-time employment offset a 59.7k decline in full-time employment. The labor force also shrank sharply. Canada’s employment data usually beats expectations in August, so there may be some rebound when those figures are released on Sep. 5th, but until then I would expect CAD to remain weak. S&P Friday cut its rating outlook for several of the major Canadian banks to negative on new rules limiting government support for banks if they get into trouble.

On the other hand, NOK was the best-performing G10 currency, but that could be in for a change today. Norway’s CPI for July is due out today, and both the headline and underlying figures are expected to decelerate on a yoy basis. That could be NOK-negative. Norway has been one of the few European countries where the central bank is not confronting below-target inflation, but July’s expected slowdown in inflation may cause some concern at the Norges Bank. This figure could therefore be the occasion for some profit-taking.

There is a very light calendar of events today. We have no major data or events coming from the Eurozone, UK or US. During the European morning, US Fed Vice Chair Fischer will speak on the economy and monetary policy in Stockholm. He will be taking questions so we could get some important insights into Fed policy.

From Canada, housing starts for July are expected to decrease.

As for the rest of the week, the main event will be Wednesday’s Bank of England quarterly inflation report release, including new economic forecasts. On Tuesday, the main point of interest will be the German ZEW survey for August. The current and the expectation situation are expected to decline reflecting somehow the worries of the Ukraine tensions impact. On Wednesday, besides the BoE inflation report, during the Asian morning we have China’s retail sales and industrial production, both for July. During the European day, Eurozone’s industrial production for June is coming out, while in the UK, we have the unemployment rate for June. From the US we get retail sales for July. On Thursday, we have Japan’s machinery orders for June. In Europe, we get preliminary GDP data from France, Germany and Eurozone as a whole. Eurozone’s final CPI for July is also coming out. Finally on Friday, UK’s preliminary GDP for Q2 is coming out, while from the US, we have industrial production for July, the Empire State manufacturing survey for August and the preliminary UoM consumer sentiment for August.