Fed Fun!

Today all eyes and ears are on the FOMC meeting and the new format, where Fed Chairman Bernanke will hold a Q&A session after the release of the interest rate decision. So make not of the time changes, as the rate decision has been moved up to 12:30 EST, with the press conference to follow at 2:15 EST, which was the old rate decision time.

It will be extremely interesting to say the least to see how this goes and whether or not Bernanke is a better salesman than the market believes. It is no secret that QE2 has been wildly unpopular with the public and that indeed it has been responsible for higher commodities prices despite the intellectual dishonesty surrounding that fact.

However, what QE2 has also done is help stabilize asset prices so that the economy did not become over-ridden by deflation.

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Dollar Light on Data, Heavy on QE3 and Downgrade Speculation

Dollar Light on Data, Heavy on QE3 and Downgrade Speculation

Some would consider this past week’s close a boon for the dollar because the selling pressure eased up into the close. In reality, the drop in volatility is neither beneficial nor detrimental to the currency. We have simply seen the market hit a saturation point for fundamental warnings. Headlines and forecasts for dire financial and economic conditions (in the US and the global economy) can only exact so much influence on price before market participants start to look for the actual impact. In the week ahead, the fundamental winds will almost certainly pick back up; but the threshold for market-moving news will likely be higher than we have seen in the recent past. So to gauge direction on the Dow Jones FXCM Dollar Index (ticker = USDollar), we should follow trends on risk appetite, European troubles, liquidity issues, the discussion of QE3 and the countdown on the budget impasse. H Read more…

KBC: Polish inflation was much lower due to German E.coli outbreak

Czech Republic

Czech markets have finally reacted to domestic figures as expectations for short-term rates (FRA) and the koruna fell after surprisingly lower-than-expected June’s inflation figures released already on Tuesday. As we already mentioned low inflation readings imply that probability of an immediate rate hike form CNB is very low now, which means that the short-end of the curve might stay at very low levels and the koruna might not get any interest-rate support soon. Moreover, in the case of the koruna we are afraid that the zloty could stay weak in coming days, because of negative spill over effects from the euro zone periphery.

Hungary

The Hungarian forint set a new 1-month low of 270.25/€ yesterday at noon after news from the European banking stress test increased risk aversion again. The currency later recovered to 267.00 and settled down at 269.00. The central bank released a warning signal that the 2012 budget needs about 2% of GDP tightening measures in order to achieve the budget deficit target of 2.5% of GDP. It also stated that current plans, like the Szell Kalman Plan or the Convergence Program may sig- nificantly lower this amount. The government will submit the budget proposal to the Parlia- ment in mid-September and that may be a key element in this debate.

Poland

The Fed’s dovish signal and subsequent weakness in US dollar helped the zloty to trim some of the recent losses. Nevertheless the pair stayed above 4.00 EUR/PLN as the Swiss franc (key currency for fx denominated loans of Polish households) continued to gain towards euro and as inflation came much lower than expected trimming hopes on further interest rate hikes. 
 
Polish inflation came out at 4.2% y/y in June, much lower than both our and consensus 4.8% view. The outcome was similar to earlier released figures in the Czech Republic, Hungary and Romania, where an E.coli outbreak in Germany pushed down prices of vegetables. Although it is a one-off effect that should vanish in the upcoming months, it supports our base scenario, which considers a break in interest rate hikes till late autumn. Well known dove Elzbieta Chojna Duch said the inflation reading proved the council was right to pause last month. On the other hand  rather hawkish Anna Zielinska-Glebocka said that the June drop in CPI could be on-off and should not have impact on the monetary policy. 

Bin Laden Bounce!

Overnight it was revealed that Osama Bin Laden has finally been brought to justice and was killed by US forces. The sense of relief that came over the markets may be short-lived however as there are still many sources of risk in the global economy, each posing a different threat.

Oil sold off immediately on the news and stocks are higher to start the day and while this certainly is an important development, it may not be enough to reverse recent trends. Those trends of course are a weak US dollar and higher commodity prices, especially oil.

This week there are a few rate policy decisions that we need to keep an eye on: Australia on Tuesday and Europe and the UK on Thursday.

In addition, the US Non-Farm Payrolls report is due out on Friday and this leading indicator may show whether or not the economy is on the mend.

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Forex: U.S. Dollar Weakness Ahead, Euro At Risk

Talking Points

The U.S. dollar continued to lose ground on Thursday and risk trends are likely to drive price action throughout the North American trade as market participants show a fairly muted reaction to the mixed batch of data coming out of the world’s largest economy. Although we saw a rebound in household spending, the slower pace of growth in producer prices suggests the consumer price report tomorrow will reflect a softer outlook for inflation, and the central bank may continue to carry a dovish tone over the remainder of the year as the nation faces a protracted recovery.

As Fed Chairman Ben Bernanke is scheduled to deliver the second-half of the semi-annual monetary policy report today, we are likely to see the central bank reiterate the comments from the previous day, and market participants may show a bearish reaction to his statements as he opens the door to expand monetary policy further. I

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European Market Update: Rating agencies remind markets that debt crisis is far from over; Gold continues to hit fresh all-time highs

***Economic Data***

– (FI) Finland Jun CPI M/M: 0.3% v 0.0% prior; Y/Y: 3.5% v 3.3% prior
– (JP) Japan Jun Final Machine Tool Orders Y/Y: 53.5% v 53.3% prelim
– (IN) India Jun Monthly Wholesale Prices (WPI): Y/Y: 9.4% v 9.7%e
– (IN) India Primary Articles WPI w/e Jul 2nd Y/Y: 11.6% v 11.6% prior; Food Articles WPI Y/Y: 8.3% v 7.6% prior
– (HU) Hungary May Final Industrial Production M/M: -0.8% v -0.8% prelim; Y/Y: 2.6% v 2.6% prelim
– (NV) Netherlands May Retail Sales Y/Y: 0.5% v 3.4% prior
– (AS) Austria Jun Consumer Price Index M/M: 0.0% v 0.0% prior; Y/Y: 3.3% v 3.3% prior
– (IT) Italy Jun Final CPI (NIC incl. Read more…