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Thursday, 6 August 2015

    The Thursday Super for GBP?

    Dollar Soars as Service Sector Index Hits 10 Year High
With less than 24 hours to go before 'Super Thursday', sterling traded strongly against all of the major currencies. For the first time ever, the Bank of England will simultaneously release its monetary policy decision, meeting minutes and the Quarterly Inflation Report. Independently each of these event risks have the power to trigger big moves in the currency but collectively we can be assured that Thursday will be a fun day for the British pound. We can't help but wonder if the timing of these releases, which will be followed by a press conference 45 minutes later from Mark Carney suggests that the central bank is at the cusp of a major change in monetary policy. What makes Thursday so super for the pound is that while no one expects the BoE to raise interest rates there could be a dramatic change in guidance. More specifically, we will be looking for 4 things:

#1 Number of Policymakers Voting in Favor of a Rate Hike - There could be up to 3 dissenters (Weale, McCafferty and Miles)

#2 Changes in BoE Forecasts - How Soon will they Reach 2% Inflation?

#3 Assessment of Slack - Wages and Productivity are on the Rise

#4 Carney's Outlook - He's Generally more Hawkish than his Peers

Investors are clearly bracing for a positive outcome and we agree that the Bank of England will start to prepare the market for tightening. However the point of Super Thursday is to increase transparency and not signal major changes in monetary policy. Since the last meeting we saw a pickup in manufacturing activity but service and construction activity slowed. Consumer confidence also declined as retail sales dropped and jobless claims increased. Inflation remains extremely low with year-over-year CPI sitting at 0% and core YoY CPI at 0.8%. So while the general outlook for the U.K. economy is improving and more U.K. policymakers are warming to the idea of raising rates, the data does not scream the need for tightening. So if the BoE remains elusive, we could see a sharp correction in the pound that could push GBP/USD to 1.55. However if the central bank looks beyond these reports and focuses on the decline in slack and rise in inflation expectations with at least one member of the Monetary Policy Committee voting for a rate hike, sterling will extend its gains against all major currencies.

Dollar Soars as Service Sector Index Hits 10 Year High

Throughout this week we said that USD/JPY needed unambiguously positive data to break and hold above 125. On Wednesday there was a very strong ISM non-manufacturing report that overshadowed the weakness in other data. In July, service-sector activity grew at its strongest pace in 10 years. Economists had only been looking for a small uptick in the index but instead, the ISM report surged to 60.3 from 56. According ISM Chairman Nieves, it is unusual to see so much strength in the summer but what made the report even more positive for the dollar was the big increase in the employment sub-component. The ISM non-factory employment gauge rose to 59.6 from 52.7, the largest increase ever. As one of the most important leading indicators for non-payrolls, this improvement suggests that there was very strong job growth last month. However the sharp decline in private-sector payrolls according to ADP is worrisome and suggests that a good number is not a done deal. Meanwhile, a stronger dollar caused the U.S. trade balance to widen to $43.84B from -$40.94B. The Challenger Layoff Report and Job Claims are scheduled for release on Thursday and once again unambiguously positive numbers are needed for USD/JPY to hold onto its gains at these elevated levels.

USD/CAD Marches Higher

The Canadian dollar dropped to its weakest level versus the U.S. dollar in ten, almost eleven years. With no resistance until 1.3475/1.35, there seems to be no stopping the currency pair, which has been driven higher by a stronger dollar and weaker oil prices. After a brief respite, oil fell approximately 1.5% Wednesday to $45 a barrel -- this key level is being tested and will likely be broken. Initially the Canadian dollar soared after Canada reported a significant improvement in its trade balance. Lower prices provided a significant boost to trade activity with exports growing by the fastest amount since December 2006. In, the trade deficit shrank to -480M from -3.37B, the lowest level since September 2014. In the long run, the weaker Canadian dollar and lower oil prices will play a central role in turning around Canada's economy, but we need to see oil stabilize first. In the meantime, there could be more weakness in the Canadian dollar and strength in USD/CAD before that happens. Despite the stronger trade number, the Canadian dollar gave up its earlier gains to end the day lower as the U.S. dollar surged against all of the major currencies. Meanwhile, the Canadian and New Zealand dollars traded lower even though Australian service-sector activity grew at its strongest pace since February 2014. Australia's employment report was scheduled for release Wednesday evening and based on the rise in the employment component of manufacturing- and service-sector PMI, we are looking for a firmer release. In New Zealand, labor-market activity weakened with the unemployment rate rising, employment growth slowing and the participation rate declining -- all reasons for the RBNZ to maintain a dovish bias and lower interest rates one more time this year.

Euro Takes a Backseat to GBP and USD

The euro ended the day slightly lower against the U.S. dollar, which is a bit surprising given the overall strength of the greenback. Economic data from the Eurozone was mixed with the PMI composite and services index revised higher. Germany's numbers were revised upward while France's numbers remained unchanged. Retail sales dropped 0.6% in June mimicking the slide in German consumer spending. German factory orders and Eurozone retail PMIs are scheduled for release Thursday but the euro's performance will be driven primarily by the market's appetite for sterling and dollars.


Federal Reserve officials are weighing in on whether the central bank should lift interest rates for the first time since the financial crisis. But what does the leading Republican presidential candidate say?
Donald Trump told Bloomberg Television that the current low rates could fuel a bubble. 
 “I’ve always loved low interest rates as a developer and I’ve always done well with low interest rates,” 

he said. But as a Republican presidential candidate, he’s not as sure. 
 “I think you’re creating a bubble and the bubble could explode,” 

he said. He talked favorably of former Fed chief Paul Volcker, and in a roundabout way endorsed the Volcker rule, which separates commercial and investment banking.
Trump is one of 10 Republican candidates who made the cut to participate in Thursday’s Fox News debate. A Republican consultant writes in The Wall Street Journal that Trump’s standing in the polls may tempt Vice President Joe Biden to run on the Democratic side. The logic? That Trump will offend so many moderates that a Republican couldn’t possibly win.


Gold prices held mostly steady in early Asia on Thursday wit the focus ahead on U.S. jobs data at the end of the week.
On the Comex division of the New York Mercantile Exchange, gold for December delivery held steady in early Asia on Thursday at $1,084.40, up 0.04%, as investor assess chances for a rebound after recent steady declines.
Silver for September delivery rose 0.10% to $14.565 a troy ounce. Copper for September delivery fell 0.09% to $2.351 a pound.
Overnight, gold fell mildly on Wednesday retreating back to near five and a half year lows, as strong non-manufacturing data from the Institute of Management pushed the dollar to its highest level in three and a half months.
Gold had stabilized in recent sessions after dipping below $1,075 an ounce late last month to touch down to its lowest level since 2010. Last Friday, for instance, it moved back above $1,100 an ounce after gaining more than $7 on the session. Since then, however, it has closed lower on three of the last four trading days. Over the last month, gold has only closed in the green in six of 27 sessions while losing more than 7.25% in value.
The precipitous fall included a 10-day rout in mid-July, which marked gold longest losing streak in nearly two decades. Investors have abandoned their positions in gold, as it loses its appeal as a safe haven asset following the resolution of comprehensive Greek Bailout and Iranian Nuclear deals. A historic collapse in Chinese equities and signals from the Federal Reserve on the timing of an imminent rate hike has also weighed on the precious metal.
Dollar-denominated commodities such as gold become more expensive for foreign purchasers when the dollar appreciates. The dollar pared earlier losses that resulted from a downgraded assessment of the current conditions in the U.S. labor market. In its monthly national employment report for July, fellows from the ADP Research Institute estimate that private payrolls in the U.S. rose by 185,000 in July, below forecasts of a 210,000 gain and down from an increase of 237,000 a month earlier.
It comes two days before the U.S. Department of Labor releases the official government data from its national employment situation report for the month of July. On Wednesday, Federal Reserve governor Jerome Powell said he will be taking a data-dependent approach to the timing of a potential rate hike, placing particular emphasis on the strength of the labor market.


Weeks after Rupert Murdoch officially stepped down as Chief Executive Officer of 21st Century Fox, passing on control of a major chunk of his media empire to his 42-year old son James, the company demonstrated signs of a strong transition in leadership with better than expected fourth quarter results on Wednesday.
For fiscal year 2015 as a whole, Fox increased adjusted operating income before depreciation and amortization by 3% to $6.49 billion, while its adjusted income from continuing operations per share increased 11% to $1.72. The company gained $7.3 billion in net proceeds from selling its stakes in Sky Italia and Sky Deutschland AG, as well as acquiring $900 million of additional shares in Sky.
Fox also believes it substantially raised the profile of its sports networks through its airing of prominent global events such as the ICC Cricket World Cup, the 2015 FIFA Women's World Cup and the U.S. Open Golf Championship. Over the year, Fox's cable programming revenue increased to $3.57 billion, up from $3.35 billion a year earlier.
"We made clear operational strides over the last year that will further position us to benefit from the strong and growing global demand for high quality video content," said Rupert Murdoch, who has remained as the company's Executive Chairman during the transition. "We delivered a solid financial performance, drive by sustained gains in affiliate fees, while we continued to invest in building our new channels Fox Sports 1, FXX and Star Sports."
Still, Fox saw its total revenues and net profit shrink amid declines in its filmed entertainment division along with the sale of its satellite business. The company's total revenues dipped from $8.42 billion last year to $6.21 billion in 2015, slightly below analysts' forecasts of $6.41 billion.
Also on Wednesday, the company announced a new $5 billion authorization to its stock buyback intended to be completed over the next 12 months.
Class A Fox shares fell 1.42 or 4.35% in after-hours trading to $30.53.