MORE QUESTIONS THAN ANSWERS

MORE QUESTIONS THAN ANSWERS

15/08/12 @ 07:21 GMT by Michael Derks, Chief Strategist


Yet another day when the price action threw up more questions than answers. With stocks moving forward after some slightly better GDP data out of both Germany and France, safe-haven favourites such as the Japanese yen were on the defensive, as was the gold price. Rather curiously however, the best-performing currency was the dollar, which was relatively well-bid for most of the day. Stronger-than-expected retail sales for July contributed to the more positive tone. In response, USD/JPY threatened the 79.0 level, now not that far short of both the 50d and 200d moving average, while EUR/JPY printed a one-week high. Part of the explanation for the yen’s slippage, not just against the dollar but also other majors over recent days, resides in the latest BoJ Minutes, which appear to suggest that the Board is much closer to implementing further stimulatory measures than the market felt was likely. Also rather mysterious was the demise of the high-beta currencies, with the Aussie sliding below 1.05 on a day when risk appetite was more upbeat. The AUD slid further overnight after some disappointing news on consumer confidence. Looking ahead today, trading conditions in currency markets are likely to remain subdued as most of Europe is out because of Assumption Day.

[You must be registered and logged in to see this image.]

Commentary

The reluctant US consumer. July was a better month for the US consumer, but that was never going to be difficult after three consecutive months of declines. Unfortunately, the underlying trend for retail sales is still relatively subdued, with spending barely rising in real terms in 2012. Moreover, gasoline prices have been climbing over recent weeks, which will surely crimp sales during the driving season. The US economy is still inching ahead, but its performance is hardly convincing.

UK inflation picture still benign. Yesterday’s July inflation figures out of the UK may have surprised slightly on the upside, but scratch below the surface and the picture was still relatively benign. Higher airfares, no doubt because of the Olympics, resulted in a 5.6% leap in the fares/travel costs component. Elsewhere, there was still plenty of evidence of discounting on the High Street in response to weak demand and the Olympic distraction – for instance, household goods prices fell 2.1% in the month, while clothing and footwear dropped by a further 1.9%. In overall terms, the level of the consumer price index has barely changed over the past four months. As always with inflation, nothing can be taken for granted. Over the next few months, rising global food prices will start to feature, and the price of both petrol and diesel on UK forecourts has started to climb once more. Next January, rail fares will rise significantly. Even so, we should still see inflation fall to at least 2% before too long.