Crouch start or why GBP and NFP didn't revive the market

There is a suspicion that in the budget of Japan was formed the certain «financial hole»

The appeared report of NFP can be considered moderately negative. As if FRS didn't try to convince the market that the possibility of increase an interest rate remains, but the probability of this event in September is minimum. The following step - for the ECB.

From the point of view of the market, the result of NFP was almost zero - each currency continued own previous dynamics: the yen completely neutralized growth, remaining the weakest in the run-up to the meeting of the Bank of Japan, the pound grows stronger than others only on the factors. EUR/USD rally against the background of weak NFP was blusterous, but impermanent and stopped around the key resistance 1.1250, and more attentive view of data gives the grounds to refrain from active purchases. However, the European shares couldn't keep growth impulse as the technical pullback, which arose in recent weeks, lost the force.

The American figures, of course, are lower than the estimates, but average rates of employment growth remain quite healthy, production orders and orders for consumer durables data are also rather positive, the average duration of business week was reduced by 6 minutes, the average hourly wage was raised for 0.1%.

Goldman Sachs analysts in general think, that the current data on employment are just sufficient in order that the most part of FOMC members supported toughening of policy in September, but will try to mitigate tough consequences of such solution by a soft tonality of the accompanying statement.

Other reaction is interesting, however. After euro grew up to 1.1250, and then it was sold to 1.1150, oil behaved strange: jumped up till 46.89, though bad data are serious negative for an oil demand. And there is no logic - this is work of speculators, but quite «clean», large players earn on trade against news.

The pound against euro reached the maximum level for the last month. Theresa May's meeting with colleagues from British government was devoted to the scenario on the organization of an exit of the country from the EU which development busy the most active supporters of Brexit: Boris Johnson, Liam Fox and David Davies. It is declared that there is no special need in a hurry as national economy already recovered from the shock connected with Brexit, the beginning of the procedure is postponed until 2017, but the long period of uncertainty badly affects economy and business. May excludes the idea of consultation with parliament about an EU exit, that is the last from reliable methods to postpone an exit is rejected.

The current indicators say that the economy of Great Britain feels surprisingly well:

  • growth of economy following the results of the second quarter 2016 constituted 0.6% (for 2.2% per year);
  • the consumer confidence index grows;
  • export of manufactured goods increased;
  • consumer price index - the main indicator for calculating inflation - grew by 0.6%.

However in Office for national statistics (ONS) believe that this positive isn't connected with Brexit directly, but only reflects a general condition of the British economy. Solutions of the main problem - labor shortage - weren't offered to discussion yet.

The market waits from the ECB for QE continuation and after March, 2017, but it will be insufficiently yet to make steady negative impact on euro. Risks at the next meeting of the regulator can give even an additional impulse to growth because if the ECB doesn't declare the QE expansion, then it will be perceived as a signal of strong disagreements and a hint on possible change of a rate. The target indicator of inflation, established by the ECB, is so far from reality, that influence of decisions of the ECB on euro will depend on as far as will remain free space for the QE expansion.

There is a suspicion that in the budget of Japan was formed the certain «financial hole» - approximately in ¥8.7 trillion or $84 billion. The Japanese regulator buys up papers with a negative rate and estimates them on a purchase price. For the beginning of August the Japanese CB held state bonds nominal value of ¥326.7 trillion but carry them on balance at other price  for ¥87 trillion higher. As a result on balance of the regulator much more papers with negative yield, than with positive, can accumulate, and there are no resources for compensation of this loss yet. Naturally, this situation isn't commented by a management and BOJ is ready to take further steps for monetary policy mitigation already at a September meeting.

From the other news we will note:

  1. Data that world CB (Germany, Austria, Netherlands) accelerated process of withdrawal of gold from FRB of New York - since 2014 inventories in the world's largest storage of gold were reduced by 388 tons - it is the largest outflow of gold from the USA since the mortgage meltdown 2007, leaked out into the press. The withdrawn inventories are placed in Vienna and Switzerland.
  2. Morgan Stanley recommends to investors continue to buy five-year state papers of the USA in spite of the fact that they can finish month the worst dynamics since February of last year. The estimate for growth of treasury bonds is based on FRS won't change rates until the end of the current year.
  3. Merkel declared at an internal meeting of the party that quotas for refugees are exhausted by Germany and expansion won't be. According to ARD poll, the internal rating of approval of Merkel fell to a minimum over the last 5 years, more than 50% of Germans don't want her new premier term, and the rating of a party of euroskeptics of AfD grew by 2 points to 14%.

On Monday volatility will be weak. There is no American session - in the USA and Canada celebrate the Labor Day. If the European Central Banks, PBA and the Bank of Canada take soft positions, their currencies can sharply fall, having caused, respectively, increase in cost of dollar. From events it is worth paying attention to the British data and Carney's performance on Wednesday, the Beige book of FRS and an index of activity in non-productive sector from ISM, and also we don't forget the Chinese statistics within a week.

EUR/USD: Intraday resistance: (1.1180-1.1190) (strong) - (1.1220) - (1.1250-1.1257) (very strong) - (1.1350-1.13555) (very strong); supports: (1.1137-1.1126) - (1.1100) - (1.1060) (strong) - (1.1043) (protection of market makers). In case of return to 1.1295 and steady trade the following purpose for - 1.1426 resistance is higher. The negative scenario is limited to the level of 1.1000.

USD/JPY: Intraday resistance: (103.80) - (104.00-104.25) - (104.70) - (105.00-105.10); supports: (102.40-102.25) (strong) - (101.13) - (100.00-99.78) (protection). Morning falling at opening of week doesn't cancel the bull scenario.

Author: Lachlan Patel,
ForexChief Currency strategist