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Daily Insights - July 30, 2014

Dollar near 2014 high ahead of FOMC

  • Optimism around China’s recovery has been a key factor in the Asian equity rally this month. The jump in the HSBC China “flash” PMI last week highlights the effects of the Chinese government’s targeted measures, and is likely to be echoed in the NBS manufacturing PMI on Friday; we forecast an increase to 51.2 (consensus 51.3). Chinese equities have rallied nearly 9% in July, while USD/CNY is close to breaking below the USD/CNY fix for the first time since early March.
  • Japan IP disappointed to the downside, but remains consistent with our Q2 GDP forecast. The recent weakness in activity data has been taken well, with the TOPIX up 12% since May and currently just 1% below the January peak. This partly reflects a good start to the earnings season, though expectations of further BOJ easing may also be playing a role. The BoJ has thus far stuck to its original targets for the monetary base under QQE in a bid to reach its “two percent in two years” CPI price stability goal set in April 2013. However, the targets only extend to end-2014. At some point (most likely at the 31 October MPM, in our view), it will need to provide forward guidance on where the monetary base will head into 2015. As an initial step, we expect it to keep the current trajectory intact to end-June 2015.
  • Preliminary German CPI for July looks in-line or possibly below the consensus forecast for a decline to 0.8%y/y from 1%. We expect Thursday’s euro area “flash” HICP inflation to decline to 0.4% y/y (June: 0.5%; consensus: 0.5%). On a positive note, the monthly EA confidence survey and Q2 Spanish GDP were on the stronger-side of expectations, while the latest ECB lending survey showed a net easing in lending standards for the first time since 2007. 10y bund yields remain at a record low (1.12%), while EUR/USD traded below 1.34 for the first time since November.
  • Today is a big day in the US, with advance Q2 GDP, the FOMC decision, ADP employment and nearly 40 earnings reports. We and consensus expect a 3.0% q/q saar rebound in GDP. The FOMC will likely upgrade its assessment of the US economy modestly and indicate that the asset purchase program will conclude in October. The dollar index is nearing a nine-month high as short-end USD yields have rallied aggressively against most other major currencies this month.
  • The health of commodities as an asset class has improved markedly: beta returns have improved, correlations with other assets have fallen and costs of carry are positive. However, the big surprise this year is that investors have continued to withdraw assets from commodity investments on a quarterly basis despite this improvement.


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