FX: A Semblance of Good News?

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For the most part, currencies are treading water this morning. U.S. producer prices grew by 0.1 percent in June, which was the first increase in wholesale prices in 4 months. Economists anticipated another monthly decline in price pressures but with PPI ticking upwards, the case for a third round of Quantitative Easing weakens. Excluding food and energy costs, PPI rose 0.2 percent, which was right in line with expectations. While inflation is still very low, the Fed will latch onto any reasons that would allow them to delay QE3.

The stability in currencies today is the best scenario we could have hoped for given the downgrade of Italy by Moody’s and last night’s report of slower Chinese growth. One of the most significant event risks this week was China’s Q2 GDP report and even though the latest numbers showed growth slowing to its lowest level since the first quarter of 2009, investors were unfazed because this along with the retail sales and industrial production reports were in line with expectations. The reaction in the foreign exchange market could have been much worse if investors wanted to focus on the 8% number but with expectations set so low going into the releases, the fact that GDP only missed by 0.1% turned out to be good news.

While Italian and other European policymakers have been screaming about the untimeliness of Italy’s downgrade, investors were unfazed and shrugged off the decision by Moody’s to cut Italy’s sovereign debt rating by 2 notches to Baa2 because that still left Italy with a rating one notch higher than S&P. The EUR/USD was also helped by a strong Italian bond auction that showed investors still willing to fund the country at reasonable yields after the downgrade.

It may be Friday the 13th which for our non-western readers is a day that is generally unconsidered unlucky, but with only the University of Michigan consumer sentiment report due at 10am ET, it should be quiet. The only risks would come from big moves in equities but there is little indication that this would happen.

Kathy Lien
Managing Director

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