While world markets remain fixated on geopolitical risks stemming from the conflict in Syria, upcoming economic data from the US and Japan especially could give traders something more to talk about.
The possibility of a military strike on Syria has not diminished over the past 24 hours, but you would not be able to tell that from the price action in the financial markets. US stocks rebounded, Treasury yields edged higher, and currencies recovered during Wednesday’s session.
Some major currencies like the euro (EUR), British pound (GBP), and Australian dollar (AUD) still lost value against the US dollar (USD), but intraday recoveries indicate that Tuesday’s liquidation did not turn into panic selling on Wednesday.
The financial media attributed the recovery in stocks to the rise in the energy sector, but we believe that some investors feel Syria poses only a short-term risk to the markets, and not a long-term one like some feared initially.
As other nations decide if and when they want to deepen their involvement in Syria, investors may shift their attention back toward US economic data and the prospects for tapering by the Federal Reserve. Some have said that the rise in oil prices and uncertainty in Syria will prevent the Fed from reducing asset purchases this year, and while we agree that it could discourage the central bank, it may not be enough to delay the plans altogether.
Revisions to second-quarter US GDP data are scheduled for release on Thursday, and economists are looking for a sharp upward revision. If GDP growth ends up being stronger than initially anticipated, USDJPY could extend its gains.
Jobless claims are also scheduled for release and are expected to remain low. Fed Presidents James Bullard (St. Louis) and Jeffrey Lacker (Richmond) will be speaking, although Bullard is the only voting member of the Federal Open Market Committee (FOMC).
Commodities Really Steal the Show
It was a mixed day for the commodity currencies, as the Australian dollar (AUD) extended its losses, the New Zealand dollar (NZD) rebounded slightly, and the Canadian dollar (CAD) ended the North American session unchanged.
All three commodity currencies rose from earlier lows, which is a sign of potential stabilization, however, Canada and Australia both released secondary economic reports that paint a picture of weakness in both economies. Construction work declined in Australia during the second quarter, while average weekly earnings growth in Canada slowed in June. Neither of these reports have a major impact on monetary policy, but they confirm that both countries are a long way from recovery.
New Zealand business confidence numbers are due for release Wednesday evening along with Australian new home sales, and Canadian current account figures are due on Thursday. While these reports may have some impact on their respective currencies, the main drivers of demand for the commodity dollars will be risk appetite, as well as gold and oil prices.
Along those lines, crude oil prices rose to a two-year high on Wednesday, and gold prices climbed to a three-month high, but like commodity currencies, which are well off earlier lows, commodity prices are off earlier highs as well. The question of whether this is a pause or a bottom, however, will depend on how the situation in Syria plays out.
The Bulletproof Resistance Level in EUR/USD
For the second time this week, EURUSD rejected the 1.3400 level, and at this stage, we can't help but wonder how strong the stops are at 1.34 and how far investors will go to defend that level. In order for EURUSD to extend its gains and take out 1.34, good news needs to keep rolling in.
Wednesday's rally was stalled by weaker consumer confidence in Germany. While economic data has been improving, upcoming elections and the recent increases in food prices are making consumers nervous about the future financial situation.
On Thursday, we'll get a look at how the German labor market is faring. The number of people collecting unemployment benefits is expected to decline for the third straight month, but the unemployment rate itself is expected to remain unchanged.
Despite widespread improvements in Germany's economy, the PMI report shows that job growth in the service sector was offset by job losses in manufacturing. As a result, we would not be surprised if Germany's unemployment numbers surprise to the downside, creating a bigger drag on EURUSD and keeping the pair below 1.34 for the time being. Besides these reports, European Central Bank (ECB) members Ewald Nowotny and Yves Mersch will be also speaking on Thursday.
Carney Sparks British Pound (GBP) Rally
Having dropped to a low of 1.5430 intraday, GBPUSD staged an impressive recovery that left the currency pair down only slightly by the close of the North American session. The much-anticipated speech by Bank of England (BoE) Governor Mark Carney was surprisingly supportive for the currency, and while Carney left the door open to additional easing "just in case," his optimism reduces the chance of additional stimulus.
The newest CBI distributive trades report confirmed that the UK recovery is gaining momentum. The survey of retail sales volume rose from 20 to 27, its highest level this year. While there are lower highs and lower lows in the GBPUSD, the surprisingly upbeat tone of Carney's speech could drive a stronger recovery in the pair.
A Busy 48 Hours Ahead for Japan
After Tuesday's steep selloff, Japanese yen (JPY) crosses rebounded thanks in part to the recovery in US stocks and rise in Treasury yields. No economic data was released from Japan, but Bank of Japan (BoJ) Deputy Governor Kikuo Iwata reminded the markets that the central bank will keep monetary easing in place. He believes it could take up to a year before Japan sees any real benefit, but the coast should be clear in 2014.
According to Iwata, a weak yen would help the export sector, which explains why the BoJ would prefer to see the currency weaken as opposed to strengthen. Despite the aggressive policies, however, the yen has not seen any significant weakness since bottoming out in May, so Japan's economy needs to find support in other ways.
Over the next 48 hours, a number of important Japanese economic reports are scheduled for release, and will provide a look at how the recovery is faring. We start with retail sales tonight and then consumer prices, household spending, the jobless rate, and industrial production on Friday. Weak wage growth is expected to push retail sales down for the second month in a row.
The Ministry of Finance will also release its weekly portfolio flow report. According to last week's report, Japanese investors sold foreign bonds for the first time in six weeks. If the selling continued, USDJPY could have a tough time extending its recovery.
By Kathy Lien of BK Asset Management