Thursday, August 31, 2006

Global Growth is Slowing

EUR/USD 1.2851 Hi 1.2864 Low 1.2816
USD/JPY 117.06 Hi 117.49 Low 116.95
AUD/USD 0.7635 Hi 0.7644 Low 0.7608
EUR/JPY 150.46 Hi 150.74 Low 150.16

First the good news: there is none. That was quick. In Japan all of the economic numbers released this week were bad. Today was no different. Industrial Production numbers for July fell 0.7%. The market had been expecting a rise of 0.9%. Similarly Housing Starts for July were down 7.5% (forecast +0.1%), Retail Trade and Household Spending were weak, and significantly below forecasts. But the market is not ready to give up on the Japanese Economic Recovery Story quite yet. Analysts are looking on the bright side: rates in Japan are now expected to remain on hold for the remainder of the year which is supposed to be good news because low rates stimulate demand (note rates in Japan have been zero FOREVER so the focus is misplaced) and domestic demand is now the engine of recovery, as if Japan had quietly transformed itself to a Demand-Led Economy, which it hasn't.

The Japanese industrial machine is export-orientated. The slowdown (sorry "softening") underway in the U.S. economy will hurt Japanese exporters and this will be bad for growth. This is now showing in the Japanese data. More bad news is likely.

The USD remains buoyant against the JPY in the wake of the poor economic data out of Japan. The real news though is that the EUR/JPY has made new highs. The Euro performance will complicate the job of the ECB. A too aggressive policy stance will likely push the Euro still higher, with negative economic consequences as Europe's international trade position suffers.

Data released in Europe has also been mildly disappointing. Unemployment in Germany remains high, Confidence in Europe is high, but not frothy and everyone is waiting for the negative fall out from higher interest rates, higher OIL and the appreciation of the Euro in 2006. Thus far the economic slowdown in the Anglo economies has not yet had a significant impact on growth. But nobody is talking yet of Europe as the global engine for growth. At best it looks like the Euro Zone economy could emerge over the remainder of 2006 as the best of a bad bunch. Which is still bullish for the Euro.

Trichet talks today. The market will be looking for signs of an October rate hike. There is a chance that given the more sombre economic climate globally that Trichet may give more dovish guidance than the market is looking for. The EUR/USD will need hawkish guidance to reach 1.2900 today, though there is a chance we see that target this week, provided U.S. data continues to show weakness. Our target remains set at 1.3000 for the EUR/USD as Summer trading comes to an end. The EUR bull trend is not over yet.

Data due to be released in the States today is unlikely to be market moving, everyone is waiting for NFP tomorrow. Any sign of economic weakness will see the USD come under further selling pressure, particularly against the EURO.

Global stock markets have been enjoying a relief rally as it becomes clear that interest rate rises may be less dramatic than previously forecast. For now the market is happy with the interest rate story and is ignoring the underlying economic fundamentals, which are worrying. It's too early to talk about a Global Economic Recession, but it is clear that global growth will struggle in the months ahead. Stock market bulls should be cautious.

OIL 70.49
GOLD 630.50

Despite the relative weakness of the economic data, the outlook for slower global growth and the associated softening in commodity prices, the OIL and GOLD bears are nowhere to be seen. That is not expected to change. GOLD will continue to benefit from uncertainty, poor global political leadership and the fact that global Central Bankers (or really the FED) has chosen REFLATION as its referred policy option. Although it is unclear if this policy choice will work (it didn't do the Japanese much good) the policy choice in itself will be enough to undermine faith in the USD.

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