London Session Forex Recap – July 5, 2016

  • Spanish services PMI: 56.0 vs. 55.2 expected, 55.4 previous
  • Italian services PMI: 51.9 vs. 50.3 expected, 49.8 previous
  • French final services PMI: unchanged at 49.9 as expected
  • German final services PMI: 53.7 vs. unchanged at 53.2 expected
  • Euro Zone final services PMI 52.8 vs. unchanged at 52.4 expected
  • Euro Zone final composite PMI: 53.1 vs. unchanged at 52.8 expected
  • U.K. services PMI: 52.3 vs. 52.8 expected, 53.5 previous
  • Euro Zone retail trade m/m: 0.4% as expected vs. 0.2% previous
  • Euro Zone retail trade y/y: 1.6% vs. 1.7% expected, 1.4% previous

Risk aversion persisted so the comdolls were on the back foot while the safe-havens were on the offensive. The pound, meanwhile, was kicked lower while the euro got an early boost that allowed it to close the session on a high note.

Major Events/Reports:

U.K. services PMI disappointsMarkit’s June services PMI reading for the U.K. was pretty disappointing since it came in at 52.3, a tad worse than the expected slide from 53.5 to 52.8. To make matters worse, the drop to 52.3 means that the reading has slid back to April’s 38-month low. And the bad news doesn’t end there since commentary from the PMI report was pretty bleak. For instance, Markit Chief Economist Chris Williamson said that “A further slowing, and possible contraction, looks highly likely in coming months as a result of the uncertainty created by the EU referendum. However, with the June PMIs having already fallen into territory that would normally be associated with the Bank of England cutting interest rates, it’s unlikely that policymakers will wait for more data before unleashing additional monetary stimulus. More policy action is therefore likely in the coming weeks”

Rumors from ItalyAn unnamed source told Bloomberg that Italy plans to aid its beleaguered banks, as allowed for by Article 32 of the European Union’s bank failure rules. One specific plan mentioned was to prop up Banca Monte dei Paschi di Siena SpA, Italy’s third-largest bank, by boosting it with some much-needed capital ahead of bank stress tests.

To those who are not familiar with this developing story, around 17-18% of total consumer loans issued by Italian banks are non-performing loans. This totals to around €360 billion, which is friggin huge, so the Italian banking system is in a bit of a pickle. And if this situation is not diffused soon, it may cause a loss of confidence in Italian banks, which could result in a banking crisis that will likely affect the entire euro zone since Italy is the third or fourth largest economy in the euro zone.

BOE Financial Stability Report – Below are some of the more important points from the BOE’s Financial Stability Report, as well as BOE Guv’nah Mark Carney press conference shortly after the report was released:

  • “The Bank is also able to provide substantial liquidity in foreign currency, if required”
  • “some [Brexit-related] risks have begun to crystallise”
  • “The current outlook for UK financial stability is challenging”
  • A Brexit could threaten “the financing of the United Kingdom’s large current account deficit” since it relies on “on continuing material inflows of portfolio and foreign direct investment”
  • A Brexit may be bad for the U.K.’s commercial real estate market since it “had experienced particularly strong inflows of capital from overseas”
  • In response to the pro-Brexit vote, the BOE’s Financial Policy Committee eased capital requirement on banks by reducing the “countercyclical buffer rate from 0.5% to 0%” and is expected to maintain it until a least June 2017
  • This just means that British banks can loan out more money

Base metals and oil slide lower – Base metals, especially copper, were on the back foot during the morning London session, thanks to fears that demand from China will weaken, according to market analysts. Meanwhile, oil continued to sink, thanks to deteriorating economic outlook, according to market analysts.

The base metal copper was down by 0.90% to $2.197 per pound by the end of the morning London session. As for oil benchmarks, U.S. WTI crude oil was down by 2.39% to $47.82 per barrel while Brent crude oil was down by 2.02% to $49.09 per barrel.

Risk aversion persists in Europe – It was another risk-off day in Europe, with the pan-European FTSEurofirst 300 down by 1.04% to 1,292.43, the blue-chip Euro Stoxx 50 down by 1.30% to 2,829.00, and the DAX down by 1.40% to 9,573.00.

The risk-off vibes also sent safe-haven flows to gold since it was up by 0.86% to $1,350.55 per troy ounce by the end of the session. As for U.S. equity futures, the gloomy mood also dragged them down, with S&P 500 futures index down by 0.42% to 2,087.50 and the Nasdaq futures index down by 0.45% to 4,413.38.

Market analysts noted that mining shares were the main losers, so we can probably blame the risk-off mood to the slide in base metals. Financial companies were also major losers, likely because of worries over Italy’s banks.

Major Currency Movers:

CAD – The prevalence of risk aversion dampened demand for all the higher-yielding comdolls, but the slide in oil prices was apparently extra burdensome for the Loonie since it ended up as the weakest among the comdolls.

USD/CAD was up by 52 pips (+0.41%) to 1.2930, AUD/CAD was up by 14 pips (+0.15%) to 0.9675, NZD/CAD was up by 25 pips (+0.27%) to 0.9287

JPY – The risk-off vibes sent forex traders screaming in panic towards the safe-haven currencies. And as usual, the yen was the safe-haven of choice for most forex traders.

USD/JPY was down by 12 pips (-0.13%) to 101.76, CHF/JPY was down by 25 pips (-0.23%) to 104.63, CAD/JPY was down by 40 pips (-0.51%) to 78.71

EUR – The euro got a bullish injection when the morning London session opened. The only clear catalyst was the rumor that Italy was planning to prop up its banks, so that may have been it. Anyhow, the euro’s performance became more mixed after that, but the early bullish boost allowed it to end the morning London session on a high note against all of its forex rivals.

EUR/USD was down by 15 pips (+0.14%) to 1.1144, EUR/CAD was down by 77 pips (+0.54%) to 1.4410, EUR/CHF was down by 26 pips (+0.25%) to 1.0837

GBP – Pound pairs were already moving in a downward trajectory before the morning London session opened, but pound pairs got a noticeable bearish boost when the reading for the U.K.’s services PMI failed to meet expectations.

GBP/USD was down by 66 pips (-0.51%) to 1.3117, GBP/JPY was down by 85 pips (-0.62%) to 133.55, GBP/CHF was down by 53 pips (-0.42%) to 1.2754

Watch Out For:

  • 2:00 pm GMT: U.S. IBD consumer optimism (48.3 expected, 48.2 previous)
  • 2:00 pm GMT: U.S. factory orders (-0.8% vs. 1.9% previous)
  • 6:30 pm GMT: New York Fed President William Dudley has a speech
  • Dairy auction currently underway (2.6% previous); auction usually ends at around 2:00 pm GMT)

See also:

Asian Session Forex Recap

U.S. Session Forex Recap

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