High	Low			High	Low
EUR/USD	1.1125	1.1082		USD/ZAR	12.8727	12.7822
GBP/USD	1.5689	1.5640		GBP/ZAR	20.14	20.03
EUR/GBP	0.7111	0.7078		USD/RUB	65.98	64.14
USD/JPY	124.49	124.18		USD/ILS	3.8067	3.7714
GBP/CHF	1.5336	1.5246		S&P 500	2,099	2,098
GBP/AUD	2.1270	2.1184		Oil (Brent)	49.21	48.55

The Japanese economy contracted in Q2, this was expected so it’s really more of a confirmation of economist forecasts. The data suggests broad based declines in demand which doesn’t bode well for Prime Minister Abe’s project, one can only hope that his attempts at reconciliation with his neighbours by expressing regrets about his country’s actions in World War 2 will go some way to opening up trade opportunities in the future. Japan needs whatever help it can get, but it no longer has the comfort of a rapidly growing Chinese economy to count on. This is important because Japan and China represent the joint first and third largest economies in the world. If you want to consider the Eurozone as a single economic zone (more fool you) then perhaps you could say joint first and fourth? This is a substantial part of global GDP that isn’t performing that well at the moment, and we must consider the ramifications for South East Asia as well.

 

One of the members of the UK’s MPC has written an article in the Telegraph today which I fully endorse, in fact I have written about this several times. The thrust of the article is that Bank of England should be raising rates now to ensure that when activity and inflation gets to the point where action will definitely be required policy is already moving in the right direction. The reason for this is that the lag between a rate rise and its impact on the economy can be anything from 12 to 18 months. It really makes no sense to do nothing now and wait for further down the line. That smacks of a more reactive central bank which is not something the Bank of England purports to be, and even worse, a reactive central bank has to be more aggressive than a proactive one. I would make the same case regarding the Federal Reserve in the United States, but my sense is that they will be more proactive than the Bank of England in this regard.

 

In Nigeria the central bank is getting very serious cracking down on the activities of the Bureau de Changes. This activity is normally conducted on the streets of the main cities and involves individual traders who are able to trade in surprisingly large size. The Financial Times reports that trees in the capital have been pruned to ensure that their activities can’t be conducted under cover. Amazing stuff! Couple that with some of the circulars that have been sent out by the central bank in recent days, which will make it more difficult for Nigerians to physically deposit foreign currency in domiciliary accounts. This activity has been identified as one of the primary sources of the stress the naira has been experiencing this year, as rich locals hoard foreign exchange in hopes that they can profit. We’ll see if this restriction is effective, experience tells us that people always find ways to get around restrictions.

 

We get lots of inflation data this week. Tomorrow it’s in the UK, then the day after the U.S and then Canada at the end of the week. In between there will be some other interesting macro news, not least retail sales in the U.K, and key confidence data in some Eurozone countries. Talking about Eurozone countries, the Bundestag votes on ratifying the new Greek €86bn bailout plan. While it is certain to pass – the opposition Social Democrats will ensure that it does – it will be interesting to see how much resistance exists in Chancellor Merkel’s party. It is possible she could be seriously weakened by the vote, and anything really shocking will likely have a negative impact on the euro. Another item worth noting is that the Jackson Hole central banker conference is at the end of this month, but as the Chairwoman of the Federal Reserve is not going to be there, it’s unlikely to be hugely significant this year. We will however take note of any potential significant speeches if they occur.

 

From a trading perspective, GBP/USD looks to have bounced back to levels where I consider the odds favour a bearish view for this week. I had said last week that I expected the euro to outperform the pound going forward, but EUR/GBP is doing its best to prove me wrong so far this morning. I will stubbornly stick with my view, I consider the cross to have far greater upside potential at this stage than downside. In general, markets continue to trade based on the dollar rallying when risk sentiment is positive (and falling when sentiment is negative), on that basis it is not at all surprising that things have been a bit confusing since the end of Q1. The S&P 500 has basically gone nowhere since then, perhaps we’ll only see trend moves again when the big investors come back from their summer vacations.

 

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