» Asian Morning Update 29th August 2007

Falling equity markets and subprime fears hit Forex again

With Europe having closed shop for the day quite early all that was left was for the market to watch for the U.S. stats and comments. The first, Consumer Confidence was in line with forecasts at 105.0 in August which is a drop from 6.9 points. This is the lowest reading over the past 12 month and saw losses in all components: current index -8 to 130.3, expectations index -6.2 to 88.2 and labor differential by -3.4 to 7.8. The result is hardly surprising given the current uncertainty but continued declines, if they occur, could contribute to undermining the economy with consumers looking to conserve rather than spend.

On the other hand the Richmond Fed Manufacturing Index was much better than anticipated. The headline manufacturing index was up by +3.0 to +7.0 due to a healthy shipments number. However, new orders slipped. Forecasts had centered on a 1.0 outcome.

On a day when European and U.S. stocks declined to heighten nerves the S&P Case Shiller home price data showed that the average price of resold homes was down by -0.39% in June, the biggest decline since February. This brings the annualized losses to -3.49% YoY but taking the annualized declines in Q1 and Q2 the losses appear to have slackened in pace though this may be seasonal.

The Fed also published the minutes of the August 7th FOMC meeting showing a unified response to the market turmoil which threatens negative impact on growth. However, they still see the risk of overspill into the rest of the economy as minimal. Inflation remains a key concern but consumer spending remains firm. As for investment, the minutes emphasized that “the supply of credit to finance real investment did not appear significantly diminished.” Clearly the Fed will wish to avoid making statements that will undermine confidence but their comments have remained steady and measured. However, there are still risks of further problems coming to light with the ultimate concern being a credit crunch which could force the global economy into reverse.

This hasn’t been missed by Japanese ministers with BOJ Deputy Governor Muto warning that the market turmoil caused by the subprime fallout is already having an impact in Asia and liquidity flows will need to be monitored as they could affect long term price stability.

The economics minister Ota was more sanguine saying that it is too early to be too pessimistic about the U.S. economy but does feel that more time is needed to assess the possible impact of a worsening. However, she commented that the impact of the U.S. housing woes are not yet being felt but warns that any worsening could impact on Japanese exports. Remember that the Japanese export economy is probably over 100% of the total economy – that is the domestic economy is in negative territory – so any serious reductions in exports will hit the economy hard.

Falling equity markets and the continued nervousness over the stories circulating over U.S. banks’ exposure to the subprime took its toll yesterday with Dollar-Yen slumping and while the strong German IFO survey propped up the Euro temporarily this too fell back by the end of the day.

At the moment the Forex market is still composed and quite orderly but with corrections to the initial movements now having seen a sufficiently deep retracement a resumption of the Dollar’s rally cannot be ruled out. There is still a little more room for the Euro to climb but this is not set in stone.

Certainly the dip in Dollar-Yen had a similar impact on crosses with the carry trade argument taking a step back. However, it will return and even if we see a dip to new lows the market has demonstrated that the Yen at higher levels presents good value and any dips should be short lived – if seen at all.

The economic release schedule is fairly quite this week and has little to provide much of an impact so all eyes will be on the equity markets and discount window in order to spot any weakness developing again.

More later when the analysis is complete.

The following economic releases are due today from Asia:

Australian July HIA New Home Sales   (MoM)
Australian Q2 Construction Work Done          +2.0%

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Source : GFT Forex

This entry was posted on Wednesday, August 29th, 2007 at 1:08 and is filed under GFT Forex. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.