‘If it keeps on Rainin’, Levee’s Goin’ to Break’

It might just be the opening line to what is a great song, and whilst perhaps an obvious conclusion to an unstoppable deluge, its surely nonetheless a very apt metaphor to where the markets are right now?

So far this year the equity markets have dodged and survived every geopolitical bullet that’s been shot their way, be that from, NK, China, Hong Kong, Russia and the Mideast. However, and be that as it may, surely at some point the seemingly continuous wall of geopolitical uncertainty may just prove too much?

Naturally, I hope it doesn’t, but the latest news/developments out of Iran are a major concern. This is all very bad timing for the UK too with the uncertainty of Brexit and a new government about to take over the reins.

This also has implications for risk aversion and the JPY. Most recently the USDJPY has steadied from low of 106.78 reached near the end of June, to around 108 as I write this morning. Before I say anything else, let me just add here that I am no particular fan of buying the Japanese currency for geopolitical reasons, but I do accept that the JPY has a safe haven status that simply cannot be ignored, just as does the CHF and the USD.

Indeed, as I look around the markets both the CHF and the USD are commencing the week on a very firm footing. The EURCHF is not far off 1.10 this morning and hence at its lowest level in over two years. That’s surely a good indication of the level of geopolitical concern out there just now? The USD index is starting the week on a firmer note too, with that continuing to defy its negative Q2 close- a close that saw the EURUSD also rebound above important technical levels.

Now of course these latest Mideast tensions could be so easily diffused if Iran does the right thing and releases the tanker it impounded last week. Meantime, the UK and its allies need to tread carefully here if they are to diffuse the situation in the Gulf. Just at this moment in time that’s exactly what the markets think will happen or else the likes of the JPY, gold and WTI would all be priced higher than they actually are this morning.

To a certain degree the JPY is also being capped by a large expiry at 108.00 today, but another relapse through 107.00 again and we could easily be looking at another test of the key 105.00 level.

To better see how the JPY is faring right now please take a look at the chart below which is a 10year weekly chart of the USDJPY which I peeled off a little earlier this morning.

As you can see the price is still well below all of its key long term weekly moving averages (all of which are falling) and will need to break back above 110 in order give any indication that a recovery is in process. The danger is that the longer it remains below all those moving averages, and they continue to fall, then the more the chance of further downside traction.

In relation to the JPY and also the GBP this morning, given current domestic situation, perhaps the pair to keep a close eye on is the GBPJPY. It’s still well above 130, but from a longer term perspective very much back in the danger zone. I’ll say no more than that for now, but I will be writing more about this pairing in the very near future.

Data release wise its definitely a game of two halves this week, with little to move the dial until Thursday when we will get the latest ECB monetary policy decision, followed by the US Q2 GDP revision on Friday. Both of these events have the potential to move the markets and whilst no changes are expected from the ECB on Thursday much will depend on what Mario Draghi has to say in his usual post decision press conference.

As far as the latest estimate of US GDP is concerned, the markets are expecting a significant downside revision to growth. Q2 GDP is widely anticipated to be marked down to around 1.8% from the previous estimate of 3.1%. However, offsetting that prospect to some degree could be a sizeable shift in the other direction for consumption and prices. Hence as usual much will depend on the exact detail of all that lot in terms of how the markets react.

Finally, just to note that with Philip Hammond threatening to exit the Kitchen yesterday, it looks set to be a blisteringly hot week for the UK. Given that it looks likely that Hunt will not grab the Yellow Jersey, he should surely think twice about doing the same because the last thing the UK needs right now is a Foreign Secretary fresh in the job!

Important Economic Releases Due Later This Week

22/07- 4.00pm Bank of Japan Head Kuroda Speech to IMF in Washington

23/07- 11.00am UK CBI July Trends –Orders, Selling Prices and Optimism

24/07- 2.45pm US July Manufacturing, Services and Composite PMI data

25/07- 9.00am German IFO Index

25/07- 11.00am UK CBI July Reported sales

25/07- 12.45pm ECB Monetary Policy decision

            (No Changes to any of current Benchmarks Expected)

25/07- 1.30pm ECB Post Monetary Policy Decision Press Conference

25/07-1.30pm US June Durable Goods Orders Report

26/07- 1.30pm US Q2 GDP and Personal Consumption/Prices Revisions