A plethora of geopolitical developments and economic news led to a rocky overnight session, ensuring the path forward for financial assets is anything but smooth heading into the end of the week. Asian equity markets were taken for a drubbing after President Obama announced last night that he had authorized targeted airstrikes against ISIS militants in Iraq in an effort to defend Americans on the ground and get humanitarian aid to stranded Iraqi nationals.
The escalation and the re-involvement of the Americans in the Iraq conflict sent financial markets into a classic risk-off panic, with the Nikkei dumping by 2.98% as the Yen strengthened on safe haven flows and probed into the mid-101s against the USD. The dash for safety and the bid tone in the Yen was despite the Bank of Japan cutting its outlook for exports and industrial output as a part of its monetary policy statement, where the central bank remained optimistic about the effects of the sales tax fading and elected to keep policy unchanged for the time being. The Shanghai Composite was spared from the carnage in other Asian markets, as China posted its largest trade balance surplus on record at $47.3bn, after exports exploded higher to an eye-brow raising 14.5% growth compared to the last twelve months to July, almost twice the estimate that had been expected by economists.
Inflation data for the month of July will be released overnight, and should consumer prices see a quicker rise than the anticipated 2.3%, a stronger than expected print could have policymakers cautious about how much more ‘targeted’ easing is necessary.
Heading over to Europe, the ceasefire between Hamas and Israel has come to an end, with rockets once again lighting up the sky as the month-long conflict resumes after both sides were unable to come to agreement over a peaceful resolution. Equity indices in Europe had begun the day sharply in the red but have since been able to recover from their earlier losses and are now slightly positive with the Dax and Stoxx leading the charge.
The Euro has also managed to rebound from yesterday’s losses on a bout of short covering that must have Draghi scratching his head wondering how the common-currency is higher after trying to jawbone the currency lower at yesterday’s press conference. With Draghi tipping his hat to diverging monetary policy between the Fed and ECB, along with confirming fundamentals for a weaker Euro were more prevalent than a few months ago, there wasn’t much talk that would suggest a sturdier Euro except for a “sell the rumor, buy the fact†type scenario.
The economic fodder from the zone was mixed this morning and is hard pressed to explain the Euro’s rebound, with Germany’s trade balance figures for June coming in softer than expected, while France saw a slight upside surprise in its industrial output figures in the same month. EURUSD is flirting with trying to retake the 1.34 handle as we get set for the North American open, but has run into some trouble as willing sellers emerge to sop up short-covering demand.
There is little on the docket in the way of tier-one data for the North American session, though headlines from Bloomberg that the secretary of the Russian Security Council has said Russia is seeking to de-escalate the Ukraine conflict has helped S&P futures ramp back into the green from the earlier Iraq-inspired sell-off, telegraphing the index may be able to hang onto the 1,900 handle for the open.
The main data piece for Loonie traders this morning was the employment situation in Canada, which saw the unemployment rate dip to 7.0% for the month of July. The actual numbers were far worse than the jobless rate conveys, as the economy created only 200 jobs on expectations for 20,000 new positions, with the labour force participation rate dipping to 65.9% from 66.1%.
Adding insult to injury, all of the new jobs created were part-time work, with a destruction of 59.7k full time positions taking place over the course of the month. After promising economic data earlier in the week, the Loonie is reacting swiftly to the new developments, falling down the elevator shaft about 0.5% after the headlines hit the wires.
A close in the high-1.09s would most likely swing momentum towards the USD, and while the buy-the-dip mentality is still in place for USDCAD, the dips could get less frequent if the Canadian labour market continues to display its mediocrity.
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