Last week saw the largest percentage range in EURUSD since early November of 2011. On that occasion, EURUSD had spiked higher on the anticipation that a late October EU Summit might produce a solution to the sovereign debt crisis. Early November saw the beginnings of a EURUSD collapse that quickly took the pair from 1.3700 to under 1.3000 by the end of the year. As EURUSD trades above 1.3000 here, I would only note that we are no closer to a resolution on that front than we were then.
But that’s not what this week is about – or at least not the main thing. Mostly, this week is about sorting out the market’s understanding of the Fed’s and Bernanke’s intentions. We had been building up for a tapering of Fed purchases virtually all year - if in fits and starts - until last week saw Bernanke rolling a grenade onto the dance floor of the strong US dollar party. Were Bernanke’s comments intended to be as dovish as they sounded? If so, is this like Carney’s push back against investors’ move to dump bonds – a move which Bernanke fears will derail recovery hopes as yields back up more quickly than the Fed hoped? And if that is so – are we to understand that the Fed would like to peddle the message that it is going to slowly withdraw accommodation, but will be then abandon those plans if the market shows the least sign of fear? And if that is how the Fed plans to run its policy mix, does this not put the market in the driver’s seat for policy, rather than the Fed? If Bernanke doesn’t step up with a clear message this week, that’s the overriding message we will receive – and it’s a dangerous one as we move toward a Bernanke exit and the potential chaos of a difficult nomination process in the months ahead.
Look out for the US Empire Manufacturing survey for July and the Advance Retail Sales report up today out of the US. The numbers have looked a bit sluggish this year, though not as sluggish as one might expect given the expiry of the payroll tax cut and the higher tax rates on higher income taxpayers.
Other key event risks this week include the BoE minutes, where the market will hunt for signs of what instruments Carney would like to reach for in the event the UK recovery signs sputter. So far, EURGBP neither seems to be able to rally smoothly or follow through lower on signs of reversing – perhaps we finally get a bit of direction after the minutes are released.
China’s growth data was perfectly in line with expectations, which gives more reason than ever, given the signs of strain in financial markets there, to not take the data at face value. China remains a significant area of concern for the rest of Asia and the global economy.
Look out for RBA minutes tonight and Riksbank minutes early tomorrow morning.
Technical questions/setups for this week:
EURUSD - top and turn again? As mentioned last week, I’m not convinced Bernanke’s comments last week are more than a short term hiccup for the USD rally – but it’s a question of whether the top is in already just above 1.3200, or whether we go on to interact with the 1.3300 or even 1.3400 are again before we turn back around lower. Trading back below 1.2900 would be the beginnings of confirmation in my book that the highs are in.
GBPUSD – see above for EURUSD, with a potential exaggeration or dampening of volatility depending on the EURGBP scenario (see below). 1.5000 is the important psychological downside swing level.
EURGBP – another failed reversal from late last week, it would appear, but it is up to the BoE minutes to tell us whether we have a go a 0.8750 or 0.8800 or higher. The downside argument needs a deep plunge back through 0.8600 to gain momentum. Tomorrow’s UK Inflation data may also weigh.
USDJPY – To B-wave or not to B-wave? The preferred Elliott Wave scenario is that we are looking at whether we have completed a B-wave (rally) that will yield to a C-wave (sell-off). We got a promising start to this setup last week, but let’s see if the daily Ichimoku remains relevant (along with the psychological 100.00 resistance) as it’s important to see a break of the 98.15 support to encourage the activation of the C-wave scenario.
Chart: USDJPY
USDJPY woke up this week above the Ichimoku daily cloud because the latter is falling quickly. A fall below today’s low thus far avoids any near term bullish impression from this development. Further to the downside, note the importance of the 98.15 area after last week’s test.
AUDUSD – we had a late Friday meltdown in thin liquidity as Australia was off for the weekend and it appears this may have been a run at a 0.9000 barrier, considering that was the actual low. If we stay below the 0.9150/0.9200 swing zone, the near-term downside argument remains in place, with a downside break of 0.9000 opening up for another two or three figures of progress lower.
USDCAD – needs to turn back higher for bull move to survive. I prefer it higher again, but 1.0500 offers better confirmation. A daily close back below 1.0300 would make the upside argument a tough sell.
Stay careful out there.
Economic Data Highlights
- New Zealand Jun. Performance of Services Index out at 55.0 vs. 56.0 in May
- China Q2 GDP out at 7.5% YoY as expected and vs. 7.7% in Q1
- China Jun. Industrial Production out at +8.9% YoY vs. +9.1% expected and vs. 9.2% in May
- China Jun. Retail Sales out at +13.3% YoY vs. +12.9% expected and vs. +12.9% in May
- US Jul. Empire Manufacturing (1230)
- US Jun. Advance Retail Sales (1230)
- Canada Jun. Existing Home Sales (1300)
- US May Business Inventories (1400)
- New Zealand Q2 Consumer Prices (2245)
- Australia RBA Releases Minutes from July meeting (0130)