Talking Points:
- Dollar: Can US CPI Break Greenback’s Technical Boundaries?
- Euro Markets Cooling and Periphery Bonds Rising is Unusual
- British Pound at Mercy of Yields as Event Risk Approaches
Dollar: Can US CPI Break Greenback’s Technical Boundaries?
The Dow Jones FXCM Dollar Index (ticker = USDollar) was nudged higher this past session, but the move clearly lacked the belief we would expect from a commitment from bulls. Similar hesitation is seen from EUR/USD at 1.3500, GBP/USD at 1.7000 and AUD/USD above 0.9300. While these pairs have some relationship to the ‘reach for yield’ theme, the greenback is a safe haven for liquidity – a higher order of fear. These same pairs can also develop material trend through the adjustment of US interest rate expectations. This is a much more willing fundamental driver through the immediate future with a key monetary policy pressure point due this session. The June Consumer Price Index (CPI) statistics are due at 12:30 GMT and the consensus is for the annual pace to maintain its 2.1 percent clip while the core reading maintains 2.0. If the Fed is to hike, it will be on the basis of price pressures. A substantial deviation may be needed though with the Fed, NFPs and GDP next week.
Euro Markets Cooling and Periphery Bonds Rising is Unusual
Far less resistant to sentiment tides, the Yen crosses have more readily followed equities into their retreat. This pullback has exacerbated some existing moves and subsequently led to provocative technical breakdowns. EUR/JPY dropped below 137.50 and has progressed to its lowest level in five months. NZD/JPY accelerated a three-day, nearly 2 percent tumble that has tentatively broken a two-year rising trendline. Unlike the dollar where its appeal really kicks in when demand for market depth is tantamount, the Japanese currency finds a bid well before that extreme as the market looks to first unwind risky positions before proactively seeking out the havens. As a funding currency driven down by a BoJ that has capped its stimulus effort and a risk drive that is facing low returns, these crosses are far more exposed.
British Pound at Mercy of Yields as Event Risk Approaches
The Cable illustrates the pound’s concern ably enough. The benchmark pair stands just above 1.7050 and the backbone of this past year’s bull trend. A four-day decline (with Monday’s close) presents the pair’s worst run in three months. The next significant step is likely to decide a ‘break’ for bears or revival of the long-standing trend. The sterling has experienced a very strong run on the basis of a hawkish rate forecast – realizing a hike before its major counterparts and seeing a pace that keeps that premium thereafter. How much premium should this view afford the currency? Are we full pricing the hawkish view or has the reach for yield pushed us beyond the objective parameters? Looking at the two-year Gilt yield and 1-year-2-year swap suggests it may be stretched. Watch 0.80 and 2.05 for the two respectively – and 1.70 for GBPUSD.
Australian Dollar: What Happens if CPI Stokes Rate Forecasts?
Next to the US inflation readings, the next most prominent round of event risk for the upcoming session is Australia’s own consumer inflation statistics for the second quarter. The contrast in performance between the Aussie and Kiwi dollar’s over the past few years illustrates the latter’s greatest shortfall: a carry currency that has suffered from an utter lack of hawkish rate expectations. Over the past six months, the expectations for further cuts have been shed. Yet, the jump to hike forecasts has yet to be made. When a key fundamental characteristic is fully underappreciated as carry interest is for the Aussie, there is tremendous potential. But, something substantial is needed to rouse bulls from recent years of cuts and a preoccupation with the connection between Australia and China. An upside CPI surprise could accomplish that.
New Zealand Dollar Stabilizes as Market Sets Hawkish View for RBNZ
The estimates are starting to roll in for the RBNZ rate decision from economists. Last week, the Kiwi dollar suffered a hefty stumble when the country’s 2Q CPI reading printed a weaker-than-expected 1.6 percent annual pace. This is well below the RBNZ’s 2 to 3 percent target and we are already three rate hikes into the central bank’s new regime. Is there enough justification in data and forecasts to keep such a steady pace of tightening – especially when its global counterparts have yet to move? The Bloomberg economist forecast shows 14 of 15 believe another 25 bp hike to 3.50 percent is in store. NZDUSD, meanwhile, is 160 pips off last week’s highs.
Emerging Markets Still Led by Russian Ruble Struggle
The MSCI Emerging Market ETF extended its Friday rebound – pushing the measure back to 17-month highs without committing to reviving the gradual bull trend of the past months. Complacency is currently have a far more productive influence on this market category than even the S&P 500. In fact, the one-month (20 trading day) correlation between the VIX Volatility Index and ETF is 0.81 – strongly positive. Progress for further volatility deflation is naturally limited though. What does that mean for this asset class? Meanwhile, the EM currencies were a mixed bag for the day – and general retrained with the amplitude of their moves. Gains versus the dollar were measured by the South African Rand, Turkish Lira and Brazilian Real. The day’s worst performer was the Russian Ruble – extending its decline following the Flight MH17 incident.
Gold Consolidates Before Market Weighs its Inflation Hedge Appeal
Gold barely budged this past session. The 0.1 percent advance in spot further carved out a diminishing range that has carried over from last week. Taken in conjunction with the proper spark for encouragement, this is generally the formula for a meaningful breakout. Yet, we need an effective catalyst to graduate this potential into realized price swings. The US inflation statistics dead ahead will utilize one of the commodity’s primary fundamental themes – though it also happens to be its weakest. Gold’s appeal as an inflation hedge is severely diminished by global measures of exceptionally weak price pressures. The IMF’s measure of world inflation stood at 3.4 percent – well below the pace that preceded the 2008 bull trend ignition. Furthermore, if US inflation surprises, it will also impact the dollar…a potential impact curb.