The US dollar continued vaulting higher yesterday, with strength broadening impressively versus all other major currencies. USDJPY traded to a new post-global financial crisis high above 106.00 overnight amid news of a slight weakening in Japanese consumer confidence, which has now stalled slightly after improving in the wake of the VAT hike.
GBP remains weak, though in the crosses, we have signs of stabilisation as EURGBP has traded a bit sideways. Perhaps there is a chance of a two-way market for the currency with today’s UK industrial production data (the manufacturing production is the bigger focus) and the appearance of the Bank of England's governor, Mark Carney, when he addresses the Trade Union Congress later this morning.
It is the first interesting data point after the watershed polling developments last week and over the weekend concerning the Scottish independence referendum vote on September 18. Another new poll – this one from the Guardian newspaper – showed a 38% Yes vs. 39% No vote, meaning an awful lot of undecideds out there…
The Federal Reserve Bank of San Francisco published the results of a survey indicating that the market may be underestimating the rate at which the US Federal Reserve will unwind accommodation from next year, with the median estimate from the Fed for the next two years above the median estimate of the primary dealers. Though, to be fair to the primary dealers, they know the doves are in control of the Federal Open Market Committee…
Looking ahead
There is hardly anything of note in the US session later in the day, but plenty is happening, with the big greenback cutting a swathe through the market. Now it’s about holding the line above 105.50 in USDJPY and watching whether the coup de grâce is administered in USDCAD above 1.1000 and AUDUSD below 0.9250 – we’re on the brink of this at the time of writing.
Chart: AUDUSD
Watching and waiting to see if the commodity dollars also fall through critical levels against the greenback – the latest developments in AUDUSD look promising for the USD bulls, as a break of 0.9250 could set up a run toward sub 0.9000 levels, if we use the height of the head-and-shoulders formation as a basic guide to the downside potential (the 100% projection shown in the chart).
The next major test for the US dollar will be next Wednesday’s Fed meeting, where we likely face some kind of adjustment to the current statement that we are probably getting inside the “considerable time” for how much longer the rate will remain at zero – meaning that we’ll need to see some kind of language adjustment.
Still, despite the USD upside we are seeing at the moment, the forward Fed rate trajectory is almost entirely unchanged over the last couple of weeks – and the ebb and flow of expectations has centered on the same expectations for the better part of a year. Neither is there enough pressure from the strength in the data to expect that the Fed makes anything but the most incremental adjustments.
The CHF factor
The other big question is what the Swiss National Bank will do next Thursday – or before. A strong move into punitive rates on sight deposits could put EURCHF back into the old trading range and see USDCHF soar toward parity, while no move would mean possible pressure on the floor, with tremendous gap risks if sub-1.20 levels trade and the SNB decides to “let it go”. Not likely – but possible.
Economic data highlights
- UK Aug. BRC Sales Like-for-like out at +1.3% YoY vs. +0.3% expected and -0.3% in Jul.
- Australia Aug. NAB Business Confidence/Conditions out at +8/+4 vs. +10/+8 in Jul., respectively
- Japan Aug. Consumer Confidence Index out at 41.2 vs. 42.3 expected and 41.5 in Jul.
- UK Jul. Visible Trade Balance (0830)
- UK Jul. Industrial and Manufacturing Production (0830)
- UK Bank of England’s Carney to Speak (1045)
- US Aug. NFIB Small Business Optimism (1130)
- Canada Aug. Housing Starts (1215)
- UK Aug. NIESR GDP Estimate (1400)
- US Fed’s Tarullo to Speak (1400)
- Euro Zone Bundesbank’s Dombret to Speak (1800)
- Japan Aug. PPI (2350)
- Japan Jul. Machine Orders (2350)
- Australia Sep. Westpack Consumer Confidence (0030)
- Japan Bank of Japan’s Iwata to Speak (0130)