FX Update: Can USD Rally Extend?

We closed last week with a slightly stronger US dollar in the wake of the reasonably strong ISM surveys (note that the ISM non-manufacturing survey saw the strongest new orders component since early 2011 and the strongest employment component since January). This pulled the anticipation of the Fed’s first rate increase forward again, about as close as it was before chair Janet Yellen’s very dovish appearance at the last Federal Open Market Committee (FOMC) meeting pushed it back. The European Central Bank (ECB) meeting saw very few developments, with the euro trading passively and in line with its recent weakness. The week also saw a strong UK services PMI (though very slightly less strong than expected). Germany’s industrial production dropped sharply in May – another negative sign after a number of weaker expectations surveys in recent months. This is a growing theme that isn’t getting enough attention . The issue of failed repo trades, on the other hand, is gaining increasing attention as the Fed struggles with some of the unintended consequences of its extreme monetary policy of the last several years as it has bought up too much of the longer-term treasury supply. Bloomberg covers this important issue . No one is safe if there are dangers lurking in what is traditionally supposed to be the most liquid safe haven of them all: US treasuries. Another Bloomberg article discusses how currencies are no longer following “the fundamentals” of changes in current account as the focus is entirely on capital flows and central bank policy. I have indirectly pointed this out on a number of occasions, as, for example, the Australian dollar has entirely failed to pay attention to changes in the declining prices for key commodities exports like iron ore and the sterling rally continues to ignore the massive shortfall in the UK’s current account. Looking ahead Technically, the focus this week will be on the 1.3500 area range low in EURUSD, whether GBPUSD is capped for now and will feel around for a higher support above 1.7000 and whether USDJPY can ever get anything going (I would like to see US treasury yields moving through that 200-day moving average around 2.70% on the benchmark to support that idea, otherwise, the range may hold). Elsewhere, it’s whether the US data was sufficiently strong to see the greenback pull higher against the commodity dollars as USDCAD probed the last shreds of support ahead of 1.0500 in the low 1.0600’s last week and AUDUSD suffered a big reversal that has yet to see further confirmation. Chart: AUDUSD AUD traders this week will look for whether last week’s reversal in AUDUSD can lead to a full test of the range lows below the local support at 0.9320. Bulls will need a sharp reversal this week back above 0.9400/25 to brighten prospects for a fresh attempt higher. The Wednesday Australian employment report will likely provide the spark for the next leg in either direction. It’s a relatively quiet week ahead on the economic calendar, particularly for the US. Today’s main highlight is the Canada June Ivey PMI. Other calendar highlights this week of note include: Wednesday:

• Australia June Employment Change and Unemployment Rate (key after last week’s AUD reversal).
• US Fed FOMC meeting minutes – not expecting a lot from these. While the hawks have shown of getting more hawkish and widening the gap to the doves-in-control, there is little prospect of a hawkish majority any time soon.
• Sweden – Sweden will remain sensitive to all incoming data for a while after the big Riksbank 50-bp rate cut shocker last week

• Sweden June CPI – the most important of Sweden indicators as the Riksbank has ratcheted up the deflation fears
• Norway June CPI – Like SEK, NOK will remain very sensitive to incoming inflation data after the recent dovish turn by the Norges bank.
• UK Bank of England Rate Announcement – no move and no statement expected. Current expectations are not looking for a BoE rate hike until the November/December time frame

• Canada Jun. Employment Change and Unemployment Rate - this tells us whether the lows are in or whether we are headed for a test of the next major support at 1.0500.

• Australia Jun. AiG Performance of Construction Index out at 51.8 vs. 46.7 in May
• New Zealand June QV House Prices rose 8.0% YoY vs. 8.2% in May
• Switzerland June Unemployment Rate out unchanged at 3.2% as expected
• Germany May Industrial Production out at -1.8% MoM and +1.3% YoY vs. 0.0%/+3.6% expected, respectively and vs. +1.3% YoY in April.

• Norway May Industrial Production and Industrial Product Manufacturing (0800)
• Canada June Ivey PMI (1400)
• Sweden Riksbank’s Ingves to Speak (1730)
• Japan May Current Account Balance (2350)
• Australia June NAB Business Confidence/Conditions (0130)
• Japan BoJ Deputy Governor Nakaso to Speak (0345)
• Japan June Eco Watchers Survey (0500)