*** Kathy will be in Asia. No Daily Reports between Aug 11 and Sept 2. Periodic Macro pieces may be written
By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
- 3 Main Events in FX this Week
- Euro Extends Gains on Signs of Greek Progress
- GBP Squeezes Higher, Stops Triggered
- USD/CAD Hit Hard by Oil Rebound
- AUD & NZD: Shrug Off Disappointing Chinese Trade Data
3 Main Events in FX this Week
Compared to last week when we had the Bank of England and Reserve Bank of Australia's monetary policy announcements along with New Zealand’s dairy auction and employment reports from U.S., Canada, Australia and New Zealand, this week should be decidedly quieter. We only have 3 main pieces of economic data scheduled for release – UK employment, U.S. retail sales and Eurozone GDP. While each one of these reports provides important insight into the respective economies, we don’t expect the market’s general outlook for these currencies or their expectations for monetary-policy changes to be altered by the releases. For the U.S. in particular, Friday’s non-farm payrolls report keeps September tightening on the table and the retail sales report isn’t expected to change this possibility. Thursday’s report is extremely important because consumer spending is the backbone of the U.S. economy. But between the overall strength of the labor market, the rise in spending reported by Johnson Redbook and the natural rebound that is expected after the drop in June, retail sales should rise strongly for July. A good number would reinforce the market’s expectations for tightening and keep the dollar bid. However after appreciating significantly in the past few weeks, the dollar is struggling to extend its gains. The 125 level is proving to be rock-solid resistance for the currency pair and in order for this level to break, retail sales would need to rise 0.8% more (headline and core) otherwise consolidation is likely for the next few weeks. No U.S. economic reports were released Monday but we heard from Federal Reserve Presidents Lockhart and Fischer. Both policymakers failed to harden or soften the market’s outlook for monetary policy but Lockhart sounded optimistic while Fischer sounded cautious. According to Lockhart, the central bank made significant progress in driving down the unemployment rate and the point of liftoff is close but according to Fischer, “global deflation is a factor that bothers us." So while one Fed President suggested that rates could rise sooner the other sounded less excited about tightening.
Euro Extends Gains on Signs of Greek Progress
Like the U.S., no major economic reports were released Monday but the same drivers that lifted the euro at the end of last week continued to lend support to the currency this week. Euro extended its gains versus the U.S. dollar on dollar profit taking and progress in Greek debt negotiations. According to European Union officials, the mood is optimistic and everyone hopes that a deal will be made by the August 20 deadline. The lack of overt resistance by Germany is definitely helping the euro and allowing the currency to remain within a 1.08 to 1.11 trading range. While we are worried that the talks could break down in the next 10 days, the conciliatory tone of Greece and its creditors is good news and the consolidative price action in the EUR/USD suggests that investors are hopeful. A lot of progress needs to be made this week to meet the deadline and if negotiators are successful, we expect to see a further short squeeze in EUR/USD. In the meantime, the German ZEW survey is scheduled for release Tuesday along with Q2 German and Eurozone GDP. Easing concerns for Greece and stronger data should bolster investor confidence and growth.
GBP Squeezes Higher, Stops Triggered
Sterling performed well on Monday despite the lack of U.K. or U.S. data. The gains for the currency pair were swift once the 1.5570 level was broken. Last week the changes to the Bank of England’s economic forecasts suggests that the central bank is in no rush to raise interest rates. For the past few months we have been saying that the BoE will raise rates in 2016 and our outlook has not changed. Given that there are at least 4 months until the New Year, this timing is consistent with the central bank’s relaxed timing on raising interest rates. U.K. employment numbers are scheduled for release next week and no major changes are expected. The manufacturing sector reported strong job growth but the service sector saw slower growth. The most important thing to remember is that while the BoE is in no rush to tighten, it will still be the next major central bank to raise rates and therefore sterling should be bought on dips and not sold on rallies.
USD/CAD Hit Hard by Oil
All three of the commodity currencies ended the day virtually unchanged against the U.S. dollar but the lack of day-to-day changes masks significant intraday volatility. At the start of the North American trading session, the Canadian, Australian and New Zealand dollars were trading significantly lower. CAD was hit by the early decline in oil prices while AUD and NZD were pressured by this weekend’s Chinese economic reports. The price of crude reversed sharply intraday rising more than $1 from its lows to end the day, up approximately 2%. In response USD/CAD dropped like a rock, experiencing its largest one-day decline in 2 months. We still believe that the uptrend is intact in USD/CAD and are looking for Canadian data to continue to weaken. Meanwhile, according to our colleague Boris Schlossberg, “China reported a Trade Surplus of $43B versus expectations of $55B as exports slumped a whopping -8.3% on a year-over-year basis. Imports also declined by -8.1% suggesting that the broad slowdown in the Chinese economy continues. Analysts are now starting to anticipate the possibility of recession in the commodity-based economies with Canada looking most likely to slip into negative growth territory if crude remains at the current low price for an extended period of time.” I agree and believe that AUD and NZD should be trading lower.