One week into August and the currency market still acts as on holiday mood. The NFP release at the end of the previous week didn’t bring the much-expected break in the USD pairs, despite noteworthy developments.
While the flagship NFP number disappointed, once again the previous releases were revised higher. The revisions alone (+59k) were enough to compensate for the disappointing number.
As such, it is no wonder the USD traded randomly, with algos not knowing what to do with the data.
This week started with ranges and critical levels still holding. The EUR/USD threatens the downside, with 1.1500 stops looming large, while the USD/JPY pair seems unable to float above 112, while bid above 111.
With USD/CAD flirting with the psychological 1.30 level waiting for news related to the NAFTA treaty, there is not much of economic news to move markets. That is, until the following Friday when the U.S. CPI is due.
The monthly data is closely watched by Forex traders looking for clues about what the Fed will do. If last week’s FOMC Statement is of any value, the Fed looks poised to continue raising the rates. The number of times it used variations of the word “strong” increased, highlighting the willingness to let the dollar squeeze higher still.
While the move not visible against major Forex pairs (despite EURUSD down two big figures recently), it shows a terrific upswing against emerging markets currency. The Turkish Lira (TRY) in particular looking extremely weak in an environment destined to see the USD strengthening even more.
The end of July saw the Fed shrinking the balance sheet with a further twenty-five billion dollars drained from the international financial system. It is like the Fed cuts the lifelines for emerging markets as the monetary policy and the strength of the USD seems more and more like a weapon in today’s global economy.
Will emerging markets adapt via issuing debt in other currency? (e.g., CNY – Chinese Yuan). Unlikely.
What is likely to happen is for the dollar to squeeze higher in a low-volatility environment. For this, the summer month of August seems to offer perfect conditions.
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