With most of Europe on vacation, there’s very little left in the month of August as far as compelling economic data to be released and the latter half of the month is expected to be quiet.
Monday saw fairly muted trading volatility amongst the major currencies with the exception of the NZD/USD pair – which is to be expected given that the only major event this week is the Reserve Bank of New Zealand’s interest rate decision on Wednesday. The kiwi traded in a range of 70 pips Monday with a generally downward trend eventually settling around the 735 handle.
Given a weaker number in labor force participation, which fell roughly half a percent to 70% in Q2, slower GDP growth weighing and softening PMI’s, I anticipate the RBNZ will be much less hawkish in their conference that follows an hour after the rate announcement – there is virtually zero probability of a hike or cut. Thus a decline is anticipated in the pacific currency, likely accompanied by strong volatility.
The pound has seen probably the strongest move coming in at 3 straight days of selling totaling around 189 pips on the back of NFPs and very dovish commentary from the BoE last week. The currency broke a strong trend line of support originating in late June and has seen selling pressures strongest during the overlap trading hours between London and New York, when the major players are all repositioning their portfolios. It is unclear whether the selling will stem after the 3-day selloff or if institutions will continue to pressure the currency downward sparking more than a correction.
The euro seems to be the only resilient currency amongst the majors. While it has enjoyed a substantial rally since the start of the year, it recently broke the 1.18 handle (a solid trend support line from about the end of June) on news of stronger than anticipated NFPs.
The question is: will the euro continue this potential correction or climb over the 1.19 handle and quite possibly see the long awaited 1.20 handle? Markets will have to be patient.
Since there is no significant data upcoming and the euro’s rise has largely been attributed to dollar weakness and tapering stimulus and the conflict in sentiment now seen from recently strong U.S. data, I would say the question will be answered based on what ECB President Mario Draghi has to say at the upcoming Fed gathering August 24th-26th. It is widely expected that Draghi will use this platform as an opportunity to signal central bank policy for the eurozone. The event takes place just two weeks prior to the meeting of the decision-meeting Governing Council in Frankfort.