Will the G8 Meeting Impact the US Dollar?

With the stock and bond markets closed for Independence Day in the US, the foreign exchange market was extraordinarily quiet. The dollar has fluctuated within a tight range against the Euro and Japanese Yen as the non-committal nature of the Federal Reserve and the European Bank leave little direction for the US dollar, let alone the EUR/USD. The economic calendar next week is also very light. The only pieces of data worth watching are pending home sales, the trade balance and the preliminary release of Consumer Confidence by the University of Michigan. Most of these numbers should be weak, but the impact on the US dollar could be minimal. The only thing that can have a meaningful impact on the dollar is the G8 meeting in Japan which will be held from July 7 to July 9. Last month was the finance ministers meeting, which proved to be a non-event for the US dollar. However going into that meeting, there was a lot of speculation about the possibility of currency intervention and a major change to the language relating to currencies in the communiqué. Inflation is a problem that central banks around the world are struggling with and the part of the reason why inflation has gotten to current levels is US dollar weakness. Official opposition to further dollar weakness by the G8 would trigger a major turn in the US dollar, one that could take USD/JPY towards 110 and the EUR/USD below 1.55. G8 meetings have in the past been huge market movers for the US dollar. However this time around, there has been barely any speculation for a similar move. Part of this could be because it is still early. Any official statement will not be released until next Wednesday. China has already been unusually vocal about wanting to see the dollar stabilize and with oil prices hitting a new record high on Thursday, inflation has worsened. However no central bank governors are expected to attend the meeting in Hokkaido. In the past decade, all of the meetings that have affected the FX markets have been attended by central bank governors. Therefore like the Finance Ministers meeting last month, the upcoming G8 meeting attended by world leaders could end up being a nonevent for the US dollar.

Euro: No Bias Equals No Action

The Euro has weakened modestly against the US dollar following a surprising drop in German factory orders. For the sixth month in a row, factory orders have been negative, which comes in sharp contrast with the stronger manufacturing PMI report released earlier this week. According to Goldman Sachs, European Banks may have to raise as much as EU90 billion euros to restore their balance sheets. On Thursday, ECB President Trichet had his chance to engineer a new trend in the Euro. The market was looking for hawkish comments and if he delivered them, the EUR/USD would be on its way to a new record high. Unfortunately Trichet gave currency traders little to work with by introducing two new buzz words - “no bias.” This proved to be the biggest disappointment for Euro bulls and unless Trichet reverses his stance, no bias could lead to no action in the EUR/USD this summer. Since the beginning of the second quarter, the EUR/USD has been trapped within a 1.53 to 1.60 trading range and that range will probably remain intact until Labor Day. Like the US, the Eurozone economic calendar barely has any market moving data. German industrial production and the trade balance reports are the only numbers worth watching. First quarter GDP is also due for release, but these are final numbers, which means that they should not be very market moving. Meanwhile Switzerland will be releasing their unemployment numbers which are expected to trend lower.

British Pound Faces Bank of England Rate Decision

The currency pair with the most market moving data next week is the British pound. The Bank of England has an interest rate decision scheduled while the UK will release their industrial production and trade balance reports. Given the repeated disappointments in the PMI numbers, we now understand why the BoE has been reluctant to raise interest rates. Mervyn King and his colleagues are expected to leave rates interest rates unchanged once again at 5 percent - the last time they altered rates was in April when they eased by 25bp. If rates are not changed, the BoE will not release any comments or statements, which means that Thursday’s rate decision could be a non-event. In the week ahead, unless industrial production is surprisingly strong, the British pound should underperform the US dollar and Euro.

Australian, New Zealand and Canadian Dollars Edge Higher

The Australian, New Zealand and Canadian dollars edged higher today as the US dollar retraced its gains. Canadian IVEY PMI came out 69.6, much stronger than the market expected. The employment component of the report actually dropped from 59.3 to 58.2, which suggests that the Canadian employment numbers next week should be weak. Australia will also be releasing their labor market report. Given the drop in the employment component of service and manufacturing sector PMI, a larger number of Australians may have dropped off of June payrolls. New Zealand only has their Business PMI index due for release – which we expect to be bearish for the Kiwi.

Japan: Busy Economic Calendar

In contrast to the US, Japan has a very busy economic calendar next week with the Eco Watchers survey, machine orders, trade balance, corporate goods price index, consumer confidence and industrial production due for release. This could lead to some yen driven price action, which is something that we haven’t seen in a while. Keep an eye on US equities however since risk or no risk is still the primary driver for Japanese Yen crosses.

Kathy Lien is the Chief Currency Strategist at FXCM.