Dollar: Is The Turn For Real?

What a difference a day makes. By the middle of last week the euro was all the rage in the FX market and trader’s sights were set on a retest of record highs for the EUR/USD. But a one-two combination of relatively “positive” NFP numbers and a much more subdued Jean Claude Trichet knocked the euro for a loop and by the end of trading session on Thursday the pair lost 200 points.

So is this turn in the dollar for real? In the short term we think the answer is yes. Now that further rate hikes from the ECB appear to be very much in doubt, the greenback’s strength is likely to come not so much from any shockingly positive US economic news, but rather from further speculative unwinding of euro long positions.

As a matter of fact, on the economic front there is little to cheer about for dollar bulls. The NFP report was hardly encouraging showing a sixth consecutive monthly loss of jobs with the forward indicators suggesting that the US economic data may only get worse, Under those conditions the Fed may have a very difficult time raising rates in September and once the market reaches that conclusion the pair could resume its rally as interest rate differentials take center stage once again.

For the time being, however, the unexciting US economic calendar and the onset of summer vacation season may keep trading flows to a minimum containing EUR/USD to 1.5400-1.5800 range. Next week key event risk occurs on Friday with both Trade Deficit and U of M data expected to be slightly dollar bearish. However, given the paucity of economic reports next week oil may play a crucial role in setting the near term direction for the pair. Now that sentiment has turned in buck’s favor, if crude comes off the highs dropping through the $140/bbl level it could encourage dollar bulls to push the EUR/USD further and test the 1.5500 level as the week progresses.

Euro: Looks Like One And Done

We wrote on Friday, “The true cause of the EUR/USD vertical drop was Mr. Trichet’s post rate hike press conference in which the ECB chief uttered the four little words, “I have no bias”, that killed the euro. The unit’s latest rally has been driven almost exclusively by higher yield expectations. As we noted at the start of the week, the key question for the currency market vis a vis the euro was one and done or more to come? After Mr. Trichet’s press conference the “one and done” scenario appeared far more likely taking all the momentum out of the euro rally.”

Now that another rate hike from ECB seems problematic the euro rally has hit a wall and upcoming economic data is unlikely to prove supportive next week. Industrial Production is expected to pull back to 3.2% from 4.8% the month prior and given the sharp decline in Germany Factory orders may even provide a nasty surprise to the downside. Additionally German Trade Balance is also forecast to decline from the April reading as high energy prices and high exchange rates are due to take their toll. In short, next week is setting up as a difficult environment for euro longs with the unit primed to test the 1.5500 support as speculative capital continues to flow out of the unit.

Has the pair carved out a triple top at the 1.5900 handle? Perhaps. But as our technical analyst believes that the current down move is corrective in nature and given gloomy landscape for the US economy over the next several months we tend to agree. In the short run however, the euro clearly remains on the back foot.

Market-Moving Data Keeps The USD/JPY Intact, Back To Carry

There was a significant number of economic indicators from both sides of the USD/JPY pairing last week. And, through the fray, volatility would ultimately bow to technicals and keep the four-month old rising trend from March’s spike low on the rise. Looking at the Japanese docket, there were not only a number of fundamentally interesting reports, but even a few figures that are known market movers (news from the land of the rising sun is rarely – if ever – market moving). Topping event risk over the past week was the second quarter Tankan survey’s statistics. The most closely followed business sentiment report beat the market’s very negative forecasts but still marked the worst readings for current and future activity in years. The outlook for activity hit a five-year low for manufacturers and a four-year low for service-based firms. This isn’t surprising considering raw material prices have surged while consumer demand has hit a six year low. What could be construed as a surprise though was expectations for the first decline in earnings since the 2001 recession and plans to throttle capital expenditure back to its weakest pace in six years.

Other indicators on the calendar roused little response from the yen; but certainly threatened the overall health of the economy. Offering a more timely read on the manufacturing sector, the June PMI figure fell for a fifth consecutive month to its lowest reading since records began in 2004. As for domestic demand, it seems the Japanese consumer won’t be a pillar for expansion through the second half of the year. Earnings in the year through May grew a slight 0.2 percent as businesses look to cut wages to preserve positive revenues as demand cools. However, with consumer confidence at a six-year low, spending trends at their the weakest since September 2006 and inflation at a decade high, the wage cuts may ultimately cull revenues further as Japanese shoppers tighten the purse strings.

In the days ahead, there are few economic indicators that threaten volatility from the yen. Key event risk is Tuesday morning’s Eco Watchers Survey. The sentiment report has been trolling lows not seen since the end of 2001. The ongoing decline in domestic demand and rise in raw material prices will be particularly taxing for this ‘man on the street’ reading. Among the other notables is the consumer confidence report for June – which will no doubt reflect the adjustment in energy prices and decline in wages. Looking over at the US docket for cross exchange headwinds, its seems there are few major landmines. This otherwise restrained fundamental setup will no doubt open the door to bigger technical trends and carry trade sentiment. With global equities pushing lows not seen in years, a rebound in risk trends could find a renewed correlation between the carry trade and capital markets resulting in a sharp correction from one of the markets.

Fundamentals May Not Sustain A Pound Rally Alone, Can The BoE Help?

Many believe the UK economy is in its worst state since the recession of 2001, and last week’s data is quickly bringing those skeptics over to the dark side. There was a battery of major economic releases that was otherwise clouded by interest rate speculation in other currencies. However, the significantly dour fundamentals from the past week will no doubt have a major impact on the economy and currency later down the line. The period started off on a weak footing with the GfK’s consumer sentiment survey dropping to its lowest level since 1990 (and notably just off a far greater low) during the London riots. As the week wore on, the focus shifted from consumer to the housing market – which happens to be in just as dire a state. Mortgage approvals in May hit a record low while the Nationwide Housing prices report for June fell at its fastest pace since 1992. Further suggesting things would only worsen for the housing market and consumer, the BoE’s survey of Credit Conditions for the second quarter left policy officials warning that credit conditions would only worsen over the coming three months. Finally, the broad picture was seen in PMI figures that measured the three major sectors of growth: services, manufacturing and construction. All three suggested their respective group’s were contracting – with factory and service activity at its lowest levels since 2001, while construction outdid the such declines with an 11 year low of its own. Overall, this puts the central bank’s forecasts for growth to cool to a 1.0 percent clip (the weakest pace of expansion since 1992) with in sight.

However, despite the very dire tone of the economic swell, there the pound was still rather reserved in its pull back. This is likely due to the ongoing battle between rate expectations between the Federal Reserve and Bank of England. Both policy bodies have taken a notably hawkish turn in their policy statements after a series of rate cuts. At the same time, each has also refrained from giving a distinct timeline for any hikes. Mervyn King has suggested he plans to write a number of letters with inflation above the 3 percent limit. On the US side, the Fed has failed to move beyond caution over upside inflation risks. With the fundamentals underlying this pair shifting though, it will only be a matter of time before the market will need to add economic activity into their forecasts for interest rate decisions and GBP/USD direction.

Looking at the docket ahead, the stalemate in the BoE/Fed rate outlook may come one step closer to resolution with the MPC’s rate decision on Thursday. The policy group is expected to hold the benchmark at 5.00 percent. The presence (or even absence) of commentary with this decision though may be the deciding factor for rate forecasts. If there is a statement with the announcement, the hawkish or bullish tone could dramatically alter the bias in speculation for near-term hikes. On the other hand, if the bank holds with tradition and doesn’t release comments, the probability for a near term move will move back into the Fed’s favor and push GPB/USD lower. Other indicators to watch out for will be the industrial production, Nationwide consumer confidence and trade balance reports.

Swiss Franc Fails To Rally Despite Dow Tumble—What Gives?

The Swiss Franc moved marginally lower against the US dollar through the past week of trade, as drops in global equity markets were not enough to save the CHF from a late USD rebound. Indeed, it was the first week in recent memory that the typically risk-sensitive currency did not move in lockstep with the US Dow Jones Industrials Average and other key risk barometers. Domestic economic data had likewise little effect on the Swiss Franc; effectively unsurprising Consumer Price Index and SVME Purchasing Managers Index results left domestic fundamental outlook relatively unchanged. The biggest market-moving event on the week actually came from the US economy, with an effectively lackluster US Non Farm Payrolls report forcing major moves in the American currency. Pessimistic forecasters had predicted that the world’s largest economy would lose a significant number of jobs through the month of June, but an effectively at-consensus NFP print ironically produced a strong US dollar rebound. It seems as though outlook for US expansion has become so dire that even the most mediocre data is enough to lift sentiment—hardly a supportive atmosphere for growth-sensitive US stock markets. It is perhaps unsurprising to note that the US Dow Jones Industrials Average hit its lowest levels in nearly two years through end-of-week trade, but the Swiss Franc nonetheless seemed unresponsive to further financial market duress. Subsequent outlook for the low-yielding CHF will likely depend on upcoming Swiss event risk, but a limited economic calendar may bring similarly muted volatility in CHF pairs.

The sole notable piece of economic event risk will come on Monday, when government officials will release June unemployment figures for the domestic economy. Analysts predict that the Swiss jobless rate will remain effectively unchanged through the month of June when adjusted for seasonal volatility—hardly a recipe for sharp volatility surrounding the event. Indeed, we would argue that it will likely take a sizeable disappointment to elicit strong responses from CHF traders; relatively stable economic outlook means that traders are unlikely to place any significant weight on an individual economic report. Otherwise, currency speculators will have to watch how the Swiss Franc responds to any flare-ups in volatility for global equity markets. Recent price action suggests that CHF traders will place little weight on movements in risky asset classes, but longer-term correlations nonetheless underline the fact that the Swissie most often responds to shifts in global risk appetite. We will keep a watchful eye on the CHF’s relationship with the Dow and other major equities, but there is relatively little reason to expect major volatility out of Swiss Franc pairs.

Canadian Dollar Stuck In Range – Can Upcoming Data Force A Breakout?

The Canadian dollar remained effectively unchanged through end-of-week trade, as a virtually empty domestic economic calendar left the Loonie to the will of indecisive currency market flows. An initial USD/CAD rally on surprising US dollar strength sent the pair near key resistance levels in the 1.0250-1.0300 range, but a similarly sharp reversal suggested that speculators were not yet willing to break it from its 8-month trading channel. The directionless price action has frustrated traditional trend-following currency trading speculators, and the pair’s reluctance to break beyond well-established trading ranges may continue through the near term. IVEY PMI -- Not even fresh record-highs in Crude Oil prices were enough to force worthwhile rallies in the Canadian Dollar, and traders will have to wait for several key economic data releases for any realistic hope of sustained price moves in the USD/CAD currency pair.

Canadian Building Permits, Employment, and Trade Balance data releases will likely bring noteworthy intraday volatility for the domestic currency, and any especially large surprises could force major price breakouts in the otherwise rangebound USD/CAD. Monday’s Building Permits report will likely show that building activity slowed after an unexpected surge through the month of April—consistent with overall moderation in domestic construction activity. Event risk will subsequently die down until Friday, when government officials will release Net Change in Employment and International Merchandise Trade Balance figures within a short time frame. Analysts predict that the Canadian labor market added 10,000 jobs through the month of June—its second-lowest monthly gain from year to date. The relatively muted forecasts reflect renewed pessimism that a downturn in global growth will affect the highly trade-dependent economy, but economists nonetheless predict that net exports will continue to rise on strong energy prices. Record-highs in crude oil will surely boost the trade balance and should increase global demand for the domestic currency. Yet the Loonie’s correlation to oil has weakened considerably through recent trade and strong intraday price moves in crude have seemingly done little to move the CAD. It appears that little can force the USDCAD out of its long-standing range, but traditional trend-following traders hope that the coming week’s key data may be able to force sustained volatility for the North American currency pair.

Employment Change Report Threatens Aussie Dollar Bulls

The Australian dollar saw substantial volatility last week as a barrage of fundamental releases had price action seesaw below the 20-year high just above 0.9600. The week started off in a tame fashion as AUD/USD failed to react to May’s dismal HIA New Home Sales figure as the metric plunged -9.4% since the preceding month. This validated our analysis, as we wrote going into the week that “Home Sales data is likely to show continued weakness. With a slowing economy and high borrowing costs standing in their way, Australians are unlikely to take on big-ticket purchases.” Things got more interesting as the RBA announced that interest rates would remain at 7.25%. Governor Glenn Stevens noted that while the outlook for inflation “remains concerning”, current monetary policy “remains appropriate” given expectations that demand will “moderate this year”. Traders took the neutral language as a sign of weakness and the AUD/USD was sold off to end the trading day 82 pips lower. These losses would be fully reversed the following day as May’s Retail Sales figure surprised to the upside, yielding the fastest increase in 6 months to print at 0.7% versus 0.1% expected. Perversely, the improvement in retail activity came in the same month that economy lost -19.7k jobs. Though it is tempting to interpret this as indicative of Australians’ confidence in finding new employment and thereby make a statement about the resilience of the labor market, it should be noted that some lag is to be expected before job losses translate into reduced disposable income expectations and depress consumption. The week concluded with May’s Trade Balance showing a shortfall of -A$965 million versus a narrow A$12 million surplus in the preceding month. The deterioration was driven by a 6% jump in imports. Fuel imports led the rise, gaining a whopping 17% as oil prices continued to soar. Going forward, a decline in consumer demand will take some of the steam out of import growth. That said, the oil rally shows no signs of weakness as of yet and fuel costs will likely continue to boost imports in the near term. With a leveling off in export growth, last month's surprising surplus looks to have been a one-off affair.

This week brings some timely new insights into how the economy has weathered the end of the second quarter and the beginning of the third. Monday will start things off with June’s edition of NAB Business Confidence. The reading has stalled at 6-year lows having plunged 59% in the first quarter. Intuitively enough, the decline ended just as the RBA stopped raising interest rates. Therefore, it can be expected that entrenched expectations of continued monetary policy inaction for the rest of the year are likely to keep business confidence near current levels. Tuesday will give a timely look at the current state of affairs with the release of July’s Consumer Confidence report. The index slumped to the lowest since 2005 in June. Traders will look for continued downside to confirm that May’s buoyant Retail Sales will reverse course deeper into the second quarter. The week’s significant data is exhausted on Wednesday as it is revealed if June saw continued deterioration in the labor market following May’s aforementioned loss of -19.7k jobs. The loss came as Australian companies yielded to a dual assault from high energy prices and record borrowing costs. Generally speaking, employment is the last indicator to turn south as the economy slows down. With little changed in the underlying forces driving labor demand from May, traders will expect another drop to cement Australia’s downward trajectory in the near to medium term.

NZ Dollar To Remain Ranging As Data Fails To Surprise The Market

Last week’s calendar yielded results in line with our analysis. Going into the week, we wrote that “June’s NBNZ Business Confidence reading will offer a timely look at the end of the second quarter and can be expected to fit with the broader theme of broad economy-wide slowdown. Persistently high input prices can only add to firms’ negative sentiment.” Sure enough, the metric plunged to -38.7 from 49.7 in the preceding month. Further we noted that “June’s Commodity Price index may decline following an easing in dairy prices through June, dragged down by New Zealand’s biggest export item.” Indeed, the index flat-lined, showing 0.0% from May. Policymakers had hoped exports would buttress the economy as domestic demand falters under the weight of rising commodity prices and record-high interest rates. On balance, the releases failed to stir the market as expectations of overt decline for the economy have already seen the RBNZ signal rate cuts by the end of this year. The New Zealand Dollar has been confined to a neat 81-pip range since mid-June.

Next week’s docket offers precious little to catalyze price action for a break-out. NZIER’s Business Opinion Survey will likely fall in line with the economy’s overall trajectory to show continued gloom in the second quarter. June’s REINZ House Sales figure is to follow lower as well, having put in an abysmal -52.9% drop in May. As with the housing market in New Zealand’s larger neighbor, it is unlikely that New Zealanders will take on big-ticket purchases with a slowing economy and high borrowing costs in their way. The week will conclude with June’s Business NZ PMI. All signs point to a repeat of last week’s NBNZ release, with the metric slipping deeper below the 50 boom-bust level. All told, none of these releases are likely to offer substantial fuel for a directional breakout in the NZD/USD. As such, the pair will see familiar range-bound price action in the near term.

Boris Schlossberg is a Senior Currency Strategist at FXCM.