U.S. Dollar Fakeout
Thursday was not a happy day for dollar bulls. After essentially convincing the whole FX market that it was serious about fighting inflation, the Fed completely blindsided dollar longs by issuing a surprisingly dovish FOMC statement. By stating that any additional firming "will depend on the evolution of the outlook for both inflation and economic growth" the Fed instantly depressed any expectations of another 25 basis point rise in August and sent dollar bulls stampeding for the exits. As a result, the EUR/USD catapulted more than 200 points off its pre-FOMC lows ending the week materially higher as market sentiment made a major shift away from the greenback.
As one writer so indelicately put it, Bernanke lied and dollar bulls died. Is this the last of the Fed hikes? Perhaps. Certainly the PCE deflator data released early on Friday did not suggest any runaway price inflation as the number printed at 2.1% in line with expectations. In short as we noted on Thursday, â,"At this point, odds for an August rate hike have been lowered and we are much closer to seeing if we have not already seen the Fed's very last rate hike in this cycle.â,
Next week, the market will be able to gauge the true extent of slowdown in theUS economy as both ISM Manufacturing and Non-Manufacturing data hits the tape. Finally, Non-Farm payrolls will be released on Friday. Any print within 150K should keep dollar bears at bay as it would suggest that US economy continues to muddle through, a number below 100K however, would make the probability of further rate hikes remote at best and will likely exacerbate dollarâ,"s decline.
The Return of the Hawks
In addition to the dovish FOMC announcement, the euro benefited from the decidedly more hawkish rhetoric from EZ monetary officials. As everyone from Weber to Mersch to Smaghi hinted that rates will rise in by as much as 50bp in the near future, traders put a solid bid underneath the unit never letting it trade below the 1.2500 level. However as we noted on Friday â,"much like the overenthusiastic dollar bulls, euro longs may be overestimating the true intent of Euro-zone monetary policy makers. Given the tepid rate of consumer spending as evidenced by the sharply lower than expected German Retail Sales the we believe the possibility of a 50 basis point hike in August is small at best.â,"
Next week the EZ calendar is significantly more crowded with both Manufacturing and Services PMI expected show continued strength in the regionsâ," economy. On Thursday the ECB will announce rates, although this is a non voting meeting and the market expects the repo rate to remain at 2.75%. The real focus will be on any communiquƒ© from the ECB with an eye towards the August rate hike. Overall, the momentum from last weeks sharp rise should continue if the eco data remains supportive. However, much like the Fed, the ECB is subject to huge political pressures and is unlikely to act aggressively. Therefore while the euro does have some upside left its is relatively limited. For the time being we believe that pair will remain range bound.
Fukui Fades
It is really no longer a question of if but rather of when. We are referring of course to the issue of lifting the long held Zero Interest Rate Policy by the Bank of Japan. Over the past few weeks monetary policy considerations have been eclipsed by the scandal surrounding the BOJ Governor Fukui. However, despite the Fukuiâ,"s unending troubles regarding his investments, the market is coming to the conclusion that the BOJ will have to raise rates whether Mr. Fukui remains at the helm of the Central Bank or not. The only question in most traderâ,"s minds is will it happen in July or in August. Regardless of the date, a move away from ZIRP will most likely precipitate the liquidation of the carry trade and should provide support for the yen.
Last week, Retail Trade data rose a healthy 0.6% while inflation gauges continued to show positive year over year comparisons. The increase in Retail Sales was the fifth rise in seven months â,“ a trend that bodes well for Japanese economic growth going forward.
Next week the central event on the Japanese calendar will the TANKAN survey. The market expects a modest increase to 21 from 20 and only a significantly lower number would do damage to yen long positions by putting the into doubt the expected BOJ hike. If as expected the Japanese data shows continued growth in its Industrial sector, the pressure on BOJ to act - Fukui or no Fukui - will accelerate.
Pound Procurement
Following a precipitous fall throughout the week, the Pound got a post-Fed decision boost and remained buoyed by encouraging growth figures. GDP for the first quarter was unexpectedly revised up to 0.7% for the quarter and 2.3% annually. Household spending remained soft, but a 4.6% jump in annual investment growth helped to strengthen GDP. CBI distributive trades remained at a reading of 9, however, the July expectation index fell to 9 after June's surge to 12. Net consumer credit and mortgage approvals showed, as usual, that lending to consumers continues to accelerate, as both figures rose more than expected to ,£1.2 billion and 117K, respectively.
The star of next weekâ,"s releases remains the announcement of benchmark rates from the Bank of England. The BoE has been decidedly neutral as of late, mostly due to lower inflation and worries about weaker growth. The passing of MPC member David Walton last week represented the loss of the sole hawk in the group, severely limiting the minute chance of a rate hike from 4.50% next week. The manufacturing sector is likely to make a turn for the better, as manufacturing production is expected to rise 0.3% and industrial production anticipated to gain 0.4%. Nationwide consumer confidence may indicate solid sentiment, with the index likely to rise to 99 in June.
The Pound stands to benefit in the coming days off of upbeat economic data, but the hesitancy and dovish rhetoric of the BoE could impact the rush to buy.
Swissie Switch Up
Had the Greenback not dominated the currency scene this week, the results out of Switzerland would have lent strength to the Swissie. The KOF leading indicator jumped to 2.50 in June, a six-year high, from a revised 2.34. This figure served as the perfect backdrop to the gain in the UBS consumption indicator, which improved to 1.865 from a revised 1.618. Both the KOF and UBS figures reflected growth in the labor market, as the unemployment rate is predicted to drop to 3.0% by the end of the year. Consumer demand has also been given a boost, as demonstrated by adjusted retail sales. The figure rose a whopping 12.2%, and while the number may be slightly distorted due to the smaller amount of shopping days, the increase was the biggest since Switzerland started recording the data in January 2001.
The calendar for the next week is very light, with only the SVME Purchasing Managers Index and unemployment rate set to be released. Nonetheless, both figures should give insight into not only how potent last weekâ,"s encouraging figures were, but also into how the Swiss National Bank will act at their next meeting. While the Bank will not convene again until September, the recent growth should add scope for the Bank to raise rates again, potentially as much as 50 basis points.
Finally, given the political turmoil seen worldwide recently, such as the ordeals with North Korea, Fukui, and Iran, it was peculiar for the typical safe-haven currency to take a downturn. Should the global tensions fail to ease, the next few weeks could allow the Swiss Franc an opportunity to resume its status of security.
Boris Schlossberg is a Senior Currency Strategist at FXCM.
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