Dollar: No Fireworks For the Buck
Another week another slide in the greenback as almost all of the data printed in the red. Housing. Durable Goods, Consumer Confidence and Personal spending and income all missed expectations. The spread between spending and income recorded a second negative month in a row indicating that the US consumer is tapped out. We noted on Friday that, “as we move into the summer season, the global macro theme developing in the market, shows that US growth is slowing materially relative to its major industrialized partners with the net effect being that interest rates in both Euro-zone and UK are likely to increase while US rates will remain flat. “ Since global capital flows will always seek the highest rate of return this course of action could lead to further dollar declines unless US growth in Q3 reaccelarates – which is difficult to imagine given the persistent slide of the housing sector.

Next week both ISMs and employment data will dictate the terms of trade with the market looking for little variation from any piece of data. The lower dollar should help the Manufacturing survey especially with better reads in Empire and Philly index the week prior, but the services survey may see a markdown as housing woes continues to weigh on the US economy. With July 4th holiday coming in the middle of the week, trading may be a bit uneven as some market participants may choose to lay out on the beach for the rest of eth week rather than come back to trade the NFP’s.

Euro Powers On
The unemployment rate in France hit a 25 year low and French consumer sentiment registered its best reading since the survey began helping to put a bid underneath the EURUSD as the week came to a close. Evidence is mounting that the Eurozone recovery is spreading to the region’s second largest economy and the news bodes well for euro hawks looking for another rate hike out of the ECB before the end of the summer. However, as the pair once again approaches its record highs, EZ politicians are unlikely to sit still and accept the rise. Although most market players view Nicola Sarkozy, the recently elected President of France as a free-marketeer, he is a notorious euro dove and is likely to put enormous pressure on the ECB to hold off on any further rate hikes should the unit appreciate steeply in anticipation of additional monetary tightening in the Euro-zone. However, if EZ growth continues unabated and especially if oil prices remain above $70/bbl suggesting strong global demand, the ECB may well ignore his rhetoric.

Key event risk for the Euro next week will come on Thursday when ECB holds its monthly press conference after its policy meeting. No one expects any rate hikes to be announced in July, but traders will be focused on the statement of ECB president Jean-Claude Trichet vis a vis any possible policy changes in August. Typically the ECB likes to forewarn the markets of any upcoming rate hikes and “vigilance” has become the codeword for upcoming tightening. It’s difficult to say if ECB will choose to raise rates in August during the peak of European vacation season. Most probably the tradition bound institution may decide to wait until September to enact a change in policy and that may cause a slight sell off in the unit from speculative accounts.

Yen Remains Weak
On Friday we wrote, “The one area of the globe where growth and most importantly price levels continue to stagnate is Japan … Japanese core CPI data once again printed negative at -0.1% registering 5th consecutive month of no increase in prices. The fact that core CPI data is still negative remains the most important factor weighing on the yen. Until there is proof of actual inflation in Japan the BOJ will be excruciatingly slow to tighten monetary policy and yen will only get bid during bouts of risk aversion.” For the week, the yen did manage to gain 50 basis pints against the greenback, but it remains woefully weak barely trading above multi year lows against the dollar.

Next week opens up with a bang as the quarterly Tankan survey comes out on Sunday night. The market expects no change form the headline number but the possibility of a worse than expected reading from the future expectations component may put further selling pressure on the unit. The rest of the week is generally quiet with only LEI data on the docket. If the equity markets remain calm then USDJPY will most likely trade off bond yields, however should the pair approach the 125.00 level once again official rhetoric will try to stem yen’s decline, but given the lackluster eco data from the land of the rising, carry trade speculators could smash through that “cement ceiling” despite the admonishments from authrities.

Bank of England Decision Critical for Future of GBP Strength
The British Pound finished firmly above the $2.000 mark for the first time since May, as growing yield spreads continued to boost the European currency. A week of relatively second-tier data was forecast to provide relatively little volatility through the week, but an impressive Nationwide House Prices report sent the GBP on a tear against all major counterparts. Given higher than expected house price inflation, speculators increased bets that the Bank of England Monetary Policy Committee would raise rates by 25 basis points at their upcoming meeting. The interest rate curve reacted accordingly, with Short Sterling futures now pricing in BoE Repo rates at a whopping 6.26 percent through December. Whether or not yields and the domestic currency can hold onto such gains will very much depend on the coming days of events, with the key Bank of England Rate Decision to make or break both asset classes. A small minority traders are still unsure of what to expect from the central bank, but such uncertainty leaves markets primed for volatility regardless of the outcome.

A Bloomberg news survey shows that the vast majority of economists expect the central bank to raise rates by 25 basis points through Thursday’s announcement. The recent minutes from June’s policy decision showed that the Monetary Policy Committee voted 5-4 to leave rates unchanged—leaving the upcoming decision highly likely to produce an interest rate hike. Given that markets have largely priced in the event, it is unclear that such an outcome would lead to an extended Cable rally. In the admittedly unlikely case that the MPC leaves rates unchanged, however, we would almost certainly see a sharp GBP tumble. This arguably leaves risks to the downside for short-term GBPUSD price action, but a week full of key US economic data will likewise drive moves in the GBPUSD pair.

Whether or not the pair can mount a meaningful attack on multi-decade highs will likewise depend on broader market flows. Recent CFTC Commitment of Traders data shows that net GBPUSD longs reached fresh record-highs—a sign that the currency may be nearing a medium-term top. Of course, such one-sided bets can remain at extremes for weeks at a time, which leaves a fresh run at 2.0131 well within the realm of possibilities. A more granular look at retail traders’ positioning shows that increasingly skewed GBPUSD shorts likewise leave scope for test of new highs. Whatever the short-term outcome, it remains relatively clear that the coming week will prove very important for the future of GBPUSD gains.

Swiss Franc Shows Few Signs of Slowing Gains
The Swiss Franc rallied for the second consecutive week against its US counterpart, with the USDCHF dropping to fresh monthly lows through Friday trade. Relatively mixed fundamental data did little to boost the European currency; instead, a falling US-Swiss yield advantage drove the currency pair lower through short-term price action. This dynamic was most pronounced on Friday, when a flight to safety across US markets cut the US-Swiss 10-year spread by an incredible 11 basis points. Swiss economic reports were largely ignored, with a mildly disappointing KOF Leading Indicator result leaving spot prices relatively unchanged. From a positioning standpoint, the currency bounced off of incredibly oversold conditions, with CFTC numbers showing that net-shorts fell from -79,331 to -58,831 as of June 26. Combined with the outlook on domestic interest rates, the improvement in sentiment for the Franc suggests that it may have set a medium-term low at Sf1.2468. A quiet Swiss economic calendar means that the USDCHF will largely trade off of US event risk, but a sustained break below Sf1.2215 would only improve outlook for future Swissie gains.

Notable domestic economic data releases will be limited to Monday’s SVME Purchasing Managers Index and Friday’s Unemployment report. The empty gap between the two events will leave the USDCHF to trade off of pure market flows, with a sudden jump in risk aversion leaving risks to the downside through short-term price action. Friday’s US stock market volatility allowed the CHF and the JPY to appreciate as the S&P 500 Volatility Index closed significantly higher and led to fears of further stock market tumbles. Though the S&P 500 finished the day only 0.16 percent lower at 1503.35, increased market skittishness suggests that US investors will continue to liquidate equity holdings on uncertainty. Such an event would almost definitely prove bearish for the USDCHF, which typically drops on declines in risky asset classes. Otherwise, look to Friday’s Employment figures to gauge the strength of the domestic economy. Overall momentum suggests that the Unemployment rate will only drop further through the medium term, but disappointing results could easily lead the Swissie lower against major trading counterparts.

Has the Canadian Dollar Reached a Long-Term Top?
The Canadian dollar saw an unexpectedly wild week of trade, as the currency set fresh multi-decade highs against its US namesake on reported corporate interest. Few analysts expected the Loonie to make any particularly volatile moves through short-term price action, as the USDCAD pair is notorious for trading within a range after prolonged periods of moving within a clear trend. Yet fresh record net-longs virtually guaranteed a continued CAD rally. Though such one-sided buying proves that markets are very bullish the Canadian currency, extreme interest may in fact be the Loonie’s undoing. According to our technical currency analyst Jamie Saettele, the USDCAD may have set a multi-year low at 1.0470. Whether or not 1.0470 holds will be the key question through medium and long-term USDCAD trade, but a relatively empty Canadian economic calendar for the coming week will do little to force particularly volatile moves in the currency. Instead, the North American currency pair will likely trade off of US event risk ahead of the following week’s critical Bank of Canada interest rate decision.

Friday’s Canadian and US employment figures will be the clear highlights through short-term price action, with Monday through Thursday moves to depend on broader market flows. Though the USDCAD’s correlation with oil has weakened through the medium term, the commodity’s impressive ascent has clearly left an impact on the forex pair. Likewise significant, continued drops in US equities and domestic bond yields may leave the Greenback’s yield advantage over the Loonie further below current levels. The key question remains how each respective labor market fared through the most recent labor reports. A higher-than-expected gain in Canadian payrolls would almost definitely lead to USDCAD drops, but it is far from clear that a disappointment in US Non Farm Payrolls will bring a sustained Loonie bid. Given that Canadian economic growth is inextricably linked to the strength of the US consumer, CAD bulls hope that both reports impress. Otherwise, the currency may succumb to overstretched futures positioning and post further corrections on its overwhelmingly CAD-bullish trend.

Will The RBA Surprise Aussie Dollar Traders?
The economic calendar offered little for fundamental traders to go on last week. Though most of the days were covered with at least one indicator, few of those reports amounted to anything worthy of the market’s attention. The two exceptions were the HIA’s gauge of new home sales and the Conference Board’s leading indicators composite. Cutting into the economy’s impressive string of positive indicators, the housing gauge fell from its one-year high when it dropped 4.4 percent to 8,387 units. The HIA’s chief economist attributed the contraction to a record low in housing affordability. At the same time, he said economic conditions were still healthy and housing activity would likely rise in tandem with the general improvement. Not long after the sales report weighed on the housing sector, the leading index lowered the bar for the entire economy. Like most other countries’ ‘leading’ gauges, Australia’s version is a considerable laggard as it collects data from April to project growth trends three to six months into the future. Regardless, the indicator crossed the wires with a slower 0.3 percent pick up, completely undoing the optimism garnered by a hefty upward revision to the previous period’s report. Despite the deceleration in this low key report, the overall economy is still running strong with the export sector enjoying international demand for Australian commodities and consumers utilizing a 33-year low unemployment rate and strong wage growth to facilitate their liberal spending habits.

Taking a look at the listings on the docket ahead, it is clear that fundamentals will be playing a much bigger role in Aussie dollar price action. There are a number or market moving reports littering the field, though all of these numbers will be mere appetizers compared to the speculation that will likely build into the RBA’s rate decision. However, before we get ahead of ourselves, a quick look at the lesser reports will give a feeling for the environment the policy meeting will be ushered into. The TD Securities inflation report will give an up to date look at the inflation facet of the rate game. There is no official consensus though high domestic energy prices and strong consumer spending trends will likely stoke pressures. A strong rebound in the annual figure would be a welcome sight since the government’s number dropped back with in the RBA’s tolerance zone in the first quarter. Switching gears from inflation to growth, reads on retail sales, building permits and the trade account will cover virtually every angle of the economy. Consumers are expected to have upped their spending on retail goods by 0.7 percent in May, though the construction figure has no forecast attached to it while the deficit is expected to balloon. But, will these readings even have a say in the central bank’s deliberations - surprises or not? Economists and the market think not. Bloomberg’s survey reveals that of 27 economists, only one expects a hike. The all-knowing market is in the same boat. Though the Aussie dollar is at 18-year highs against its US counterpart, this seems to be its fair value given the low volatility and risk seeking conditions in the market rather than premium for another hike. The Australian Bank Bill curve suggests the next 25bp hike will be held off until next year.

Kiwi Data Flow Eases Though RBNZ Intervention Still A Fear
It has been the New Zealand dollar’s MO that it remains propped on interest rate speculation even as the economic data turns against it. However, last week’s data flow suggests the fundamentals will only add to the kiwi’s meteoric rally. Looking over the listing for the past five days, the good news was everywhere, in every sector. Trade numbers were certainly on the mend. The physical trade balance peaked back into positive territory in May, even though it fell slightly short of the market’s forecasts. The more impressive read for the bulls was the all encompassing first quarter current account balance. The long-standing deficit made a big leap to parity when it contracted from a NZ$3.94 billion shortfall to NZ$2.22 billion. In turn, this lowers the balance’s ratio of GDP from 9 percent to 8.5 percent, the lowest it has been since the second quarter of 2005. This is an important number considering the country was in jeopardy of losing its top sovereign debt rating not long ago, because of this specific measurement. For the consumer, the second quarter Westpac sentiment survey impressed in its ability to contain its declines. Considering the central bank has just hiked rates three meetings in a row, New Zealanders seem very optimistic vis-à-vis their financial health. Another surprising improvement came out of the NBNZ business sentiment read for June. After plunging to a 13-month low the previous period, the additional burden in lending rates and a rising local currency since would have suggested we were in for worse number. Then, to wrap it all up, Friday’s GDP report pulled the very last pessimist into the kiwi’s fold. From the final three months of 2006, the economy grew 1.0 percent - as expected. However, from the same period a year ago, growth actually accelerated faster than predicted - a seven-quarter high 2.5 percent.

Considering the strong showing in last week’s calendar, interest rate speculation will dominate the kiwi’s path - and perhaps the overall carry trade - more than ever. On the other hand, further gains will be harder and harder to win. The New Zealand dollar is already at 25 year highs against the greenback and 20 year highs against its carry opposite, the Japanese yen. Looking into the market’s barometer for policy speculation - the yield curves - there is a healthy premium attached to another rate hike within the next three to six months. Unofficially, there is considerable chatter surrounding a fourth consecutive rate hike from the RBNZ at its coming meeting. Though, if the last two were unexpected, then another one is starting to reach for standard deviations most traders are willing to bet on. Aside from kiwi-centric rate outlook, the general carry current should have its way with the currency especially if the calendar isn’t putting up much of a fight. And lest we forget, the threat of another round of direct RBNZ intervention will keep the market on its toes.

Boris Schlossberg is a Senior Currency Strategist at FXCM.