Dollar – No Help from Data
With the exception of US Pending home sales, the economic news for the week was almost uniformly good but the greenback can’t win for trying. Both ISM surveys beat their estimates, as did the NFP’s which not only saw better numbers for the current month but material upward revisions for the months prior. Yet despite all that the dollar lost another 60 basis point against the euro and now stands within a few pips of all time lows. To add insult to injury the news from across the ocean wasn’t even bullish as ECB chose to hold off on any further rate hikes until September.

Still, in spite of dollars woes, the greenback appears to be nearing some sort of a near term bottom. As we noted on Friday, “From a long term perspective however, the key level of employment growth appears to be centered at 100K monthly jobs. While that is hardly a blistering pace of economic expansion, that level will prevent any talk of Fed easing for the rest of the year and therefore should serve as somewhat of a support for the greenback. Only if the job picture begins to materially deteriorate into the latter half of this year by consistently slipping below the 100K figure will the pressure on US monetary officials to ease begin to truly escalate.” With NFP’s printing comfortably above the 100K number US short term rates should hold steady and at the very least produce a modicum of support given the dollar’s 125 basis point positive spread to the euro.

Next week the calendar is relatively light with only Trade Balance and Retail Sales as any events of note. Given the greenbacks recent weakness the Trade Balance could surprise to the upside as US exporters perform better. The Retail Sales print however is likely to be the key. Last week’s news that auto sales have collapsed to near post-Katrina lows suggest that the US consumer is tapped out. If Thursday’s number confirms that notion by surprising to the downside the greenback could slip lower as any expectations for a rebound in US growth will be postponed.

Euro – Double Top In the Making?
On Thursday, the ECB confirmed consensus forecasts and kept the EZ short term rates on hold at 4.00% for yet another month. Furthermore as our colleague Kathy Lien noted, “Trichet did not use the words, ‘strong vigilance’ which has been code for expect a rate hike at the next meeting and interestingly enough, he even pointed out that these words hold particular significance. The central bank clearly does not want to see the EUR/USD at 1.40 and Trichet even went so far as to say that ‘we are in domain (in regards to exchange rates) where it is very important to be responsible.’”

Despite euro’s lofty exchange value (it once again set record highs against the yen and was within striking distance of doing so against the dollar) the economy in the export driven region did not appear to suffer. Both PMI Services and Manufacturing surveys remained well above the 50 boom/bust line suggesting that demand growth in the 13 member union is organic and may be sustainable for the foreseeable future. Nevertheless, ECB’s reluctance to act on rates should begin to weigh on the currency, as speculative sentiment which was highly primed for two rate hikes this year may have to adjust to only a solitary 25bp increase. At the very least the euro may be due for a pause as it approaches the 1.3700 barrier against the greenback.

With little of interest on the European calendar, US data will be key to the pair’s direction next week. If US numbers falter, the rate differential theme may not matter as the euro will continue to appreciate on relative growth expectations alone. With GDP growth above 3% vs. the paltry 0.6% expansion in US, the Eurozone has now become a far more dynamic area for investment and may therefore continue to attract capital flows at the expense of the buck.

Yen Yields to Yield
The yen continued to be battered by carry trade sales. The sharp jump in US yields and new record high in the EURJPY weighed on the currency all week long. The demand from retail Japanese investors for higher yields has spawned a new issuance of foreign currency trusts which according to Bloomberg could reach 11.4 Billion dollars this month. But as we noted on Friday, “these types of moves are far more emblematic of a top rather than the bottom as peak retail demand is almost universally wrong. We continue to believe that 125.00 represents very serious resistance to the pair, but if US economic data produces a sharp upward surprise its is probable that USDJPY will try to test that level.”

With US long term rates creeping towards the 5.25% level the upward pressure persists. However consensus is building even within Japan that the yen has devalued to far too fast. In Japan, even some businessmen are concluding that the competitive advantages of a lower currency are negated by the rapidly rising input costs to industry. With oil above $70/bbl, the decline in yen has forced input prices to skyrocket in a country that imports 98% of it energy needs. The weak currency has also weighed heavily on consumption, with fewer and fewer Japanese purchasing vehicles. Japan June newly-registered vehicle sales dropped -11.2% on a year over year basis with annual totals running at 20% less than a decade ago as diminishing purchasing power stifles demand. In short public opinion in Japan may be coming to the conclusion that the benefits of a lower yen no longer exceed the costs, providing the BOJ with more political leeway to raise rates despite the still low inflation gauges.

Next week, one of those gauges - the CGPI index – may hold the key to near term direction. Should the data print hotter than expected, the markets may begin to anticipate an August hike by the BOJ and that may finally provide a sustained bid for the down trodden yen.

British Pound May Back Down From 26-Year Highs This Week
The British pound made stealthy gains to break fresh 26-year highs above 2.0200 last week as the Bank of England raised interest rates to a six year high of 5.75 percent. The decision was widely expected after BOE Governor Mervyn King was overruled in a 5-4 vote in June, as the majority was in favor of leaving the benchmark steady. With CPI still above the central bank’s 2.0 percent target and house price growth accelerating, there was little doubt that King would be able to convince the other policy makers to take action this time around. Nevertheless, most of Cable’s gains were accrued before the actual rate announcement in the typical “buy the rumor, sell the news” we see so often in the forex market. GBPUSD bulls were not completely out of luck, however, after a bout of US dollar weakness helped push the pair back above 2.0100 as interest rate differentials are likely to remain in favor of the UK currency for at least the remainder of the year. This case is only furthered as the Bank of England maintained their hawkish stance after their rate hike, noting that “the balance of risks” to price stability still “lie to the upside,” leaving the door open to a move to 6.00 percent before year-end. The big question for traders is: will GBPUSD above 2.0000 become the norm? Moreover, how will this impact the UK economy?

The release of the UK trade balance this week may provide some clues as to the impact of a strong British pound, as the deficit is anticipated to widen further. The manufacturing sector is in the process of recovering, and a sharp slowdown in export demand on the back of a more expensive currency could really limit any further improvements. Regardless, until inflation growth starts to slow substantially, the Bank of England will remain aggressive in their policy stance, which will only support GBPUSD further. As a result, traders should look to the producer price index readings this week for a gauge of price pressures in the pipeline, as a marked decline may precipitate a Cable fallout down towards the 2.000/50 level once again.

Swissie May Suffer On Sparse Economic Calendar
The Swiss franc showed mild gains this week against the US dollar, as economic data signaled that expansion in Switzerland has yet to falter. First, manufacturing growth expanded faster than expected in June, as SVME PMI surprisingly surged to 62.8 from 58.9. This marked the biggest monthly increase since November 2006, when the manufacturing index reached an all-time high of 67.7. Resilient growth throughout the Euro-zone has helped support production in Switzerland, as the 13-nation bloc buys about two thirds of Swiss goods sold abroad. This has also come to benefit the labor market, as Swiss unemployment rate narrowed to a nearly five year low of 2.5 percent (seasonally unadjusted). The Swiss National Bank has already signaled that it's prepared to raise interest rates further as the Swiss franc's weakness makes imports more costly and a growing economy leaves companies room to raise prices and wages. This was highlighted in the release of inflation reports, after CPI rose 0.6 percent from a year earlier, led by apartment rents and oil products.

Though the Swiss National Bank clearly remains hawkish, there will not be another policy meeting until September, leaving plenty of time for Swissie bears to take over the market. This week in particular could prove disastrous for the currency, as absolutely no economic data is scheduled to be released and will leave USDCHF more vulnerable to broader US dollar price action. Looking at technical levels, the pair has managed to hold above substantial Fibonacci support at 1.2100 and a two year ascending trendline at 1.2050, which may prevent any substantial declines for the USDCHF pair and could lead to range trading between 1.2100/2200 for much of the week.

Will the Bank of Canada Make Its Move This Week?
The Canadian calendar wasn’t particularly heavy last week, but each indicator counted in the fundamental scheme of things. Despite the lack of any hard data in the first half of the week, Monday saw the biggest USDCAD move. The steady, 140-point drop evolved from the volatile price action from the previous Friday. A large bid injected into the market in low volatility conditions pushed the pair to a new three-decade low - though the subsequent rebound was ultimately steeper than the initial move itself. Starting off with this unusual price action fresh on their minds, traders looked to realign their interest rate outlook and bid the loonie back to a ‘fair’ price. The data began on Thursday when the building permits and business activity indicators finally ran across the ticker. The approvals figure blew expectations out of the water with a 21.4 percent jump in permits over the month of May, though it couldn’t leverage much of a move from the Canadian dollar – and for good reason. While the print was quite the surprise, the indicator itself is prone to big swings. What’s more, the breakdown revealed the pick up for the month was mainly in nonresidential projects, not the vital housing sector. Crossing the wires a little later that same day, the Ivey Purchasing Managers Index garnered a little more good will for the Canadian currency. The business activity indicator hit a 13-month high 67.4, highlighting another main artery for growth for the second quarter. However, the component data cast some doubt on the following day’s labor data. The Ivey’s employment component ominously hit a three month low, highlighting the modest expectations for subsequent session’s release. However, any worry was for not. Statistics Canada reported a net 34,500 Canadian’s found employment in June. The breakdown was even more impressive as all of the gains were for full-time positions.

Looking at the coming week’s docket, it is safe to assume the market may be in for a volatile week. Starting with the lower-class indicators the housing market will come back under the microscope. Housing starts for June and new home prices for May will give a direct read on the sector – good or bad. The consensus for each is projecting slightly softer numbers in comparison to each indicator’s previous read. Should the data disappoint, it may begin to wear on projections of consumers’ strength and overall growth. The international merchandise trade report for May is similarly on track for a slightly lower C$5.5 billion print. However, all of these indicators could offer up considerable disappointments and the Canadian dollar could still rally as long as the Bank of Canada delivers the rate hike economists and the market are predicting – and market participants are impressed. Both the interest rate curve and official Bloomberg consensus are calling for a 25 basis point hike for the benchmark rate to 4.50 percent. Ultimately though, it may take more than a hike to fuel the Canadian dollar. The market has long priced in this hike and has given considerable attention to yet another later down the line. If the hike is not accompanied by hawkish rhetoric that leaves the door open for another move, it could finally turn the loonie.

RBA Doesn’t Clear Up Its Rate Outlook, Data Does
Australia’s economic calendar was among the busiest in all of FX land last week. In the span of only five days, traders had to digest indicators covering manufacturing, services, housing, consumer spending, international trade and interest rates. Starting with the lower echelons and working our way up, the AiG performance indices offered a broad read on the major business sectors. According to the group’s numbers, factory and service sector activity cooled last month. In an attempt to counter the declines, construction actually picked up over the same period. For the fundamental outlook on the economy, the data in effect offered market participants a wide-angled lens. However, since none of these indicators was marking anything close to a remarkable high or low, the actual impact on the market was limited. Stepping up the ladder on the data hierarchy, the TD Securities inflation report for June offered some up to date numbers for analysts to work with heading into the central bank’s rate decision. Though the monthly number was nudged higher, the more critical annual report held fast at 2.6 percent – well within the central bank’s 2 to 3 percent tolerance band. The growth related numbers had a little more impact on the market. Retail sales in May dipped 0.1 percent, a small number yet statistically significant given it closed the first back-to-back drop in consumer spending since December 1999/January 2000. Only making matters worse, building approvals over the same period plunged 5.6 percent over the same month to a six-year low 12,004. Given this disappointing spread of data, the RBA’s decision to leave rates alone at 6.25 percent seemed prudent. Oddly enough, since the policy group doesn’t issue a statement when the benchmark rate goes unchanged, the market learned more for its rate outlook from this week’s data than it did from the actual rate decision.

This week, the economic coffers look comparatively barren. A few second tier indicators will help bide time before traders come upon the potentially market-moving employment report. Given the drop in retail sales and building approvals – two very consumer-centric indicators – the jobs report could be a pivotal indicator for the Australian dollar. Should job growth cool as economists expect it would levy another weight on the growth outlook and certainly turn a few more rate hawks. Looking at the other indicators scheduled to cross the wires, the data may not produce the immediate volatility short-term traders crave, but the mix could certainly alter the economy’s fundamental bearing. The housing sector will take in home loan numbers to give another measure on consumer interest. And, aside from the employment numbers, a theme will develop around sentiment. Neither the NAB Business Confidence survey nor the Westpac Consumer optimism gauge for June have official consensus numbers attached to them. However, both could nudge the market’s projections.

Reserve Bank of New Zealand Absent from Kiwi Trading
The New Zealand dollar finished higher for the sixth consecutive week, as yield-seeking global investors continued to pour money into the largely overbought Asia-Pacific currency. Much to the Reserve Bank of New Zealand’s dismay, the currency extended its longer term uptrend despite its best attempts to stem its ascent. The bank was absent from the week’s price action, however, with no reports of official selling of the NZD. It seems as though the central authority has temporarily given up on its efforts to hold back the NZD, but we cannot and will not rule out intervention through the coming week of trade. Event risk was light through recent days, with a second-tier ANZ Commodity Price report doing little to force moves in NZD pairs. Yet the very strong upward surprise points to the strength of export prices in domestic industries, leaving risks to the topside for overall growth and inflation.

Foreseeable event risk will be limited for the Kiwi through the coming week of trade, with Thursday’s Retail Sales and Purchasing Managers Index reports as the only noteworthy events on the domestic calendar. The consumer spending data will prove very important to the currency’s performance, however, as the future of monetary policy tightening depending on the outlook for expenditure growth. Reserve Bank of New Zealand Governor Alan Bollard has cited persistently high consumption and borrowing as primary risks to price stability. As such, further upward surprises in Retail Sales will hint at higher interest rates through the medium term. Given that the RBNZ meets just a week after the data, futures traders will be keen to react to the smallest of nuances in the Kiwi Retail Sales numbers. Otherwise, traders will be on the lookout for further currency intervention. As our Technical Analyst Jamie Saettele highlights in a recent report, risks may remain to the downside for the future of NZDUSD performance.

Boris Schlossberg is a Senior Currency Strategist at FXCM.