US Dollar as Data Dependent as the Fed as NFPs Approach
Fundamental Forecast for Dollar: Neutral
The week ahead will be bookended by key event risk – Monday’s PCE inflation report and Friday’s NFPs
A ‘neutral’ stance from the FOMC statement last week indicative of more bias than the market accounts for
Join DailyFX Analysts for daily discussions on the Dollar and FX markets at DailyFX on Demand
There are periods where the Dollar – and all other assets for that matter – finds its price action is divorced from the influence of regular event risk. This does not look to be one of those times. While there are still high-level fundamental themes still churning behind the scenes and Summer trading conditions seem to be in full swing for the capital markets, the focus has turned to very specific milestones. One of the most critical landmarks is the timing for the Fed’s first move to tighten lending rates. That represents both a competitive turn for the Greenback and a turning point for speculation supported by ‘easy money’. This past week, the Fed left some with a sense of ambiguity as to their intentions, but what they intended to do was to turn the focus back to the data.
Looking to the past week’s headlines, there were two particular events that drew the market’s attention: the FOMC rate decision and the 2Q US GDP release. On paper, both seemed to ‘meet expectations’. However, context puts their outcome in a different light. The painful 0.2 percent contraction in the economy reported in the ‘preliminary’ measure of 1Q GDP jeopardized the central bank’s intentions to normalize policy. Yet, with the subsequent update, the economy returned to a solid pace of expansion (2.3 percent) and the previous period’s reading was revised up to a less traumatic 0.6 percent growth.
A similar perspective shift comes from the Fed’s policy statement. While the communique from the policy makers wouldn’t promise any changes or times frames, their tone and assessment of the environment didn’t change from the previous meeting. That is significant as the June gathering was accompanied by updated forecasts where the Committee maintained a consensus forecast for 50 basis points (two standard 0.25 percent moves) worth of rate hikes this year. Had they been concerned, an air of caution would have replaced the concerted effort to prepare the masses for liftoff.
Gauging the course on interest rates – which FX traders are doing for yield advantage while capital market traders assess for low-cost speculation – is now the raison d’etre. For the Fed, the decision is not made but rather depends on a consistency in the general trend in data that we have seen unfold over the months. Should the current keep its pace or accelerate, a September rate hike will be the likely result. Should it subside, the probability shifts to a later start.
This week, we will come across two particular indicators in a busy docketthat are important for shaping rate expectations. Monday’s PCE deflator is the Fed’s favored inflation measure. Friday’s July labor report will generate headlines with its NFP print, but the policy speculation will center on the wages component – the wellspring of inflation. If this data misses or beats, few will miss the implications. – JK
Euro Weighed by Risk Repricing Post-Greece, Almost QE-driven Again
Fundamental Forecast for Euro: Neutral
- As EURUSD has steadied under $1.1000 after weeks of Greek-driven headlines…
- …the EUR-complex in general is starting to trade more to the tune of an ECB’s QE-driven market (but not fully yet).
- Have a bullish (or bearish) bias on the Euro, but don’t know which pair to use? Use a Euro currency basket.
If last week was an indication of things to come, then FX markets may be on the verge of reverting to a familiar trading environment: one driven by quantitative easing (QE) portfolio rebalancing channel effects. As the dust has settled around Greece, now that with each passing day the country inches closer to unlocking a €86 billion EFSF-sponsored aid program, the Euro has started to shake off the burden of being driven by Greek-related headlines.
The EUR-crosses were, and still are likely to be, driven by the broad notion that the Euro itself is a funding currency. Yet there may be a ripple or two to overcome before that environment is achieved again, and it’s the fallout from the market being tightly wound up around Greece for the past two months.
But for the fact that the US Dollar saw a huge leg up on the week after jobs data laid clear the possibility of a very strong July US Nonfarm Payrolls report, and therefore a higher probability of a rate hike in 2015 by the Federal Reserve, the EUR-crosses (saved EURUSD) moved in tandem higher. In the course of events as the EUR-crosses climbed, two other things happened this week: yields in Europe fell; and equity markets around the world fell.
What this price action across asset classes is indicative of is a repricing of the risk spectrum in a non-Grexit world. After both core and peripheral yields rose for weeks around Greek-related headlines, the removal of the Greek catalyst and higher probability contagion outcome reignited the demand for EUR-denominated debt.
The chain reaction lays clear now: now that core and peripheral European sovereign debt were overpricing the possibility of a negative event around Greece (hence the lower prices and higher yields), it made sense for traders/investors/fund managers to rebalance exposure in their portfolios; equities around the globe were sold in order to raise capital (explains weaker equity markets); said capital was converted into Euros (explains the rally in EUR-crosses); and said converted capital was invested in seemingly undervalued bond markets (explains the plummet in European yields).
In a truly bullish world driven by QE portfolio rebalancing channel effects, the Euro would depreciate amid lower yields and stronger equity markets (something that played out from December through early-March) (or vice-versa: the Euro appreciating amid higher yields and weaker equity markets, something that played out from March through June). However, an environment characterized by the Euro appreciating alongside lower yields and lower equity markets indicates that Greece’s hold on market forces has yet to fully resolve itself completely. –CV
To receive reports from this analyst, sign up for Christopher’s distribution list.
Japanese Yen: Up or Down? Next Week Holds the Keys
Fundamental Forecast for Yen:Neutral
It was a week of extremes for the Yen; first, a renewed sell-off in Chinese equity markets sent the safe-haven JPY higher. Yet a significant reversal in China and broader financial markets sparked a swift reversal and ultimately pushed the currency to fresh monthly lows (USDJPY).
We look to the coming week’s Bank of Japan monetary policy meeting as well as potentially critical US Nonfarm Payrolls report to drive short-term direction in the USDJPY and other Yen pairs.
Governor Kuroda and the Bank of Japan will amost certainly leave monetary policy unchanged at their upcoming meeting, but a key question is whether officials make overt reference to recent Japanese Yen weakness as a risk to the domestic economy.
The Yen surged (USDJPY tumbled) last month from ¥125 as Kuroda said the domestic currency’s effective exchange rate was already “very low” with little room to fall further. Yet a more recent report from Reuters quotes “sources familiar with [Kuroda’s] thinking” to say that the BoJ governor never intended to put a floor on the Yen and would prefer further weakness. It will be important to watch for any surprises, but ultimately the biggest volatility risk on offer is almost certainly the late-week US Nonfarm Payrolls report.
All eyes will focus on the US Bureau of Labor Statistics as they release data on US labor market gains for the month of July. A recent US Federal Reserve interest rate decision emphasized that the Fed stood ready to raise interest rates on continued improvement in labor market conditions. Needless to say, any surprises in NFPs could derail current market expectations for the future of Fed rate hikes.
The US Dollar remains relatively strong as interest rate traders predict the Fed will raise rates as early as September, but the official focus on data leaves risks clearly to the downside for the Greenback. This dynamic leaves the Japanese Yen especially exposed as it has historically been one of the most interest rate-sensitive currencies. Watch for outsized USD/JPY reactions to Friday’s NFPs data to guide overall direction through the foreseeable future. – DR
GBP Opening Monthly Range Hinges on BoE Vote Count, Inflation Report
Fundamental Forecast for British Pound:Neutral
The Bank of England’s (BoE) interest rate decision on August 9 is likely to heavily impact the British Pound and dictate the monthly opening range for GBP/USD as the central bank is set to release the policy statement, the vote-count along with the quarterly inflation report.
The fresh batch of central bank rhetoric may heighten the appeal of the sterling as Governor Mark Carney continues to prepare U.K. households and businesses for higher borrowing-costs, and signs of a greater dissent within the Monetary Policy Committee (MPC) may spur a near-term breakout in GBP/USD amid the tightening race with the Federal Reserve to normalize policy. Indeed, the limited commentary following the Federal Open Market Committee’s (FOMC) July 29 interest rate decision suggests that the central bank remains in no rush to raise the benchmark interest rate, and the committee may continue to endorse a wait-and-see approach in the months ahead as Chair Janet Yellen looks for a further improvement in the labor market.
Nevertheless, there’s growing speculation that Martin Weale and Ian McCafferty, the two BoE dissenters in 2014, will push for a rate hike, and we may see the sterling largely outperform against its major counterparts should the committee show a greater willingness to remove the record-low interest rate sooner rather than later. However, another unanimous vote to retain the current policy along with a downward revision in the BoE’s updated economic projections is likely to produce headwinds for the sterling, and a more dovish tone may undermine the near-term rebound in GBP/USD as it fuels bets of seeing the Fed implement a rate hike ahead of its U.K. counterpart.
With that said, GBP/USD may continue to face range-bound prices ahead of the BoE meeting, and the fresh developments coming out of the central bank may set the tone for August as market participants weigh the outlook for monetary policy. In turn, we are still waiting for a break & close above near-term resistance around 1.5630 (38.2% retracement) to 1.5650 (38.2% expansion) to favor a more bullish outlook for the sterling, but a cautious tone from the BoE may drag on the exchange rate and spur a test of support around 1.5330 (78.6% expansion) to 1.5350 (50% retracement). - DS
Gold Holds Key Support- NFPs to Shape August Opening Range
Fundamental Forecast for Gold: Neutral
Gold prices are lower for a sixth consecutive week with the precious metal down 0.36% to trade at 1095 ahead of the New York close on Friday. Despite the losses, gold has continued to respect key support tested last week into 1072 with the broader bearish outlook at risk near-term while above this threshold.
Looking ahead to next week, the US Non-Farm Payrolls (NFP) report will be central focus in light of the Fed’s attempt to buy more time. Despite the optimistic outlook held by the central bank, the ongoing slack in labor force participation, subdued inflation and a weakening outlook for global growth may continue to derail plans for higher borrowing-costs. Even though the central bank continued to endorse a 2015 rate-hike, the unanimous vote to retain the current policy suggest that the bar remains high for a September liftoff, and the ongoing mixed batch of data coming out of the U.S. economy may further dampen interest rate expectations as Chair Janet Yellen remains in no rush to remove the zero-interest rate policy (ZIRP).
With only so much time left before the next Fed meeting on September 17, the upcoming data prints may play an even greater role in driving market volatility across the financial markets, and signs undermining the Fed’s outlook for a stronger recovery may dampen the appeal of the greenback and limit the downside risk for gold. Although the broader outlook remains tilted to the downside amid the bullish sentiment still surrounding the reserve currency, weak U.S. data prints may continue to put a floor under bullion with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) showing a meaningful turn at resistance into the close of July trade.
From a technical standpoint gold has continued to respect a critical support confluence noted last week at ~1070/73. The trade remains vulnerable for a rebound while above this region heading into August open initial resistance seen at the 2014 lows at 1130. The broader outlook for gold remains bearish while sub 1145/51 with a break of the lows targeting the 2010 low at 1044 backed by a key longer-term Fibonacci confluence lower down at 975/80. We’ll keep an eye on the August opening range for further guidance on our near-term directional bias with a breach of the recent consolidation range between below 1103 shifting the immediate focus higher next week.
Swiss Franc Opportunities Seen Beyond Breakneck Volatility
Fundamental Forecast for Swiss Franc: Neutral
SNB Shocker Fuels Highest Swiss Franc Volatility vs. Euro Since 1975
Sharp Counter-Swing Seen Ahead if ECB Delays Launching QE Effort
Buying US Dollar vs. Franc Attractive After Post-SNB Turmoil Settles
The most adept of wordsmiths might be forgiven for struggling to find an adjective strong enough to describe last week’s Swiss Franc price action. A quantitative description is perhaps most apt: realized weekly EURCHF volatility jumped to the highest level since at least 1975, swelling to nearly 2.5 times its previous peak.
The surge was triggered after the Swiss National Bank unexpectedly scrapped its three-year-old Swiss Franc cap of 1.20 against the Euro, saying the “exceptional and temporary measure…is no longer justified.” Appropriately enough, the previous historical peak in weekly EURCHF activity occurred in September 2011 when the Franc cap appeared as suddenly as it vanished. Then too, the SNB acted without warning and sent markets scrambling.
The announcement caught the collective FX space by surprise. Even the world’s top international economic bodies were apparently left in the dark. IMF Managing Director Christine Lagarde quipped that she found it “a bit surprising” that SNB President Thomas Jordan did not inform her of the impending move. “Talking about it would be good,” she added.St. Louis Fed President Jim Bullard hinted the US central bank was not notified either.
The go-to explanation for the SNB’s actions centers around bets that the ECB will unveil a “sovereign QE” program following its policy meeting on January 22. Mario Draghi and company finally secured a green light for large-scale purchases of government debt after the ECJ gave clearance to the similar OMT scheme devised (but never used) to battle the debt crisis in 2012. The SNB presumably scrapped the Franc cap to avoid having to keep pace with the ECB’s efforts.
Another wave of Franc volatility may be ahead next week. While markets seem all the more convinced that an ECB QE announcement is in the cards after the SNB’s about-face maneuver, a delay in the program’s implementation (if not its formulation) is entirely plausible. Securing the acquiescence of anti-QE advocates like Germany to having such an effort in the arsenal is not the same as launching it. The ECB may yet opt to wait through the end of the first quarter as it has hinted previously before pulling the trigger, sending the Euro sharply higher.
Measuring the fallout from the SNB’s actions is likely to be protracted. The full breadth of the various ripple effects will probably emerge over weeks and months, not hours and days. The Franc now looks gravely overvalued against currencies whose central banks are set to tighten policy this year, with the US Dollar standing out as particularly notable. It seems prudent to let the dust settle before taking advantage of such opportunities however.
Australian Dollar Looks to RBA, US Jobs Data to Drive Volatility
Fundamental Forecast for the Australian Dollar: Neutral
Australian Dollar Looks to RBA Policy Statement for Direction Cues
Upbeat US Jobs Data May Cement Fed Rate Hike Bets, Sting Aussie
Find Key Turning Points for the Australian Dollar with DailyFX SSI
The Australian Dollar spent last week treading water near the 0.73 figure against its US counterpart as prices waited for new direction cues after dropping to a six-year low. A break in the standstill looks likely in the days ahead as domestic and external catalysts fuel the return of volatility.
First, the RBA is due to deliver its monetary policy announcement. Expectations call for the benchmark lending rate to remain at 2 percent. While recent data flow suggests economic performance has deteriorated in recent weeks, officials will probably opt to wait for the May rate cut to more thoroughly filter through before easing further.
The absence of a policy change will put the onus on the statement accompanying the announcement. RBA Governor Glenn Stevens struck a neutral tone in recent commentary, noting the monetary policy balance is “about right” at the moment, but added that the question of further rate cuts remains “on the table”. With that in mind, the appearance of a dovish streak in official rhetoric that weighs on the Aussie remains a possibility.
On the external front, speculation about the likely timing of the first post-QE Federal Reserve interest rate hike continues to be in focus. A busy week of economic data releases will be capped by the much-anticipated July Employment report, which is forecast to show the economy added 225,000 jobs last month.
US economic news-flow has increasingly outperformed relative to expectations since mid-May. That suggests analysts’ models are underestimating the vigor of recovery from the first-quarter downswing, opening the door for an upside surprise.
Such a result is likely to cement bets on a rate increase at the Fed’s September meeting, boosting the US Dollar at the expense of its top counterparts including AUD. The onset of risk aversion triggered by the prospect of US tightening even as growth in the Eurozone and China remains sluggish, threatening the outlook for global performance at large, may bode doubly ill for the Australian unit.
New Zealand Dollar Looks to 4Q GDP, FOMC Outcome for Direction
Fundamental Forecast for the New Zealand Dollar: Neutral
New Zealand Dollar May Fall if Weak 4Q GDP Fuels RBNZ Rate Cut Bets
FOMC Meeting Outcome to Influence NZ Dollar via Risk Sentiment Trends
Identify Key Turning Points for the New Zealand Dollar with DailyFX SSI
The New Zealand Dollar managed to find support against its US counterpart after the RBNZ signaled it was in no hurry to cut interest rates at its monetary policy meeting. Governor Graeme Wheeler highlighted a range of factors underpinning strong economic growth and dismissed soft inflation readings in the near term as largely reflective of the transitory impact of oil prices. Speaking directly to the benchmark lending rate, Wheeler projected “a period of stability” ahead.
Still, the familiar refrainwarning that “future interest rate adjustments, either up or down, will depend on the emerging flow of economic data” was repeated. This makes for a news-sensitive environment going forward as markets attempt to divine the central bank’s likely trajectory alongside policymakers themselves. With that in mind, all eyes will be on the fourth-quarter GDP data set in the week ahead.
Output is expected to increase by 0.8 percent, an outcome in line with the trend average. On balance, that means a print in line with expectations is unlikely to drive a meaningful re-pricing of policy bets and thereby have little impact on the Kiwi. New Zealand economic data outcomes have increasingly underperformed relative to consensus forecast since January however. That suggests analysts are over-estimating the economy’s momentum, opening the door for a downside surprise. In this scenario, building interest rate hike speculation may push the currency downward.
The external landscape is likewise a factor. A significant correlation between NZDUSD and the S&P 500 (0.52 on 20-day percent change studies) hints the currency is sensitive to broad-based sentiment trends. That will come into play as the Federal Reserve delivers the outcome of the FOMC policy meeting, this time accompanying the statement with an updated set of economic forecasts and a press conference from Chair Janet Yellen. Fed tightening fears have proven to be a potent catalyst for risk aversion since the beginning of the month. That means a hawkish tone is likely to sink the Kiwi, while a dovish one may offer the currency a lift.