Posted by on July 9, 2017 10:46 pm
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Categories: Australia Bank of England Bank of Japan BOE Business CAD China Economy EUR European Central Bank European Union Fed Speak federal government Foreign exchange market Inflation Monetary Policy MPC New Zealand north korea recovery Reserve Bank of Australia Synthetic currency pair Testimony U.S. Treasury

Submitted by Rajan Dhall from

FX Week Ahead – 10-15 July

The week after the US jobs report in recent months has been a mixed one for the USD, and will be no more so next week after headline employment was once again tempered by ongoing sluggish wage growth.  After a much higher than expected 222k gain, the 2.5% yoy rate was net unchanged in June, but this due to a downward revision in May.  Consequently, the immediate USD reaction was negative, with so much focus on earnings promptly drawing fresh sellers, but this proved limited with some of the key pairings having pushed against some extended levels. 

EUR/USD is the overwhelming component in the USD index, and has weighed heavily on the greenback due to the aggressive positioning for eventual ECB tightening later this year.  Despite all the efforts from a number of governing council members, not least of president Draghi himself to curb some of relentless upward pressure in the EUR and EU wide rates, the improving data outlook and references to reflationary forces offer little prospect of a meaningful retracement.  The was highlighted by the strong demand ahead of 1.1100 a few weeks back which then generated the move through 1.1300, and again ahead of the latter level to retest the initial resistance into 1.1440-50. 

Target levels beyond this lie in the 1.1525-1.1600 area, if not a touch further, but higher levels will not only dampen inflation rates in the region, but also heighten ‘defensive’ rhetoric from the ECB. Benoit Coeurre tried hard last week, and is due to speak again over the next few days.  From the data perspective, we have a number of harmonised inflation releases in the leading member states, as well as EU Sentix investor confidence Monday, industrial production Wednesday and trade numbers on Friday.  German trade data also due out.

Out of the US, we have a little more colour on employment as we have the trends and Fed labour conditions indices on Monday, with JOLTS job openings on Tuesday an interesting one as April saw this rise to record levels above 6 milllion in April.  Over Wednesday and Thursday however we have Fed chair Yellen testimony on the semi annual report on monetary policy and the economy, but so soon after the minutes last week and the constant stream of Fed speak from fellow members, we struggle to see what else she can offer that can truly shape the path of the USD outside of hard data.  To that end, Friday is loaded with the top tier next week where both the latest inflation stats and retail sales numbers are due for release. 

Even so, USD/JPY looks set to probe higher levels.  US Treasury yield has been steadily on the rise through the past week, and was given a further push by the sell off in Bunds on Thursday, as were most of the G10 rates.  Yield control measures forced the BoJ’s hand as the zero target for the 10yr was returned, and this gave the spot rate fresh legs through 114.00.  114.50-115.00 higher up is a very heavy zone to contend with however, and with concerns over North Korea causing heightened tensions in the west, we see strong profit taking interest up here at the very least. 

Those looking at the Japanese data do so for a much longer term outlook, and core machinery orders at the start of week and industrial production at the end of it head the schedule.  The BoJ’s Kuroda is due to speak also, but there is even less to get excited about here as there is virtually no prospect of departure from script.

Out of China, we have trade data to note on Wednesday, where we expect the greater interest will lie compared to the inflation numbers on Monday. 

In the UK, the political pundits continue to argue over how the intra and cross party disagreements and divisions impact on whether we get a hard or soft Brexit. We sense the market is a little tired of the negative aspects in focus, but will be hard pressed to ignore the domestic data which has taken a ‘tentative’ turn for the worse.  We have seen a resilience in Cable building up in recent months which has led to a number of attempts on 1.3000+, but which continue to falter at these levels as the market gauges what near term value levels are justified with close to 2 years of EU talks ahead of us.

Proponents for higher levels will naturally point to the hawkish talk from certain MPC members, not least of all Haldane, who voted to remain on hold at the last meeting.  Were he to act on his assertions, the vote split would balance out at some point in H2, and we can see how impulsive ‘pre positioning’ can be!  Haldane is down to speak again next week, alongside his colleague Broadbent.  Cable remains well placed to attack sellers into 1.3000 again, but on the downside, dip buyers citing longer term value rather than rate hike expectations have been stepping in in the mid 1.2800’s.   Ranges are tightening here, but EUR/GBP is starting to show that familiar stubborness to the upside, though 0.8900 and 0.9000 remain tough obstacles ahead.

While the hawkish twist has been a surprise at the BoE, it may be a little more palatable in Canada, but not just on the say so of the BoC.  From the early stages of the year, the domestic data has been improving significantly, with the annualised growth rates outpacing some its major counterparts – albeit for now.  However, the with the central bank citing broader adjustment to the low Oil price environment and employment levels rising consistently, CAD shorts – which reached record highs some 3-4 weeks ago (!) – have been turned aggressively, not only to see USD/CAD take out 1.3000 but 1.2900 since.

The latter figure level gave way on Friday on yet more positive jobs numbers, and raised the odds for a 25bp hike at this week’s meeting to over 90%.  This may seem generous despite the change in sentiment reflected on both the governor and deputy governor’s words recently, and especially so with inflation weak here also. As such, the risk for the CAD may lie to the downside, but a BoC move would generate an extension to the rally which would see 1.2750-1.2800 at the very least.

Very little of note out in either Australia or New Zealand next week, so expect the AUD and NZD to follow the general risk themes, pushing higher when the hunt for yield resumes.  NZD has been a little more attractive since the government announced the budget surplus a little over a month ago, and along with the relaxed tone from the RBNZ continues to eye a return through 0.7300 vs the USD.  Twice we have tested the key 0.7330-50 zone, and twice we have failed, but demand south of 0.7250 remains strong.  NZD/JPY is now testing 0.8300, and looking to the highs seen at the start of the year.

As a result, one could argue that the AUD has better prospects ahead near term, having weathered a less enthusiastic RBA and in the aftermath of some unwelcome downgrades to some its leadng banks. Growth figures for Q1 were disappointing, and certainly so in comparative terms, but metal prices have been holding much of the recent recovery, so if mining investment is set to turn as the RBA believes, the resilience will continue – for now at least.  Even so, AUD/USD north of 0.7750 looks a stretch, but below 0.7550 is just as congested, but will be determined by USD performance ahead. As such, the AUD/NZD base either side of 1.0400 will be pivotal in the next few weeks, while AUD/JPY has a little more room before it nears its respective 2017 highs. 


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