US Dollar - What to Expect this Week

• US Dollar - What to Expect this Week
• EUR Driven Higher by Yield Spread
• CAD Slips After Surprise Drop in IVEY PMI
• AUD: Job Ads Rise, Construction Activity Accelerates
• NZD: Day's Best Performer
• GBP Stalls Near 5 Year Highs                                             
• USD/JPY Will Hold 100.75 to 103 Range

US Dollar - What to Expect this Week

We don't expect much in the way of gains for the U.S. dollar this week.  Investors bought dollars aggressively after the strong non-farm payrolls report, but in this new week, demand has eased.  There's no question that expectations for Federal Reserve tightening changed with the latest jobs number but at the end of the day, the Fed will be reluctant to provide a clear timing for tightening.  Yes, the unemployment rate has fallen faster than they anticipated but GDP growth has been very weak and wage inflation limited.  With the central bank set to continue tapering asset purchases at its current pace, what happens after Quantitative Easing ends will be a question they will need to address by September.  However between now and then, policymakers will most likely wait and see how much further the economy improves before sending a strong message to the market that could dramatically alter expectations.  They will want to keep yields low for as long as possible to ensure the stability of the labor market recovery.  With no major U.S. economic reports scheduled for release this week, consolidation after last week's gains is the most likely path for the U.S. dollar.   Based on the decline in Treasury yields and the dollar's reluctance to extend higher, most FX and fixed income investors do not believe that recent data will accelerate the Fed's pace of tapering or the timing of tightening.  Equity traders on the other hand don't share this nonchalant attitude because the decline in stocks today has been attributed to concerns that the Fed could raise rates sooner rather than later.  We'll hear from 6 Federal Reserve Presidents this week, 2 that are FOMC voters (Kocherlakota and Fischer).  As one of the more dovish members of the central bank, we don't expect any dollar supportive comments from Kocherlakota tomorrow.  The minutes from the last Fed meeting are also scheduled for release on Wednesday and if you recall, the dollar sold off at the time after Yellen refused to provide any details on the timing of the first rate hike.  The U.S. dollar traded lower against all of the major currencies today with the exception of British pound and Canadian dollar. Currencies will most likely take their cue from equities this week as the U.S. earnings season kicks off on Tuesday.

EUR Driven Higher by Yield Spread

The euro traded higher against the U.S. dollar today despite weaker economic data from Germany.  Although last week's non-farm payrolls report and European Central Bank monetary policy meeting widened the gap between Eurozone and U.S. monetary policy, the spread between German-U.S. and French-U.S. yields narrowed, explaining the rise in the EUR/USD today.  In the near term, the lack of gains in Treasury yields may keep EUR/USD supported but in the long run, U.S. yields should outperform the Eurozone especially since there has been far more downside surprises in EZ than U.S. data. German industrial production dropped 1.8% in the month of May, which compares to the market's forecast for a flat reading.  Not only was this the strongest pace of contraction since April 2012 but the outcome was worsened by the downward revision to the previous month's report.  Between the drop in manufacturing activity, decline in factory orders and IP, the second quarter is not shaping up to be a strong one for Germany.  Looking ahead, the German trade balance is scheduled for release tomorrow and we are looking for another downside surprise that should limit the euro's recovery. 

CAD Slips After Surprise Drop in IVEY PMI

The Canadian dollar traded lower against all of the major currencies today following a surprise contraction in manufacturing activity last month.  Economists were looking for a nice rebound in manufacturing conditions in June after the sharp drop in May but instead, the IVEY PMI index continued to fall to a 6 month low of 46.9 from 48.2. The details of the report raised concerns about the strength of Canada's recovery, as broad based deterioration was seen in employment, inventory, supplier delivery and prices.   What is interesting about today's release is that it is at odds with an earlier report from RBC, who said manufacturing activity hit a 6-month high in June.  This survey was conducted in conjunction with Markit Economics, the same company that publishes the widely followed European and Australian PMI reports.  The lack of clarity on the true state of Canada's economy should keep the currency from rising to fresh highs and USD/CAD from pushing lower.  Meanwhile the Australian and New Zealand dollars traded higher versus the greenback.  AUD was supported by an uptick in the PMI Construction index and rise in ANZ job advertisements. Despite the RBA's concerns about its overvalued currency, if this week's Australian and Chinese economic reports continue to surprise to the upside, the RBA may find themselves fighting a losing battle with AUD.  The slowdown in New Zealand house prices did not stop the New Zealand dollar from being the day's best performing currency. Looking ahead, Australian business confidence is scheduled for release this evening.

GBP Stalls Near 5 Year Highs                                             

While the spread between Eurozone and U.S. yields moved in favor of EUR/USD today, 10 year Gilt yields declined more than Treasuries, putting downside pressure on GBP/USD.  The only piece of U.K. data released today was an employment confidence survey conducted by Lloyds, which declined in the month of June.  Last week's rally in sterling was halted by slower growth in the service sector but the currency remains near its 5 year highs indicating that investors still hold out hope for further gains.  Tomorrow's industrial production report could be just the catalyst that sterling needs to extend higher because even with the pullback in service sector activity, the economy continues to recover at a pace that should result in the Bank of England tightening before the Federal Reserve.  As long as sterling holds above 1.70 versus the U.S. dollar, it is still on track to test its next resistance level of 1.7332, the 50% Fibonnaci retracement of the 2007 to 2008 decline.

USD/JPY Will Hold 100.75 to 103 Range

The Japanese Yen traded higher against all of the major currencies today with the exception of the New Zealand dollar.  The decline in USD/JPY along with weakness in U.S. and Japanese equities kept the Yen crosses under pressure.  With the U.S. earnings season beginning on Tuesday, we continue to expect the Yen to take its cue from risk appetite as last night's leading and coincident indices had very little impact on Japan's currency.  The leading index declined in May but the coincident index ticked higher.  So far the impact of the VAT tax on the economy has been limited and this week's economic reports are expected to provide further evidence of that.  Tomorrow we have Japan's current account and trade balances scheduled for release.  While the trade deficit is expected to increase, the current account surplus is expected to grow.  The impact on USD/JPY should be limited with the currency expected to remain confined between 101 and 102.75 for most of the week.