FX: 5 Events that Can Set Tone for August Trade

• FX: 5 Events that Can Set Tone for August Trade
• Will USD/JPY Benefit from Negative Japanese GDP Growth?
• GBP: 3 Things to Look for in the BoE Quarterly Inflation Report
• EUR Slips as German Investor Confidence Hits 20-Month Lows
• NZD/USD Falls to Fresh 2 Month Lows
• AUD: Uptick in Business Confidence
• CAD: Oil Prices Drop 0.75%

FX: 5 Events that Can Set Tone for August Trade

We have had a relatively quiet start to a busy week in the foreign exchange market.  The euro trickled lower on the back of weaker investor confidence, but the miss in the ZEW was not significant enough to drive EUR/USD to a fresh year to date low.  All of that could change however in the next 48 hours as key levels could be tested and broken across various currency pairs.  All of this week's major events risks are scheduled for release on Wednesday and Thursday so if there is any chance for a burst in volatility, it will be in next 2 days.  More importantly, the outcome of many of these releases could set the tone for August trade.  For example if tonight's second quarter GDP number shows that Japan's economy contracted more than expected, it could revive speculation of easing from the Bank of Japan and alter the central bank's outlook which would be negative for the Japanese Yen. If talk of more stimulus gains traction, it could even kick off a broader decline in the Yen versus other major currencies. 

Chinese industrial production and retail sales reports will follow Japan's GDP number. The Australian and New Zealand dollars are having a tough time rallying but if industrial production beats expectations, reassuring investors that Australia and New Zealand should benefit from the economic stability of their number 1 trading partner, AUD/USD could bottom above 92 cents and NZD/USD above 84 cents.

The U.K.'s employment report is also very important because the central bank is watching wage growth closely. If average hourly earnings decline, it could set off a new wave of selling in sterling but the big market mover will be the Quarterly Inflation Report.  Any hint of hawkishness either in the form of upgraded GDP or inflation forecasts would end the rally in GBP and pave the way for a stronger recovery.  If there is no sign of hawkishness however, the sheer disappointment could send sterling to fresh 2 month lows especially if it is combined with a larger decline in average hourly earnings.

Finally the U.S. retail sales report is the most important event risk on the U.S. calendar and it's the last piece of major data before the Jackson Hole Summit, which will probably be less eventful given the soft non-farm payrolls report. Economists are not looking for a significant pickup in spending and if retail sales surprise to the upside, the dollar could extend its gains and maybe even carve out a bottom for U.S. yields driving some currency pairs below key levels.

Will USD/JPY Benefit from Negative Japanese GDP Growth?

With no major economic reports released over the past 24 hours from the U.S. or Japan, the Yen ended the day unchanged against the U.S. dollar.  Investors are hanging tight ahead of tonight's second quarter GDP report.  Usually Japanese data is not a big mover of the Yen but this quarter's release will tell us just how much damage the sales tax increase in April had on the economy.  We know the economy withstood the initial pullback relatively well and this helped to boost the confidence of policymakers who felt that the decline was in line with expectations.  However, economists are looking for the steepest contraction in Japan's economy since the first quarter of 2009.  GDP growth is expected to fall 1.8% on a quarterly basis and 7% year over year. How USD/JPY responds to the GDP report depends on whether the decline is a bump in the road or a longer-term setback in the economy.  Based on recent Japanese economic reports, the recovery is losing momentum so if GDP growth drops by more than 2%, the Yen could fall sharply as investors view this as a reason for the central bank to increase stimulus in late 2014 / early 2015.  If GDP growth beats expectations and falls by less than 1.8%, the benefit that it will provide for USD/JPY would be limited because it represent status quo for the central bank. The real test will be in the third quarter.  If growth fails to rebound significantly between July and September, the BoJ may have to reconsider their policy stance.

GBP: 3 Things to Look for in the BoE Quarterly Inflation Report

At the start of the European trading session, the British pound fell to a 2 month low against the U.S. dollar but due to a gradual recovery that lasted into the U.S. session, sterling ended the day higher against all of the major currencies.  Whether today's recovery marks the beginning of a longer term recovery or a relief rally before further losses for the currency will determined by tomorrow's labor market number and Quarterly Inflation Report.  The absolute amount of job growth and claimant count rate is important but given that tightening is predicated on wage growth, we are particularly interested in average weekly earnings which are expected to fall by 0.1% in June.  If economists were correct, this would make it difficult for the central bank to justify early tightening especially given the slowdown in the Eurozone and geopolitical risks. There will be 3 main things that we will be looking for in the inflation report 1) General Tone of the Central Bank and Any Sign of Dissent Among Policymakers 2) New GDP, Inflation and Spare Capacity Forecasts 3) Timing of Rate Hike.  More ambiguity would be negative for sterling while more specifics should be positive for the currency.  There's been a lot of talk about division within the Monetary Policy Committee.  Some policymakers believe that it would be prudent to raise rates early to ensure that the process is smooth and gradual. Others are more apprehensive with slow wage growth and geopolitical uncertainty giving them good reasons to argue for steady rates.  A hawkish bias would carve out a bottom for sterling whereas a lack of hawkishness could send GBP/USD to 1.67 and EUR/GBP to 80 cents.

EUR Slips as German Investor Confidence Hits 20-Month Lows

The euro traded lower against the U.S. dollar today on the back of a not so surprising decline in investor confidence.  In yesterday's note, we outlined 3 reasons why the euro could fall to fresh year to date lows this week and while we did not think the German ZEW survey would be important enough to take EUR/USD to new lows, we also felt that it would not help the currency pair. Between geopolitical uncertainties and weak economic data, investors had very little to be optimistic about.  The expectations component of the ZEW survey dropped to its lowest level in 20 months for both Germany and the Eurozone in the month of August. This soft report drove the EUR/USD to a low of 1.3336 intraday, which was 2 pips shy of its 2014 low of 1.3333. Clearly this has become a very important level of support for the currency pair as it bounced off this level 4 times in the past 5 trading days.  While there are no major Eurozone economic reports scheduled for release on Wednesday, this support level could be tested if there is a big upside surprise in U.S. retail sales.  If not, the downtrend in EUR/USD hinges entirely on Thursday's Q2 GDP report.  We would also like to remind traders that EUR/USD short positions are at their highest level in 2 years and this leaves the currency pair extremely vulnerable to a short squeeze if Eurozone data surprises to the upside or U.S. data miss expectations. 

NZD/USD Falls to Fresh 2 Month Lows

The New Zealand dollar dropped to a fresh 2 month low against the U.S. dollar on the back of disappointing housing market numbers.  According to the Real Estate Institute of New Zealand (REINZ), house sales fell 13% in July 2014 compared to last year. House prices also dropped 0.7%, which means that not only are fewer homes being sold but the ones that are finding buyers are doing so at lower prices.  Although the winter weather affected demand, a higher Loan to Value ratio requirement imposed by the RBNZ and recent rate hikes certainly does not help the activity and outlook for the sector.  Today's housing market report only adds the reasons why we believe the Reserve Bank will keep interest rates on hold for the rest of year. The Australian dollar on the other hand ended the day slightly higher thanks to a rise in business confidence.  Due to stabilization in China, the NAB Confidence index rose for the fourth month in a row to a 10-month high.  Consumer confidence numbers are scheduled for release this evening.  With no data on the calendar, the Canadian dollar ended the day unchanged