It is Time for a Dollar Comeback

• It is Time for a Dollar Comeback
• USD/CAD Hits 10 Year Highs
• AUD/USD at 6 Year Lows
• NZD: Comm Dollars Hit Hard by Chinese PMI
• Euro: Negotiations with Greece Begin Again
• Sterling Extends Losses on USD Strength

 It is Time for a Dollar Comeback

It is time for the dollar to come back into focus next week with the FOMC rate decision and Q2 GDP report scheduled for release.  USD/JPY traded within a tight 90-pip range for the last 7 trading days and these first tier event risks will cause either 124.47 or 123.57 to break. While we are not looking for the Federal Reserve to raise interest rates in July, our money is on an upside break because liftoff is near and the central bank will want to tweak its monetary policy statement to nudge the market in that direction. At her semi-annual testimony on the economy and monetary policy Janet Yellen sounded optimistic about the outlook and indicated her preference to start raising rates earlier so that monetary policy can be tightened at a more gradual pace going forward.  Some investors are worried because retail sales declined, job growth slowed and average hourly earnings stagnated in the month of June but all three saw gains in the third quarter and as such the Fed is likely to downplay the weakness and focus on the improvements in the housing market and the drop in the unemployment rate.  Second quarter GDP is expected to be very strong and that should lend support to the greenback. U.S. yields have also fallen over the past week and hawkishness from the Fed would help to reinvigorate the dollar. So not only are we looking for the dollar to come back into focus but we are also looking for the rally to return. Picking the right pair to trade will be important because the greenback is extremely overbought especially against the commodity currencies.  The USD hit a 10-year high versus the CAD today and a fresh 6-year high versus AUD. We prefer buying dollars versus the JPY and EUR.

USD/CAD Hits 10 Year Highs, AUD/USD at 6 Year Lows

The relentless selling of commodities currencies continued today with the Canadian and Australian dollars falling to fresh multiyear lows. AUD was hit the hardest, dropping more than 1% but the biggest milestone was reached by CAD which hit a 10 year low. Since the beginning of the year, both of these currencies lost more than 11% of their value versus the dollar and the dynamics that have driven today's decline also spells trouble for Australia and Canada's economy going forward.  The big story overnight was the sharp slowdown in Chinese manufacturing activity. According to the Caixin report, which was formerly HSBC, Chinese manufacturing contracted at its fastest pace in 15 months. For the last 2 weeks investors were able to take their minds off of China with the Shanghai Composite Index turning around but with today's report, the fear of a deeper contraction in the Chinese economy has returned. When Chinese stocks were collapsing earlier this month every one suspected that China's economy would be hit hard but the government restored confidence by massaging the data.  Caixin is a private gauge that tends to provide a much more accurate assessment of the economy.  Clearly the industrial sector is suffering and chances are more weakness is likely as the slide in Chinese stocks takes it toll on the economy. For AUD/USD and USD/CAD this means the potential of further losses especially if the Fed is hawkish next week. However it is important to remember that the weakness of these currencies will create support for these economies. The Canadian dollar is at its cheapest level in 10 years and that will encourage more tourism and trade activity with the U.S. Resistance in USD/CAD is at 1.3350 and support in AUD/USD is at 70 cents.

Euro: Negotiations with Greece Begin Again

Now that Parliament has passed the required austerity measures, negotiations between Greece and its creditors have begun. Members of the ECB and European Commission arrived in Athens and they will be in the country for then next few days for an initial discussion. The IMF is also planning to be involved but they cannot officially begin bailout negotiations before the Greek government officially requests their aid. The Washington based fund has made it clear that they see no situation where some form of debt relief is not involved. We completely agree and this point of contention is where the negotiations can unravel.  After a short respite, investors have already started to dump euros on the fear that negotiations will get rocky and the negative headlines will hurt the currency. Eurozone PMIs also surprised to the downside reinforcing our concern that the troubles in the region is affecting activity and demand.  We recommend selling into the EUR/USD rally because even though Greek Parliament cleared an important hurdle with their approval of reforms there are many more to come.  European creditors will continue to question the government's ability to implement all of the reform measures and given the significant toll they will have on Greece's economy, Syriza will push to renegotiate as long as the ECB keeps the spigots open.  Both the ECB and IMF believe that debt relief is necessary but Germany will put up a good fight and their resistance will raise concerns about the talks breaking down and the renewed possibility of a Grexit.  On Thursday, ECB member Nowotny said they could consider extending the maturity of Greek debt.  August will be an important month for Greece because not only will the Parliament need to approve all of the reforms, but the Eurogroup will need to approve a third bailout package for Greece before the ECB's 3.4 billion bond repayment is due.  Also Prime Minister Tsipras could call for a snap election in the fall that would lead to political uncertainty that is rarely good for a currency. The bottom line is that Greece is not out of the woods. The path ahead will be challenging and the road bumps will deter investors from buying euros.

Sterling Extends Losses on USD Strength


Demand for U.S. dollars drove sterling lower for the second day in a row.  While the BoE minutes indicates that the central bank is moving closer to raising interest rates, this week's retail sales report raised red flags and prevented sterling from moving higher. This divergence between the central bank's policy bias and data makes next week's second quarter GDP report even more important.  Economists are looking for growth to accelerate by 0.7% and a very good number is needed to reinvigorate the rally in GBP/USD. The price action of sterling next week will also be heavily dependent upon developments in the U.S. and Greece because these 2 risks will have a larger impact on the market than GDP.