They Just Keep Buying Dollars

• They Just Keep Buying Dollars
• Euro Extends Losses on Data and Greek Developments
• AUD Hits Fresh 6 Year Low
• NZD Extends Losses of Softer Data and China
• CAD Resumes Slide as Oil Declines
• GBP: Holding Strong Ahead of Next Week's Big Events

They Just Keep Buying Dollars

Investors continued to buy U.S. dollars even after weaker than expected growth, a drop in Treasury yields and an uptick in jobless claims. The greenback traded higher against all of the major currencies today with its strongest gains seen against the euro and New Zealand dollars.  Not only did yesterday's Fed meeting fail to deter investors from buying dollars but it also breathed new life into the greenback. The dollar rose to its strongest level in 7 weeks against the Japanese Yen and to its highest level in 6 years versus the Australian dollar. A September rate hike is on the table and investors are positioning for the move.  While we are bullish dollars and believe that further gains are likely, there's just under 2 months to the next monetary policy meeting and the dollar is overbought.  Rather than chase the rally especially in USD/JPY we believe that we will have the opportunity to buy the currency pair on the 123 handle.

The U.S. economy rebounded strongly in the second quarter with growth accelerating to 2.3% from 0.6%. While this was softer than the market's 2.5% forecast, when we include the 0.8% positive revision to the previous report, the U.S. economy is in a much better shape than many had anticipated. Personal consumption rose 2% between April and June while core PCE grew 1.8%. At the same time jobless claims rose to only 267k versus the market's 270k forecast. So while some economists look at these numbers and say that they are weak or the economy is worse off than before because of the downward revisions in 2012 and 2013, we believe there's enough here for the Fed to raise interest rates for the first time in 9 years.  In the last monetary policy statement, the central bank described recent job gains a "solid" and their preference for seeing "some additional improvement" in the labor market can still be met with the next 2 NFP reports. Revisions to the July University of Michigan Consumer Sentiment survey and Chicago PMI index are scheduled for release on Friday - upticks are expected in both reports.

Euro Extends Losses on Data and Greek Developments

The euro extended its losses today on the back of weaker German data, a stronger dollar and a reminder that the IMF won't contribute to another bailout for Greece without debt relief. While some papers are reporting this as "breaking news," Lagarde has made this comment before and we believe they are very serious about.  In fact we also cannot see a solution without some form of debt relief like lower interest rates or longer maturities.  Greek Prime Minister Tsipras also called a party referendum on the bailout this Sunday, which means we are looking at another weekend of uncertainty.  As we have warned before, the path to a deal won't be easy and this is but the beginning of more challenges to come.  A rise in German unemployment also failed to help the euro. Economists were looking for unemployment rolls to fall at a faster pace in July but instead they increased.  German consumer prices ticked higher and Eurozone business and economic confidence increased but these improvements failed to offset road bumps in the Greek debt deal talks and the softer German labor market report.  Retail sales are scheduled for release tomorrow but this report will most likely take a backseat to Greece.

NZD Extends Losses, AUD Hits Fresh 6 Year Low

The worst performing currency today was the New Zealand dollar, which lost approximately 0.75% of its value against the greenback. While the decline was attributed to the 4.1% drop in building permits, we believe that it was the combination of data, sell-off in Chinese stocks, rise in the U.S. dollar and pressure on commodity prices that drove the currency pair lower. Reason being that even though permits in general declined in June, they rose 18% in Auckland.  The housing market is not the biggest area of weakness for New Zealand's economy but rather the greatest area of strength. Instead we are worried about demand from China and dairy prices.  There's a global dairy auction next week as well as second quarter employment numbers scheduled for release.  The Australian dollar was also hit hard today by housing market data. Building approvals fell 8.2% against expectations for a milder 1% decline.  Import and export prices also missed expectations and the combination of softer inflation and housing data drove AUD/USD to its weakest level in 6 years. The currency pair ended the day off its lows but still under pressure. No economic reports were released from Canada but the persistent decline in oil prices drove the loonie lower.  Over the next 24 hours, Australian PPI and New Zealand business confidence numbers are scheduled for release. 

GBP: Holding Strong Ahead of Next Week's Big Events

Of all the major currencies, sterling was the most resilient versus the U.S. dollar. It ended the day unchanged after having raced to a high of 1.5642. Technically, it looks like the currency pair could retest 1.55 but if that were to occur, it would only be due to U.S. dollar strength because fundamentally, investors have every reason to be bullish pounds.  Next week is a very important one for the U.K. with all 3 PMI reports scheduled for release along with a Bank of England Monetary policy announcement. For the first time ever, the Bank of England will simultaneously release its policy decision, the meeting minutes, the votes and new macroeconomic forecasts. Mark Carney will also hold a press conference 45 minutes after the monetary policy decision. This glut of data and event risk will make for a very volatile week for sterling and given recent comments from U.K. policymakers, we believe that the risk will be to the upside for the pound.