Tough Month for the Dollar

• Tough Month for the Dollar
• AUD: What to Expect from the RBA
• NZD: Another Dairy Auction Tuesday
• CAD: GDP Growth Slows
• GBP Breaks 1.7100, Hits Fresh 5-Year Highs
• EUR Hits 6 Week Highs, Potential for Further Gains in Next 48 Hours
• JPY: Will the Quarterly Tankan Survey Signal Further Optimism?

Tough Month for the Dollar

It has been a tough month for the U.S. dollar. The greenback lost value against all of the major currencies and on the last day of the quarter, extended its losses dropping to its lowest level versus sterling in more than 5 years and its lowest level versus the euro and Japanese Yen in 6 weeks. This morning's U.S. economic reports weren't terrible but they weren't great either and that's the big problem. Without consistently positive U.S. data, investors have found very little reason to buy dollars. Pending home sales rose 6.1% in the month of May, five times more than expected but any positive reaction was tempered by the slowdown in Chicago manufacturing activity. The main pressure on the dollar comes from the decline in U.S. yields. Ten year Treasury yields fell to a 1-month low, driving EUR/USD and GBP/USD to new highs. As long as the Federal Reserve maintains a dovish bias, the dollar is vulnerable to further losses. Of course, they will be moderate and not massive losses. Thursday's non-farm payrolls report should provide some support to the greenback but at the end of the day, unless payrolls rise by less than 150k or more than 300k, it may not inspire much activity in the dollar. Volatility in the FX market especially in the front of the week will come from the heavy economic calendar abroad. Manufacturing ISM numbers are scheduled for release tomorrow but for the next 24 hours, we expect currency flows to be largely influenced by Chinese PMI, the RBA rate decision, German Unemployment and UK Manufacturing PMI reports.

AUD: What to Expect from the RBA

The U.S. non-farm payrolls report and the European Central Bank's monetary policy announcements may be the most market moving events on the FX calendar this week but the Australian dollar is also in play especially over the next 24 hours. The Reserve Bank of Australia has a monetary policy announcement and the latest manufacturing PMI numbers are scheduled for release from Australia and China. According to the June RBA minutes, the central bank felt that it is becoming "difficult to judge the extent to which (low interest rates) would offset the expected substantial decline in mining investment and the effect of planned fiscal consolidation." At the time, investors interpreted the uncertainty in their outlook as a more dovish bias and increased downside risks. Since then, we have seen both improvements and deterioration in Australia's economy (see table below). Consumer confidence improved, job growth accelerated, inflation increased and service sector activity accelerated. However at the same time job ads declined, business conditions deteriorated and stocks weakened. Therefore we expect the July statement to express the same doubts as June - with maybe a tinge of optimism on China. How AUD/USD trades will depend on any comments about the currency and concerns about the mining sector or fiscal tightening. We expect the rate decision to be mildly bearish for AUD/USD. Meanwhile the New Zealand dollar experienced the biggest losses after building approvals and business confidence tumbled. Permits fell 4.6% in May while confidence dropped to its weakest level in more than a year. Tighter monetary policy is beginning to take a toll on the economy and if the RBNZ raises interest rates further, we could see a deeper decline in building activity and economic sentiment. However according to ANZ Bank who publishes the business confidence index, "confidence remains very high by historical standards, but it is now starting to look a little more realistic. There is no reason to reach for the defibrillator." There is a dairy auction scheduled for Tuesday - if prices rise for the second time in a row, it could stem the slide in NZD/USD. Finally USD/CAD ended the day unchanged despite a softer than expected GDP growth in the month of April April. GDP rose 0.1%, keeping the annualized pace of growth steady at 2.1%.

GBP Breaks 1.7100, Hits Fresh 5-Year Highs

The British pound cruised through 1.71 to rise to its strongest level since October 2008 on the back of relatively healthy housing market data and U.S. dollar weakness. Net lending rose by 2.0B in the month of May, the fastest pace in 5 years. Mortgage approvals fell but the pace of decline is moderating - a sign of continued strength in the housing market. Last week the Bank of England announced a series of measures to cool the housing market and if prices and demand do not ease soon, the central bank could feel pressured to renew their commitment to tighten monetary policy. While the break above the key 1.7063 resistance level suggests that we could see a stronger rally in GBP/USD to 1.7350, the 50% Fibonnaci retracement of the 2007 to 2008 decline, the currency pair's ability to get to that level hinges in large part on this week's PMI numbers. Manufacturing PMI is scheduled for release tomorrow and if the data shows activity accelerating, we expect new highs for sterling. However if manufacturing activity slows like economists anticipate, the rally could fizzle as investors question the fundamental support behind today's gains.

EUR Hits 6 Week Highs, Potential for Further Gains in Next 48 Hours

The weakness of the U.S. dollar drove the euro to its strongest level in 6 weeks and the close above the June 6th high of 1.3677 suggests that we could see a stronger move to 1.3750. From a technical perspective, further gains are likely but on the basis of fundamentals, we believe that the European Central Bank meeting will halt the rally. Of course, the ECB doesn't meet until Thursday so between now and then, EUR/USD could trickle higher. The latest Eurozone economic reports underscore the ECB's challenges. Economists expected consumer spending in Germany to rebound in May after falling in April but instead, demand dropped 0.6% and the decline in April was revised lower. Consumption remains weak in the Eurozone, creating a need for continued stimulus but Eurozone core CPI increased slightly more than expected in June, easing some of the central bank's inflation concerns. Having only eased monetary policy 3 weeks ago, we don't expect the central bank to announce additional measures. However the market will be looking for details on the announcements made in early June and knowing Draghi he will most likely use this opportunity to remind investors they stand ready to take further action and these words could be all that is needed to halt the rally in EUR/USD. With this in mind, over the next 48 hours, we would not be surprised if EUR/USD extends its recovery. German unemployment numbers are scheduled for release on Tuesday and based on the PMIs, job growth accelerated in June.

JPY: Will the Quarterly Tankan Survey Signal Further Optimism?

While the Japanese Yen rose to a 1 month high versus the U.S. dollar today, there was very little consistency in the performance of the Yen crosses. EUR/JPY, GBP/JPY and CHF/JPY traded higher while NZD/JPY experienced losses (AUD/JPY and CAD/JPY were unchanged). USD/JPY traded lower against the U.S. dollar for the fourth consecutive trading day but its losses were less than 0.1%. The recent decline in U.S. Treasury yields kept the dollar under pressure on a day with both mixed U.S. and Japanese data. In Japan, industrial production rose 0.5% in the month of April against expectations of 0.9%. Housing starts dropped 15% and construction orders rose a mere 13.7% versus 104.9% the previous month. Though the rise in IP missed expectations, the improvement is still consistent with a recovery. The small business confidence index also edged higher, rising to 47.3 from 46.6 in June. This indicates that the economy continues to bounce back from the sales tax increase in April. Tonight, we have the Quarterly Tankan survey, one of Japan's most important economic reports scheduled for release. If large manufacturers remain optimistic, it could fuel further gains in the Nikkei and potentially lend support to USD/JPY.