Dollar: US Data Leaves Yellen Comfortably Dovish

• Dollar: US Data Leaves Yellen Comfortably Dovish
• Euro Unfazed by Weaker GDP Growth
• GBP Rebounds Off 4 Month Lows
• CAD: Re-Releasing Employment Report
• NZD Soars on Stronger Retail Sales
• AUD Lifted by Hunt for Yield
• JPY: Machine Orders Fall Short but Policymakers Remain Optimistic

Dollar: US Data Leaves Yellen Comfortably Dovish

Based on the latest price action in equities, Treasuries and currencies, investors agree that the latest U.S. economic reports leave Federal Reserve Chair Janet Yellen comfortably dovish. The U.S. dollar ended the North American trading session unchanged against the euro, British pound and Japanese Yen and slightly lower versus the Australian and New Zealand dollars. The rise in Treasury prices and gains in stocks confirm that investors see no threat of higher rates.  At the same time, the dollar is holding onto its gains against the 3 most actively traded currencies because even with today's data disappointments, the outlook for the U.S. is brighter than the outlook for the Eurozone, U.K. and Japan.  Jobless claims rose 311k which was slightly more than the market's 295k forecast but we are not particularly worried about this increase because claims have been extremely low in recent weeks and the 4 week moving average remains below 300k.  Inflationary pressures also remain low with import prices falling 0.2% in the month of July.  These reports will harden the central bank's resolve to leave rates on hold for a long period of time after Quantitative Easing ends.  At this stage, we do not expect any clarification on the direction of U.S. monetary policy at next week's Jackson Hole Summit.  If we are lucky the next NFP and retail sales reports (both of which are scheduled for release before the September 17th FOMC meeting) will show an improvement, giving policymakers the confidence to provide hints on when rates could rise but if more weakness is seen, we will hear nothing but reluctance from the central bank. The Empire State manufacturing index, producer prices, Treasury International Capital Flow report, industrial production and University of Michigan consumer confidence index are scheduled for release on Friday.  While there is a lot of economic data scheduled for release, we expect the overall impact on the dollar to be limited because none of these reports are game changers for the Fed.

Euro Unfazed by Weaker GDP Growth

Contrary to our expectations, a weaker than expected Eurozone GDP report did not crush the euro which tells us 2 things #1 investors are hoping for a stronger recovery in Q3 and #2 the euro is deeply oversold and with short positions are at 2 year highs, the data wasn't weak enough to attract fresh sellers. There was zero growth in the Eurozone in the second quarter. This was the weakest period of growth for the region since it came out of recession in early 2013.  Germany in particular experienced its first contraction since Q1 of 2013 with the 0.2% decline exceeding the market's -0.1% forecast.  The French economy stagnated for the second quarter in a row and Italy fell into recession. Eurozone growth would have probably been negative if not for the stronger expansion in Spain, Portugal and other smaller EZ nations.  Consumer prices also fell more than expected with only 2 of the 18 Eurozone countries experiencing an increase in prices in the month of July.  The European Central Bank's concerns are validated by the weaker growth and inflation report and reinforced further by lowered inflation forecasts.  Nonetheless EUR/USD refuses to fall and the longer the currency pair hangs at current levels, the greater the chance of a short squeeze.  If that occurs, we view it as an opportunity to sell at higher levels.

GBP Rebounds Off 4 Month Lows

The British pound ended the day unchanged against the U.S. dollar but not before dropping to a 4 month low. Last night's RICS house price balance added to the pressure on the currency as the index dropped to its lowest level since February, indicating a further loss of momentum in the housing market.  While sterling is oversold, we are still looking for further losses. The currency pair is particularly vulnerable next week with inflation, retail sales and the BoE minutes scheduled for release.  Tomorrow we have Q2 GDP revisions but the Brits tend to do a great job of estimating their own economic reports, which mean revisions are rare but if the data is revised, it can have a meaningful impact on sterling.   Today's decline stopped right at the 200-day SMA but with the BoE official backtracking on their plans to raise rates early, we believe it should only be a matter of time before 1.6650 breaks.  According to Monetary Policy Committee member Miles, the outlook for UK growth is good but export growth has been disappointing and the abundance of slack means there's room to keep rates low. The housing market is also expected to cool further, making it difficult to provide a "cast iron" commitment on rates."  As one of the most dovish members of the central bank, his comments are in line with his general bias.

CAD: Re-Releasing Employment Report

Commodity currencies traded higher today led by the gains in the New Zealand dollar.  While stronger than expected retail sales helped to propel the currency higher, it was not until the European trading session that the rally in NZD/USD really got underway. This may reflect the usual lagged reaction to Australian and New Zealand data but the hunt for yield is also driving demand for these pairs.  With 10 year Treasury yields hovering near a 13 month low of 2.41% and 10 year German Bund yields sitting at a record low of 1.01%, the 3.38% return offered in Australian bonds and 4.17% yield offered in New Zealand bonds is extremely attractive especially on a day with positive economic data. Consumer spending in New Zealand rose 1.2% in the second quarter up from 0.8%. While encouraging, the RBNZ won't be inclined to raise rates again this year because the upside surprise in spending was modest and the BusinessNZ Manufacturing PMI index declined in July, pointing to weaker manufacturing activity.  No economic data was released from Australia and an in line house price report from Canada left the currency pair unchanged. Statistics Canada said it found an error in July's abysmal employment report and will issue a new one on Friday so watch for some unusual volatility in the currency pair tomorrow.  Given how weak the last report was, the odds favor an upside surprise.

JPY: Machine Orders Fall Short but Policymakers Remain Optimistic

The Japanese Yen held steady or traded lower against all of the major currencies today.  A larger than expected increase in jobless claims prevented USD/JPY from extending its gains even though Treasury prices pressed higher.  Japanese machine orders rebounded in the month of June, which prevented a slide in a Nikkei but at 8.8%, the increase was well short of expectations.  On an annualized basis, orders fell 3% compared to a forecast for 3% growth. Investors were relieved that machine orders did not fall for the third month in a row but the smaller increase indicates that Japanese companies are cautious about capital spending. Greater demand for electronic equipment and construction machinery helped to drive the rebound but core orders declined.  Nonetheless policymakers are still optimistic that the third quarter will be strong.  According to Economic and Fiscal Policy Minister Amari, the economy will "rebound substantially" in Q3. There are no additional Japanese economic reports scheduled for release this evening.