Investors Buy Dollars Aggressively Ahead of Fed Minutes

• Investors Buy Dollars Aggressively Ahead of Fed Minutes
• GBP Crashes on Weak UK CPI Undermines BoE Credibility
• EUR Drops to 9 Month Lows
• AUD: RBA Governor Stevens Speaks Tonight
• NZD: Dairy Prices Continue to Fall, PPI Declines
• CAD: Trades Lower on USD Strength
• JPY: Keep an Eye on Exports

Investors Buy Dollars Aggressively Ahead of Fed Minutes

Investors bought dollars aggressively today, sending the euro and British pound to fresh multi-month lows.  Although key levels in EUR/USD and GBP/USD were broken as a result of the strong housing market numbers, the dollar also traded well during the early European trading session on the back of weaker Eurozone and U.K. data.  The outlook for the U.S. economy leaves a lot to be desired but at the end of the day, dimmer prospects abroad is making the dollar and U.S. assets more attractive to foreign investors.  Consumer price growth rose less than expected but housing starts and building permits rebounded strongly in the month of July.  The Fed had been worried about the outlook for the housing market but between the rise in the NAHB index yesterday and the upside surprise in today's reports, the central bank will be comfortable with their plan to end Quantitative Easing in October.  The minutes from the last FOMC meeting is scheduled for release tomorrow and if they contain a less dovish bias, we could see further gains in the greenback.  However, if you recall back in July, the dollar sold off after the FOMC meeting because the statement was hawkish but not enough.  The central bank sounded more upbeat on inflation, the labor market and consumer spending but they downplayed recent data improvements particularly in the labor market. The Fed replaced their reference about the unemployment rate remaining high with a line that says, "a range of labor market indicators suggests that there remains significant underutilization of labor resources. Also, Fed President Plosser dissented because he felt the guidance did not appropriately acknowledge economic progress.  If the minutes reveal that other policymakers shared his concern but wanted to see more evidence of a recovery before shifting the guidance that may still be enough to extend the dollar's rally.  Of course, if the minutes turn out to be more dovish, it could strip away the dollar's gains easily with the EUR/USD and GBP/USD deeply oversold.

GBP Crashes on Weak UK CPI Undermines BoE Credibility

EUR/USD is the most actively traded currency pair but over the next 24 hours, the focus will be on the British pound, which is why we are relegating our second headliner to the GBP.  Sterling was hit hard today by a larger than expected decline in consumer prices.  CPI dropped 0.3% in the month of July, driving the year over year rate down to 1.6% from 1.9%. Producer prices were also lower but the focus is always on CPI because of the central bank's inflation target.  While this is not the lowest level that we have seen year over year CPI growth in 2014, it is certainly a move that makes the case for an earlier rate hike more difficult.  The decline in clothing and footwear prices indicate that prices have been affected by summer discounts but with PPI also moving lower, the drop in prices not only undermines BoE Governor Carney's credibility but it also kills the chance of tightening in 2014.  It also makes tomorrow's Bank of England minutes less meaningful because even if a few policymakers dissented from their latest decision to keep monetary policy steady, FX traders will question the central bank's ability to move on rates given the drop in price pressures.  GBP/USD broke below the 200-day SMA today and while there is some support at 1.66, the next main area of support is at 1.65.

EUR Drops to 9 Month Lows

As the gap between Eurozone and U.S. economic data and monetary policy widens, the pressure on EUR/USD increases.  The euro dropped to a 9 month low against the U.S. dollar on the back of a narrower Eurozone current account surplus and sharp gains in U.S. housing data.  The currency pair started the week on unsteady footing but the combination of a downside surprise in Europe and upside surprise in U.S. data drove EUR/USD below its key 1.3330 support level.  With the FOMC minutes scheduled for release on Wednesday and the Eurozone PMI reports expected on Thursday, the currency pair is vulnerable to additional weakness.  Taking a look at the charts, there is some support at the November 2013 low of 1.33 but the more significant support level is near 1.3250, the 38.2% Fibonacci retracement of the July 2012 to May 2014 rally.  While it can be argued that the weakness in EUR/USD was driven primarily by dollar strength, the grim outlook for the Eurozone economy also gave speculators a good reason to add to their short positions. The ongoing tensions between Ukraine and Russia doesn't help.  A indicated in yesterday's note, fundamentally the euro should be trading lower and if tomorrow's FOMC minutes contain a less dovish tone or the Eurozone PMIs surprise to the downside, building the case for ECB action, we could see EUR/USD drop towards 1.32.  

AUD: RBA Governor Stevens Speaks Tonight

All three of the commodity currencies ended the day lower against the greenback with the New Zealand dollar experiencing the steepest losses and the Australian dollar experiencing the shallowest.  This divergent performance drove AUD/NZD to its strongest level in 9 months.  NZD was hit hard by lower producer prices but a smaller drop in dairy prices stemmed the slide in the currency.  Although dairy prices fell for the fourth auction in row or for the 11th out of 12th auction, today's -0.6% decline was modest compared to other recent declines and in some ways raises hope that prices could be stabilizing.  Of course, it is far too early to tell and the drop in prices that we have seen over the past month alone is enough to raise concerns about New Zealand growth and keep monetary policy in New Zealand steady.  It could have been a lot worse however if prices had fallen sharply for the fourth auction in row, NZD/USD would be trading much lower.  Meanwhile the relatively neutral RBA minutes lent support to the Australian dollar.  The central bank is still concerned about the overall economic outlook and indicated that there is a notable degree of spare capacity in the labor market but investors were not concerned about easing because the RBA also talked about improving financial conditions, an uptick in inflation and a decline in rates on housing and business loans. There was no Canadian data released today but USD/CAD was supported by the gains in the greenback.  The focus will remain on the Australian dollar over the next 24 hours with RBA Governor Glenn Stevens set to deliver his semi-annual testimony on the economy and with Australian leading indicators scheduled for release. 

JPY: Keep an Eye on Exports

The Japanese Yen traded higher against all of the major currencies today with the exception of the U.S. and Australian dollars.  Unfortunately the gains in USD/JPY failed to offset the losses experienced in other yen crosses.  GBP/JPY in particular was hit hard by sterling weakness.  Last night's Japanese economic reports were relatively benign.  Leading indicators were revised up slightly while the decline in Nationwide Department store sales eased in the month of July.  Over the past month, we have seen evidence of both improvement and deterioration in Japan's economy and through these reports, the Bank of Japan remained confident that the economy would continue to recover even though there has been talk that they could lower their growth forecast for 2014.  One of their major areas of concern is exports.  In this month's monetary policy statement, the BoJ said exports have shown some weakness, which is a downgrade from their previous view that exports were flat.  The latest trade numbers from Japan are scheduled for release this evening and exports are expected to rebound.  If they fail to do so, it could strip the Nikkei and the Yen of its gains.  There are also reports that Prime Minister Abe will reshuffle his Cabinet in early September on the back of falling approval ratings.  At least 10 of his 18 ministers may be replaced.