Dollar Bulls, Look Past the Volatility to FOMC

• Dollar Bulls, Look Past the Volatility to FOMC
• Euro Outlook is Grim
• NZD Extends Losses after RBNZ
• USD/CAD Rebounds on Weaker CAD Data
• AUD: Solid Employment Report
• GBP/USD Still Flirting with 1.55

Dollar Bulls, Look Past the Volatility to FOMC

The U.S. dollar traded higher against all of the major currencies today but many investors anticipated a stronger move given the sharp rise in retail sales. USD/JPY traded above 124.15 on the back of the release and EUR/USD dropped below 1.12 but the greenback ended the day off its highs against both currencies. According to the media, the number was good but not good enough.  Just like yesterday we encouraged our readers to look past the BoJ comments and buy USD/JPY.  Today, we feel that it is important to look past the noise or volatility and focus on the data's implications for next week's FOMC meeting.  Consumer spending recovered strongly in the month May and this hardens the case for a rate hike by the Federal Reserve.  The dollar will trade higher going into the FOMC meeting and should even extend its gains afterwards.  We are looking for Janet Yellen and the Fed to prepare the market for liftoff.  On a moderate basis, this could come in the form of hawkish comments but if the central bank chose to be aggressive, they could pre-announce the move.   Today's reports show that consumer spending is on the rise and inflation is heating up. Retail sales rose 1.2% last month, which was the second strongest pace of growth in a year. Excluding autos and gas, spending rose 0.7%, higher than the market's 0.5% forecast.  Also, import prices jumped 1.3% last month while jobless claims remained low, rising to only 279K from 277K.  These reports confirm that the U.S. economy is improving and should make policymakers more confident about tightening.  Liftoff is happening whether you agree with us or not and this prospect will be positive for the dollar. The best trade is to sell NZD/USD because of the fresh divergence in monetary policy and the RBNZ's dovish bias but buying USD/JPY on any dip for a move to 126 remains a solid trade.  Producer prices and the University of Michigan Consumer sentiment report are scheduled for release Friday.

Euro Outlook is Grim

EUR/USD ended the day in negative territory but its intraday recovery has many traders wondering if nothing can keep the euro down.  This morning's U.S. economic reports were strong and the Greek debt negotiations are hitting more roadblocks with the IMF pulling its negotiation team from Brussels after failing to make progress. Everyone knows how significant the consequences are if a deal is not reached by the end of the month but June 30th is not the drop dead date.  Once the deadline passes, Greece is in arrears but it will be some time before the IMF declares a loan default.  When the deadline passes, IMF Managing Director Christine Lagarde will contact Greece to urge payment and inform them that they will no longer be able to use IMF resources.  Two weeks later, a direct appeal will be made to the Finance Minister.  If the loan is still not paid 1 month later, Lagarde will officially inform the IMF board that Greece is overdue. Shortly afterwards the board will have to decide how to respond.  So there's a bit more flexibility in the timing but the longer this drags out and the more resistance there is from both sides, the greater the strain that it puts on the euro.  Based on how the talks are going and the prospect of a hawkish Fed next week the outlook for EUR/USD is grim. So while the currency pair held 1.25 today, we are still looking for a move down to 1.1050. 

NZD Extends Losses after RBNZ

It is no surprise that the worst performing currency today is the New Zealand dollar, which fell approximately 1% against the U.S. and Australian dollars. The divergence in New Zealand and U.S. monetary policies drove NZD/USD to its lowest level in more than 4 years.  With the RBNZ talking about easing rates one more time and the FOMC gearing up to tighten, if the Fed is unusually hawkish next week we could see NZD/USD falling to 68 cents and even lower in the medium term.  In the past two days, AUD/NZD jumped over 300 pips and last night's strong Australian employment report contributed to the move.  A total of 42k jobs were created last month, almost 3 times greater than expectations.  While part time job growth exceeded full time, the fact that both moved higher is good news. The unemployment rate also fell to a 1 year low of 6%.  However with RBA Governor Glenn Stevens expressing frustration with the level of the currency and warning that more easing could be necessary, AUD/USD gave up all of its initial gains.  Of course U.S. dollar strength also contributed to the move.  After 4 days of losses, USD/CAD finally rebounded.  Dollar strength, a drop in oil prices and a smaller increase in the new housing price index along with lower capacity utilization all played a role in the rally. The BoC also released its Financial System Review this morning.  According to the central bank, the economy should rebound in the coming years but house prices are overvalued.  Governor Poloz said their decision to cut interest rates at the beginning of the year was motivated by lower oil prices.  While trade activity has been disappointing, oil prices recovered more than they expected.  The "hand-off" between Q1 and Q2 was clearly negative and the harsh winter may still be showing up in data.  However summer is here and oil is at $60 a barrel.  This should pave the way for stronger data and a stronger currency.

GBP/USD Still Flirting with 1.55

The British pound ended the day sharply higher versus the euro and slightly lower against the U.S. dollar. The 1.55 level continues to be the main area of contention for GBP/USD traders.  Whether a sustained break occurs or a near term top will be determined by next week's heavy U.K. and U.S. economic reports. There's nothing on the calendar tomorrow except for a speech from Ian McCafferty at 5AM ET - he is generally more hawkish than his peers.  Aside from the highly anticipated FOMC rate decision we have the Bank of England minutes scheduled for release along with U.K. consumer prices, retail sales and employment in the coming week.