Week Ends With Wild Swings in Currencies

The U.S. dollar traded higher against most of the major currencies today following better than expected consumer spending numbers. Retail sales rose 0.6% in the month of June, which was significantly higher than the market's 0.1% forecast. While part of the improvement can be attributed to the downward revision in May, there's no doubt that spending was strong with retail sales ex autos and gas rising 0.7%.  American consumers accelerated their online purchases and picked up spending at sporting goods and building material stores. Between April and June, retail sales rose an average of 0.67% compared to an average drop of -0.16% in Q1, which means we should see a nice uptick in second quarter GDP growth.  Industrial production also doubled expectations but consumer price growth held steady at 0.2% and the Empire State manufacturing index plus University of Michigan Consumer Sentiment reports took a tumble. So even though U.S. yields rose sharply today, the U.S. economy is not out of woods.  With that in mind, we are still looking for further gains in USD/JPY as the Japanese government prepares for easing.  We heard from a number of Federal Reserve officials this week and all of them sounded relatively optimistic about the outlook for the U.S. economy. USD/JPY took out 106 today after strong Chinese GDP numbers. While the rally ran out of steam, end of week profit taking is not unusual after such a strong move.  USD/JPY started the week at 100.40 and on Friday, rose as high as 106.31 and its no coincidence that the move fizzled right at the 50-day SMA.  In the coming week, we will still be looking to buy dips in the currency.

 

Meanwhile GBP/USD came within 20 pips of 1.35 during the Asian trading session only to reverse sharply to end the day near 1.32.  We were surprised by the overnight strength of the currency but stronger Chinese data drove all of the major currencies higher.  However with the Bank of England poised to ease next month, the rally did not last for long. The sell-off was sparked by comments from Bank of England Chief Economist and Monetary Policy Committee member Haldane who said easing needs to be delivered promptly and muscularly to cushion against negative shocks.  His speech definitely suggested that it was not a matter of if but a matter of how much the central bank will ease next month.  This view is consistent with the minutes from the Bank of England meeting, which revealed that policymakers discussed a "range of possible stimulus measures."  We continue to expect sterling to trade lower in the coming week with UK inflation, employment and retail sales figures scheduled for release next week. Markit Economics also announced that they would be issuing a special one-off Flash PMI on Friday to "help provide clarity on the potential impact of the UK's EU referendum on the economy, and is a response to demand from users."  Chances are the report will show weakness, exacerbating the slide for sterling. We expect 1.30 to be tested in GBP/USD and 0.85 broken in EUR/GBP before the August rate decision.

 

German 10 year bond yields turned positive for the first time since Brexit and yet euro erased all of yesterday's gains to end the week below the 200-day SMA. There were no major surprises in Eurozone data but the trade surplus and consumer prices eased.  The Eurozone has its own problems and on the top of the list is terrorism.  The tragic attacks in France fuels greater anti-immigrant sentiment in the region, a stance that could lead to greater protectionism in Europe.  Although the euro experienced losses on Friday, EUR/GBP and EUR/JPY flows have largely kept the currency pair contained within its post Brexit 1.10 to 1.12 trading range.  However the range could be broken in the coming week with an ECB meeting and Eurozone PMIs on the calendar.  We know that the Brits and Japanese plan to ease in the next few weeks but how close is the ECB to another round of stimulus?  Investors will be looking for the answer to this question on Thursday.  While we expect Mario Draghi to confirm that the central bank maintains a dovish bias, there hasn't been enough disruption in the financial markets since Brexit for the ECB to rush into any new action having just increased stimulus in March.

All three of the commodity currencies ended the day lower against the US Dollar. The biggest loser was the New Zealand Dollar, which continued to feel the sting of the Reserve Bank's decision to provide an update on the economy on July 21st.  The last RBNZ meeting was in June and the next meeting will be in August but the central bank's unusual decision to provide an economic update makes us worried that they may have concerns about the economy. New Zealand consumer prices and service sector PMI are scheduled for release on Sunday - two pieces of data that could have a meaningful impact on the currency.The Australian Dollar reversed course giving back all of it gains from the Asian session. Chinese retail sales beat estimates coming in at 10.3% vs. 10.2% expected. Chinese industrial production reported a rise of 6.0% vs. 5.9% expected. Chinese GDP also beat expectations, reporting a 6.7% figure while a 6.6% increase was expected. The news gave the AUD a strong shot in the arm, but the momentum was unsustainable as better than expected US data lifted the greenback. The minutes from the last RBA meeting is scheduled for release next week. Although no Canadian economic reports were released on Friday, CAD will be in focus in the coming week with retail sales and consumer prices on the calendar.