Daily Trade Recommendation

There is no opening trade call for the session as it is Monday and we will wait for a higher probability environment.  It is also a UK holiday today which will create thinner trading conditions. As usual for Monday I prepared the currencies update in order to keep you up-to-date with the market changes.

Currencies Update:

USD: The greenback remains the strongest currency in the longer term as the market currently expects the Fed to raise rates in 2015. The FOMC wants to see a further improvement in jobs and be reasonably confident about inflation tracking towards 2% before increasing the fed funds target rate for the first time in nearly a decade. Recent Personal Consumption Expenditure was slightly better than expected for the core year-on-year. The consumer price index rose only 0.1% in July as did the core, both under expectations. Year-on-year rates show slightly more pressure. Overall inflation is up 0.2%, which is still very low but up from 0.1% in the prior month and the second positive reading of the year. The core is steady at 1.8% which is just under the Fed's 2% target. Recent falls in commodity prices and weakening demand from China are causing a lowering of inflation expectations. This, along with recent FOMC minutes, has caused a recent sell-off in USD.

EUR: The currency remains weak medium term due to the quantitative easing program that is underway and expected to continue for at least another 12-18 months. Inflation and growth readings in recent months have failed to show that the economy is recovering at a reasonable rate. The ECB may have to adjust their economic outlook and QE end dates if they do not see an increase in economic activity and consumer prices in the medium term. With that said, we have seen significant EUR strength after multiple Yuan devaluations by the PBOC sparked an unwinding of the euro/yuan carry trade, which in turn triggered massive short covering of the euro.

GBP: Sterling is a very bullish currency given expectations to raise rates in early-to-mid 2016. Recent job growth has been stellar and BOE comments have been hawkish. We look to buy sterling against weaker currencies on deep pullbacks. The recent inflation report and MPC minutes were less hawkish than anticipated by the market which caused a selloff in GBP. McCafferty is now voting for a rate hike. July CPI data has given the pound a boost, with y/y core increasing 0.4% since the June reading; it now stands at 1.2%.

AUD: Australia is in decent shape, however the decline in commodities prices and waning demand from China has a negative impact on the economy. The RBA are open to further easing but have already cut twice this year which placed them in a wait-and-see mode. The recent statement released August 4 was positive for the currency as the RBA remain on hold and withdrew their jawboning language from the statement; the currency rallied 160 pips against the dollar on the day. Employment numbers on August 6 showed a mixed outcome for July; unemployment increased to 6.3% yet there were nearly 40k jobs added. However a large proportion of the new jobs were part-time, which is less positive. The SOMP released August 7 was positive for the AUD as it showed an increase in inflation forecasts. The recent yuan devaluation has put pressure on the AUD.

NZD: The Kiwi dollar is one of the most bearish currencies at present due to the easing cycle of the RBNZ. They have cut rates twice this year and are expected to cut again at the next meeting. How many more cuts will depend on dairy prices which comprise a large proportion of New Zealand's exports. The currency will remain pressured heading into the next rate decision in September and fair value against the greenback is likely to be around 60 cents by year's end. The 20-week decline in GDT index was finally halted at the recent auction where prices showed a nearly 15% increase. We will need to see confirmation of a trend change before this becomes a bullish factor for the NZD. The market currently expects another rate cut this year with approximately 80% probability.

CAD: The Bank of Canada cut interest rates at their last meeting on July 15, which caused sudden weakness in the currency as it was only partially expected. The statement struck a dovish tone and therefore more easing is possible in Canada. WTI has fallen nearly $25 since June - this is bearish for the Canadian economy and currency.

JPY: The yen remains bearish medium term due to QQE. The BOJ have revised down their forecasts for CPI in coming years and their next move may include an adjustment to their inflation goal and stimulus program. CPI and BOJ inflation forecasts should be watched carefully for indications that the current stimulus will be increased. Thus far the BOJ maintains that the 2% target will be met by mid-16. We remain on the lookout for hints of further easing. With that said, recent global events and uncertainty have seen the JPY strengthen as haven flows pour in. While the bigger fundamental picture has not changed, it is difficult to tell how long this current market sentiment can last.

CHF: The franc is fundamentally a weaker currency given the SNB's negative interest rates, however it can suddenly rally on safe-haven flows. CHF often will take direction from the EUR with which its correlation against the USD over the last 50 trading days is approximately 90%.