Busy week ahead: How are FX traders positioned?

With three monetary policy announcements, labor market numbers, New Zealand Q2 GDP, retail sales and a number of inflation reports scheduled for release this week, it should be a busy one for currencies. Volatility is on the rise with USD/JPY breaking an 8 day long consolidation to end the day at its weakest level in more than 2 weeks. The greenback traded lower across the board as investors position for dovishness from the Federal Reserve. Last month at the virtual Jackson Hole Summit, Chairman Powell introduced a new strategy for inflation that could guide the wording of this week’s FOMC statement, dot plot and the central bank’s economic projections. Other currencies are also moving on expectations for dollar weakness but after making such a major announcement in August, there may be little surprise from the Fed and that could make unexpected changes in data from other countries more impactful. Aside from FOMC, US retail sales, the Empire State and Philadelphia Fed surveys are scheduled for release this week.

For example, while we are very bullish euros after ECB President Lagarde’s comments and anticipate further improvements in July data, the German ZEW survey for the month of August could be weaker. Between the pullback in stocks and the general moderation in the Eurozone recovery investors may have grown less optimistic about the outlook for the economy. If the ZEW survey which is due Tuesday falls more than expected, it could trigger the first decline in EUR/USD in 5 trading days. Also, China announced that it will ban imports of German pork and related products after this weekend’s virtual trade summit. With that said, any decline in EURUSD could attract buyers as traders position for US dollar weakness into FOMC.

Sterling on the other hand extended its gains despite the UK governments decision to forge forward with legislation that breaks aspects of their Withdrawal agreement with the European Union. The Bank of England also has a monetary policy announcement on the calendar and like the Fed no major changes are anticipated. However, the monetary policy committee meets during heightened Brexit risks, a spike in virus cases and global uncertainty so it will be interesting to see if they maintain their optimistic growth and inflation outlook. The UK employment and inflation numbers released before BoE will be important in guiding the market’s expectations for the central bank meeting.

Despite the sharp rally in US stocks today, the Japanese Yen and Swiss Franc traded higher against most of the major currencies.  Japanese industrial production numbers were better than expected but the big story in Japan is the Liberal Democratic Party’s selection of Yoshihide Suga as Japan’s next prime minister. As Chief Cabinet Secretary for Shinzo Abe, Suga is a logical choice for the job and for a country that wants continuity. 

Meanwhile the New Zealand dollar was the best performing currency today and interestingly enough, the Australian and Canadian dollars lagged behind. The rally was driven primarily by the government’s decision to ease restrictions in every major city except Auckland and to ease social distancing requirements for Air New Zealand. Passengers will be required to wear masks, but the country’s flagship airliner can now sell middle seats. This announcement overshadowed a report that service sector activity weakened. Second quarter New Zealand GDP numbers is the most important piece of data for the country this week. No economic reports were released from Canada today but retail sales and consumer prices are due this week. For Australia, August labor market numbers are in focus along with the minutes from the last Reserve Bank meeting which will be released this evening.