Can Dollar Stay Bid?

The main story has been the return of risk appetite and since the greenback was bought aggressively when investors were nervous about Brexit, Italy and trade tensions it is now being sold across the board. None of these issues have been resolved but US stocks climbed to record highs, which allowed investors to temporarily forget about these big issues. Safe haven flows eased out of the greenback, driving most of the major currencies higher. EURUSD led the gains with a 1.6% rally followed by USD/CHF which rose 1.4%. Both sterling and the New Zealand dollar saw notable gains while the Australian and Canadian dollars ended the week virtually unchanged. AUD staged a strong recovery off 20-month lows while USDCAD simply consolidated. The Japanese Yen was the only currency that weakened versus the dollar and its performance is consistent with the risk rally. Looking ahead it’s the end of the summer in Europe and North America and the week before a major holiday in the US Most of the major event risks are behind us and with minimal data on the calendar, liquidity will truly subside. We never believed that August would be a dull month in the forex market but now that we are at the tail end of, we could finally see trading ranges narrow and currencies settle before everyone returns after the US Labor Day holidays.

US DOLLAR

Data Review

• Powell sees no signs of inflation getting out of hand

• FOMC Minutes show concern about global trade & emerging markets

• Existing Home Sales -0.7% vs 0.4% Expected

• House Price Index 0.2% vs 0.3% Expected

• Manufacturing PMI 54.5 vs 55.0 Expected

• Services PMI 55.2 vs 55.8 Expected

• Composite PMI 55.0 vs 55.7 Prior

• New Home Sales -1,7% vs 2.2% Expected

• Durable Goods Orders -1.7% vs -1.0% Expected

• Durables Ex. Transportation 0.2% vs 0.5% Expected

Data Preview

• Advance Goods Trade Balance - Potential for downside surprise given stronger dollar and drop in ISM manufacturing

• Consumer Confidence - Drop in University of Michigan index offset by a rise in IBD Index and record high stocks

• GDP Annualised and Pending Home Sales - Revisions to GDP are hard to predict but changes can be market moving

• PCE Core, Personal Income and Spending- Potential for upside surprise given a sharp rise in earnings and retail sales

• Chicago PMI and University of Michigan Revisions - Revisions are difficult to predict but changes can be market moving

Key Levels

• Support 110.00

• Resistance 112.00

Politics has been as much of a focus as economics for the US dollar.  At the beginning of last week, President Trump sent the dollar 

tumbling when he lamented about Fed tightening.  The greenback recovered but this wasn’t the first nor will it be the last time that Trump comments on Fed policy. The central bank is independent and while they may have their own reasons to slow tightening, it won’t be because of pressure from the President.  According to the FOMC minutes, policymakers were worried about trade, housing and emerging markets.  At Jackson Hole, Fed Chair Powell confirmed that further gradual tightening will be needed but investors were not impressed and instead discouraged by his comment that there’s no sign of inflation accelerating and no elevated risk of it overheating.  This along with the Fed minutes cast doubt on a December hike and is the main reason why we believe that the dollar could slide further in the quiet week ahead.   Every piece of US data released last week also deteriorated with durable goods, existing and new home sales falling. Revisions to Q2 GDP, personal income, spending, Chicago PMI and the trade balance are due for release this week – while interesting none of these reports are exceptionally market moving. 

Instead, President Trump’s political troubles the only thing that could drive up volatility. After pleading guilty to felony campaign finance violations, Trump’s personal lawyer, Michael Cohen accused the President of committing a crime and said he was aware of a Russia conspiracy. It’s not clear what type of fallout this may have but so far, the market has been unfazed and Teflon Trump has lived to survive another day. If the situation worsens and a sitting President becomes indicted, it could be a strong blow to the dollar. 

AUD, NZD, CAD

Data Review

Australia

• RBA Meeting Minutes Reiterates the Position that the Central Bank will Continue its Current Policy

New Zealand

• GDT Prices Fall -3.6%

• Retail Sales Ex. Inflation 1.1% vs 0.3% Expected

• Trade Balance -143m vs -400m Expected

Canada

• Wholesale Trade Sales -0.8% vs 0.7% Expected

• Retail Sales -0.2% vs -0.2% Expected

• Retail Sales Ex-Autos -0.1% vs -0.1% Expected

Data Preview

Australia

• Chinese PMIs - Chinese data can be very market moving but hard to predict

New Zealand

• No Data

Canada

• Current Account Balance - Potential for downside surprise given improved trade balance

• GDP- Potential for upside surprise given improved trade balance and weaker retail sales

Key Levels

• Support AUD .7200 NZD .6600 CAD 1.3000

• Resistance AUD .7400 NZD .6700 CAD 1.3200

After a dramatic week of party infighting and back-room backstabbing, Australia’s political troubles have been resolved for the time being and AUDUSD rallied in relief. Former Treasurer Scott Morrison will be the country’s sixth prime minister in 11 years. Malcolm Turnbull lost a power struggle within his own party and is being replaced by the least volatile option. The new Prime Minister lifted the political uncertainty and prevented the Australian dollar from falling to fresh yearly lows. All the political theatre is unlikely to have much geopolitical impact on the currency as Fitch reaffirmed the country's ratings. Of much greater importance are the growing tensions with China especially after Australia banned Huawei from the 5G build out on security grounds. The news is sure to further aggravate the already shaky Sino-Australian relations and could be a source of constant pressure on Aussie. The weakness in iron ore and copper prices are also weighing on the unit and could renew its slide in the week ahead as there are no Australian economic reports scheduled for release. 

The New Zealand dollar extended its gains on the back of stronger than expected second quarter retail sales and a smaller than anticipated trade deficit but the data isn’t great because the annual trade deficit hit its largest level since March 2009. Dairy prices also fell further, which could reduce the value of dairy exports going forward.  Central Bank Governor Orr said this past week their biggest challenge is getting inflation to rise and they haven’t ruled out cutting interest rates to achieve its target. We’ve been sceptical of NZD/USD’s rally for some time and see the spike at .6720 as a potential near-term top. Even if NZDUSD continues to recover, it may find it difficult to rise above the July high of .6860.

The Canadian dollar has been consolidating in a narrow range versus the greenback. Last week’s report of lower retail sales in June did not hurt the currency because the previous month’s data was revised higher. Second quarter GDP and the current account balance are due for release next week and we are looking for stronger numbers.  The market expects the BoC to raise interest rates before the end of the year but NAFTA uncertainty makes the decision more challenging. The loonie also found some relief from the US government’s plan to delay auto tariffs.  

EURO

Data Review

• GE PPI 0.2% vs 0.2% Expected

• GE Manufacturing PMI 56.1 vs 56.5 Expected

• GE Services PMI 55.2 vs 54.3 Expected

• GE Composite PMI 55.7 vs 55.1 Expected

• EZ Manufacturing PMI 54.6 vs 55.2 Expected

• EZ Services PMI 54.4 vs 54.4 Expected

• EZ Composite PMI 54.4 vs 54.5 Expected

• GE GDP 0.5% vs 0.5% Expected

Data Preview

• GE IFO Business Report- Potential for downside surprise given weaker ZEW and mixed German PMIs

• GE Unemployment Report and EZ Consumer Confidence- Weaker ZEW and mixed PMIs are offset by a stronger pace of job growth in manufacturing

• GE CPI - Potential for upside surprise given PMIs. Also saw a sharp rise in input and export prices

• EZ Unemployment Rate and CPI- Will have to update after German data

Key Levels

• Support 1.1500

• Resistance 1.1700

Meanwhile, we are growing more worried about the euro. After hitting 1.13 two weeks ago, the currency enjoyed a strong 3 cent recovery above 1.16 on the back of the US dollar’s decline and short covering. August PMIs came in better than expected reflecting an ongoing expansion in the Eurozone economy but the improvement was in services and not manufacturing, which is finally experiencing the negative effects of trade tensions. The most urgent problem for Europe, however, is not trade or data but Italy. Italian bond yields are on a tear as 10-year rates quickly approach 4-year highs. Foreigners are dumping Italian bonds on concerns that the coalition government’s plan to boost spending while cutting taxes is unsustainable and would cause Italy to bust through their fiscal targets. The spread between German and Italian 10-year bonds also widened significantly and could blow out to euro-crisis levels if they break the EU’s 3% deficit limit. It all boils down to their draft budget, which is due September and scheduled to be sent to the European Commission for review by mid-October. It’s one of the most important events for the euro but Italy’s problems could come to head even sooner if rating agencies suggest that they could downgrade Italy. All of this means there’s a serious risk of a pullback in the euro if Italian bonds yields continue to rise.  Germans business confidence, labor market and inflation data are due for release in the week ahead along with the Eurozone’s CPI estimate. The last week of August should be a quieter one for euro but when everyone returns in September big moves could happen.

British Pound

Data Review

• Rightmove House Prices -2.3% vs -0.1% Prior

• CBI Reported Sales 29 vs 13 Expected

Data Preview

• No Data

Key Levels

• Support 1.2750

• Resistance 1.2950

Sterling also extended its recovery but the lacklustre rally signals that investors are still worried about Brexit. They are sceptical of the recent progress and see the October deadline for reaching a deal slipping. There’s already reports that the deadline will be extended by 4 weeks. Nonetheless, Michel Barnier, the EU’s Chief Brexit negotiator, said negotiations have reached the final stage and they will hold continuous talks from here forward.  Brexit Secretary Dominic Raab also expressed confidence that they will have a deal by the next European Council Summit on October 18th. Barnier’s eagerness to cooperate is a breath of fresh air but the Irish border and other issues are difficult ones and until real agreements are made, investors could refrain from buying the currency. There were no major economic reports released last week and nothing substantial on the calendar this week. Technically, GBPUSD is in a downtrend as long as it remains below 1.2950.