Ugly Truth About the Dollar Rally

• Ugly Truth About the Dollar Rally
• GBP Drops Below 1.70 After Carney Fails to Deliver
• AUD: Erases Post Chinese PMI Gains
• CAD: Price of Oil Slips Below $106
• NZD: RBNZ Deputy Gov Says House Price Inflation Moderating
• JPY: Investors Unimpressed by Abe's Third Arrow

Ugly Truth About the Dollar Rally

The U.S. dollar traded higher against most of the major currencies today on the back of stronger economic data. What was interesting about today's move is the fact that investors drove the greenback higher despite a decline in Treasury yields and sell-off in U.S. equities. The S&P 500 climbed to a record high before ending the day down 0.73%. Consumer confidence rose to its strongest level since January 2008 while new home sales rose to its highest level since May 2008. At the start of the week we were skeptical about the ability of U.S. data to drive the dollar higher and even though the greenback reacted positively to the latest economic reports, the ugly truth about the dollar rally is that it is not impressive at all. The trading range of USD/JPY was only 34 pips while the range for EUR/USD was less than 45 pips and the decline in Treasury yields suggests that the gains could fade. USD/JPY managed to recapture 102 after the reports but there was not enough momentum to extend the move to 102.50.  While the improvement in consumer confidence and existing home sales are encouraging the decline in Treasury yields confirm what we have been saying all along which is that the data is just not good enough to push the Fed to tighten monetary policy early.  We also heard from Fed President Plosser today who is a voting member of the FOMC.  He expects growth to exceed 2.4% this year and the unemployment rate to fall to 5.8% by December.  He's "fairly optimistic" on the economy and warned the Fed against overstaying their welcome at zero rates. These may sound like a hawkish view but like the rest of his peers, he also indicated the FOMC will not pick a rule for policy and in doing so provided no details on when the central bank could raise interest rates.  At the end of the day, we have no better clarity on U.S. monetary policy than after last week's FOMC rate decision.  With only revisions to Q1 GDP and durable goods scheduled for release tomorrow, we expect more consolidative price action in currencies. 

EUR: German IFO Sinks to Year to Date Low

Euro ended the day unchanged against the U.S. dollar despite a weaker German IFO report.  While German business confidence declined in the month of June, EUR/USD hit its strongest level of the day after the IFO report was released.  The decline in the currency pair began in the North American trading session.  The German business climate index dropped to 109.7 from 110.4 with the current assessment component of the report holding steady at 114.8 and the expectations component falling to 104.8 from 106.2.  Given Monday's muted reaction to the PMIs, we are not surprised to see the euro barely budge on the IFO miss especially since the index remains well above its 5 and 10 year average.  Nonetheless, confidence has fallen to its lowest level this year, validating the European Central Bank's decision to ease.  With no major Eurozone economic reports scheduled for release tomorrow, the euro will should continue to trade quietly and remain confined within a 1.3475 to 1.3680 trading range. Meanwhile the Swiss Franc traded lower today on the back of weaker trade data. While the country's trade surplus increased to 2.77B from 2.45B a drop in imports and exports drove the improvement.  The UBS Consumption Indicator is scheduled for release on Wednesday

GBP Drops Below 1.70 After Carney Fails to Deliver

The British pound traded below 1.70 after Bank of England Governor Carney failed to express a strong degree of hawkishness in today's testimony before the U.K. Parliament. Rather than hardening the BoE's commitment to tightening monetary policy, Carney said there's scope to absorb more slack before rates are increased and that the MPC wanted to see market expectations adjust to data and the market adjustment was the intended result of his rate comments.  According to our colleague Boris Schlossberg, Carney also said "he was merely expressing his own opinion rather than the position of the full MPC. He noted that he did not consult MPC members prior to making the comments last week. Speaking today Mr. Carney was far more circumspect about any monetary policy moves, emphasizing the fact that the slack in the UK economy remains significant and that the BoE would not even entertain the idea of a rate hike until the unemployment rate declined to 6%. Furthermore, Mr. Carney added that the pace of interest rate hikes was more important than the timing of the initial increase indicating that the tightening policy will be modest at best." Considering the extent of long sterling positions in the market, the lack of unambiguously hawkish comments triggered profit taking on long GBP/USD trades.  We expect the move to extend to 1.6900 with a break contingent upon Carney's speech and any steps that are announced to curb the housing market on Thursday. 

AUD: Erases Post Chinese PMI Gains

Monday's gains in the Australian, New Zealand and Canadian dollars were erased by today's recovery in the U.S. dollar.  No major economic reports were released from any of the 3 commodity producing countries and even though China reported a rise in leading indicators, the initial boost that it provided for AUD, NZD and CAD faded during the European and North American trading sessions. While a continued recovery in China is positive for commodity currencies, AUD and NZD have been trading near their year to date highs and in order for either currency to set a new milestone, unambiguously positive news is needed, otherwise they are vulnerable to profit taking. While there's no major data on the calendar for Australia, Canada and New Zealand, RBA monetary policy member Lowe will be speaking this evening.  

JPY: Investors Unimpressed by Abe's Third Arrow

Last night, Prime Minister Abe unveiled the newest components of his growth strategy but unfortunately based on the muted reaction of the Japanese Yen and Nikkei, investors were not impressed. Last year, when the first version of the third arrow's growth plan was unveiled, investors sold the Nikkei and USD/JPY because the plan lacked important details.  This time, Abe was more specific but investors remained concerned about impact and implementation.  Most of the details announced today were widely expected and unlike the first and second arrows which involved massive monetary stimulus, the third arrow focuses on structural changes that could take a minimum of a year or two to yield results.  The refined plan includes a reduction in the corporate tax rate from its current level of up to 36% to below 30%, which they hope will attract foreign business and create more jobs. The Government Pension Investment Fund will also increase the risk taken on its investment portfolio as quickly as possible.  The hope here is that by increasing the GPIF's investments in stocks, they will attract more foreign investment into Japanese equities.  There will also be a number of reforms related to immigration, health insurance, overtime pay, clean energy, tourism, robotic technologies and the creation of special economic zones. While the plan is expected to boost GDP growth by 0.2-1.5%, it will be years before we see a meaningful contribution to growth from most of these policies.  Also, given the protests from various sectors, the government could still back peddle on some of these proposals.