GDP, FOMC, NFP - How these Reports Could Affect the Buck

• GDP, FOMC, NFP - How these Reports Could Affect the Buck
• Euro Falls to Fresh 8 Month Lows on Weak IFO
• GBP: Due for a Recovery
• USD/CAD Hits 1 Month High, Stops Tripped Above 1.08
• NZD Extends Losses on Weaker Confidence
• AUD: Gold Prices up 1%
• Yen Crosses Slide as Stocks Sell Off

GDP, FOMC, NFP - How these Reports Could Affect the Buck

It has been a good week to be long dollars. The greenback traded higher against all of the major currencies, extending its gain on Friday as risk aversion drove investors out of high beta currencies. Trading ranges expanded for many of the major currency pairs, teasing investors into believing that volatility is finally on the rise. Unfortunately there was no specific catalyst for the decline in stocks and rise in gold prices. Earnings from Amazon and Visa disappointed and some banks downgraded the U.S.' Q2 GDP forecasts but earnings in general have been strong and sluggish Q2 GDP growth is not surprising. We view today's move in stocks as nothing more than profit taking after a strong week. Currencies however are behaving differently. Traders are using the latest decline in equities and increase in risk aversion as a further reason to sell high beta currencies. EUR, GBP and NZD for example dropped to fresh lows against the U.S. dollar. Next week is an extremely busy one in U.S. with consumer confidence, Q2 GDP, the FOMC rate decision, non-farm payrolls and the ISM manufacturing index scheduled for release. Normally we would think that this will translate into an increase in volatility but this time around the Federal Reserve's monetary policy announcement and non-farm payrolls report could rather uneventful. GDP could surprise to the downside, putting additional pressure on U.S. yields and in turn the dollar but the report is backwards looking and not likely to have a lasting impact on the greenback. The Fed is widely expected to taper asset purchases by another $10 billion and without a press conference scheduled, very little detail will probably be provided. Based on the low level of jobless claims, job growth in excess of 200k is expected for the month of July. The only wildcard is the unemployment rate. We believe the lack of surprises should limit the move in the dollar and keep new trading ranges intact.

Euro Falls to Fresh 8 Month Lows on Weak IFO

It has been an extremely difficult week for the euro. The currency dropped to its lowest level in 8 months versus the U.S. dollar and is now prime for a test 1.34. How much further the EUR/USD falls will hinge on next week's U.S. and European event risks. From Europe, we have Eurozone consumer confidence index, CPI and unemployment reports scheduled for release. This is on top of German consumer prices, retail sales, unemployment and revisions to manufacturing PMI. If further weakness is seen in these reports, the euro could extend its slide down to 1.33. However in all likelihood, these economic reports will be mixed, providing support to the single currency. We continue to believe that the move below 1.35 will be temporary. The latest sell-off was driven by a big disappointment in German business confidence. The IFO Business Climate index plunged to 108 from 109.7. The expectations component of the report fell to its lowest level in 11 months. Our readers should not be surprised by the softer report because we warned in yesterday's note that confidence is not likely to fare as well as economic activity. IFO Deputy director Wohlrabe attributed the decline to weak exports. According to our colleague Boris Schlossberg, "German businesses are clearly becoming concerned about the impact of the conflict with Russia which could result in series on sanctions against EZ third largest trading partner." Although the European Commission's proposed sanctions on Russia are tough, it remains to be seen how many of their options are actually adopted. Also, IFO continues to project that German GDP will rise by 2% in 2014 despite the fall in confidence.

GBP: Due for a Recovery

Sterling is due for a recovery. With today's decline, it has been eight trading days since the currency pair has experienced a rally against the U.S. dollar. This is the longest stretch of period without gains for the GBP/USD since January 2013. The motivation for the sell-off in the currency is rooted in fundamentals. Speculators became overly excited when Bank of England Governor Carney suggested that rates could rise sooner but since then economic data has been mixed, prompting some policymakers to backtrack on their hawkish bias. While we could see more speculators unwind their long positions, the relatively gradual sell-off in sterling suggests that many are not ready to abandon their belief that the BoE will be next major central bank to raise interest rates. The break below 1.70 is significant but without any major U.K. economic reports scheduled for release until next Friday, we expect a bounce in the currency. Eight days is a long period of time without a recovery for the GBP/USD and the latest GDP report showed acceleration in annualized GDP growth in the second quarter. However don't expect sterling to recapture 1.72 in the near future because recent economic reports have given the BoE more and not less reason to keep rates steady.

USD/CAD Hits 1 Month High, Stops Tripped Above 1.08

All three of the commodity currencies traded lower on Friday but the Canadian dollar was the worst performer. In fact, CAD experienced the steepest losses versus the U.S. dollar of all the G10 currencies. There was no specific catalyst for its decline but risk aversion is usually negative for Canada's currency and the steeper fall in Canadian bond yields versus U.S. Treasury yields put upside pressure on USD/CAD. No Canadian economic reports were released today but recent economic data from Canada has been far from impressive and as a result, the Bank of Canada will lag behind the Federal Reserve in tightening monetary policy. We believed that a rally in USD/CAD is long overdue and now that stops have been triggered above 1.08, we expect the currency pair to slowly make its way towards 1.10. Next week's Canadian economic calendar is quiet with only May GDP numbers scheduled for release. Meanwhile the New Zealand dollar dropped to a fresh 1 month low versus the U.S. dollar. The currency pair has not seen a rally at all this week. The latest sell-off in the currency pair was driven by a decline in business sentiment. Business confidence fell to a 15 month low in the month of July on the back of falling dairy prices. This reinforces our concern that the decline in prices as well as monetary tightening is finally hitting the economy. With no economic reports scheduled for release from New Zealand next week, NZD/USD could find some support between 84 and 85 cents. AUD/USD on the other hand could see some volatility with Chinese PMI, Australian PMI and Producer Prices on the calendar.

Yen Crosses Slide as Stocks Sell Off

The Japanese Yen traded higher against all of the major currencies today on the back of hotter inflation data, sell-off in U.S. stocks and decline in Treasury yields. The Nikkei performed well last night and USD/JPY actually traded higher in the early European session. However the sell-off started to fizzle throughout North America as the Dow turned lower. Risk appetite remains the dominant driver of Yen flows and this will most likely remain true in the new trading week. Consumer prices grew by a stronger than expected 3.6% in the month of June. While price pressures eased, if you exclude food and energy costs, they increased. The modestly firmer report reflects the Bank of Japan's ongoing success with beating deflation. The Ministry of Finance also released its weekly portfolio flow data and according to the report, Japanese and foreign investors increased their exposure to stocks and bonds. Although there was nothing unusual about the report, it is worth noting that Japanese investors bought foreign stocks for the fifth week in a row. Retail sales, small business confidence, industrial production and labor cash earnings are among the key reports scheduled for release next week. We are particularly interested in seeing if consumer spending continues to rebound after falling 13.6% in April. Industrial production will also be particularly important because it is a measure of economic activity.