US Rates Tank but No Safe Haven Bid for Dollar

• US Rates Tank but No Safe Haven Bid for Dollar
• Time to Buy EUR/CHF?
• CAD: Major Upward Revision to July Jobs Report
• AUD: Busy Week Ahead
• NZD: Oil Prices Climb, Gold Prices Slide
• GBP Supported by Upward Revision to GDP
• JPY: BoJ Mulling Possibility of Cutting 2014 GDP Forecast

US Rates Tank but No Safe Haven Bid for Dollar

At the start of the North American trading session, everything was going well with U.S. stocks moving higher and currencies relatively stable however by lunchtime in NY and the close of Europe, the Dow Jones Industrial Average was down more more than 100 points, 10 year Treasury yields dropped to 2.31%, the lowest level since June 2013 and a flight to quality drove the Japanese Yen higher. Unfortunately this time around the rise in Treasury prices failed to provide a safe haven bid for the dollar. The minor rally in the greenback versus the euro and commodity currencies faded quickly. USD/JPY traded lower because of a flight to quality into the Japanese Yen. It has been a while since we've seen the dollar move in the same direction as U.S. rates and the reason for that is because the latest demand for safe haven assets was not driven by weaker data from the U.S. or other parts of the world but by geopolitical tensions. In fact, USD/JPY held steady even after manufacturing activity in NY tumbled and U.S. consumer confidence slowed to a 9 month low according to the University of Michigan's consumer sentiment index. The turnaround in the markets was triggered by reports from Russia that the Ukraine military attacked their armed convoys. Earlier this week it seemed like tensions between Russia and the Ukraine were easing but with the latest aggravations has intensified the conflict and while the selling eased by the end of the day, the conflict could get messier over the weekend and into the new trading week. This means traders should be careful of further pressure on the markets during a week that is already jam-packed with market moving event risk. Here are the top 10 events to watch next week in order of release:

1. UK Consumer Price Index (Aug 19)

2. New Zealand Dairy Auction (Aug 19)

3. RBA Semi-Annual Testimony (Aug 19)

4. Bank of England Minutes (Aug 20)

5. FOMC Minutes (Aug 20)

6. HSBC China Manufacturing PMI Aug Flash (Aug 20)

7. Eurozone PMIs (Aug 21)

8. Jackson Hole Summit (Aug 21-23)

9. Canadian Retail Sales (Aug 21)

10. US Philadelphia Fed Index (Aug 22)

Time to Buy EUR/CHF?

Normally this portion of the commentary is dedicated to the EUR/USD and while the currency pair ended the day slightly higher, it has been trapped in a narrow 1.3330-1.3450 trading range since the beginning of the month. There's a tug of war created by lower U.S. rates and the uncertainty brought on by the Russian/Ukraine conflict with extreme positioning also impacting the EUR/USD's move. A breakout could occur next week with the FOMC minutes, Jackson Hole Summit and Eurozone PMIs on the calendar. However what we are particularly interested in today is the extended sell-off in EUR/CHF. The currency pair has been falling gradually since August 5th but today it broke below 1.21 for the first time since January 2013. Geopolitical tensions are obviously to blame and even though they can escalate, we believe the downside in EUR/CHF is limited because the Swiss National Bank will defend the 1.20 EUR/CHF peg. If EUR/CHF drops anywhere near 1.2050, it becomes an attractive buying opportunity. Friday's decline in EUR/CHF was unusually severe and we would not be surprised if they are firing up the printing presses and getting ready to intervene in the currency pair.

CAD: Major Upward Revision to July Jobs Report

All 3 of the commodity currencies ended the day unchanged against the U.S. dollar but their steadiness masked quite a bit of intraday volatility particularly for USD/CAD. Aside the Russian/Ukraine crisis, Statistics Canada's revision to their July employment report was also a big focus. Apparently 41,700 jobs were created last month and not 200. According to the agency, there was a processing error that left some full time employees as uncounted. They will release a more detailed explanation of the error within the next 2 weeks but today's report makes the outlook for Canada's labor market less dismal. The report shows that job growth rebounded strongly in July but Canadian companies are still laying off full-time workers and hiring more part time employees. 18k full-time jobs were lost last month compared to 59.9k part time job growth. The unemployment rate remained unchanged at 7% and the labor force participation rate held steady at 66.1%. This release is more consistent with the uptick in trade and the IVEY PMI index so while USD/CAD bounced off its lows, we think the currency pair should head lower. No Australian or New Zealand economic reports were released overnight but next week all 3 commodity currencies will be in focus with the RBA minutes, semi-annual testimony from Governor Stevens, New Zealand milk auction, HSBC's flash manufacturing PMI report for China and Canadian retail sales scheduled for release.

GBP Supported by Upward Revision to GDP

The British pound ended the day unchanged against the U.S. dollar. Despite better than expected GDP numbers, traders are reluctant to buy sterling ahead of next week's CPI and retail sales report. The Bank of England minutes are also scheduled for release and given the dovish Quarterly Inflation Report, the odds favor a sterling negative release. On a quarterly to quarter basis, growth in the second quarter was left at 0.8% but the year over year numbers were slightly better with GDP coming in at 3.2% versus 3.1% expected. According to our colleague Boris Schlossberg, "This was the highest GDP reading since Q4 of 2007 and clearly showed that UK economy continues to vastly outperform the rest of the G7 universe. The growth was well distributed with services and manufacturing growing about 3.3% on year on year basis. Cable popped on the news clearing the 1.6700 barrier, but then faded a bit off the highs as enthusiasm waned. The GDP figures, though good will have little impact on UK monetary policy, which is far more focused on wage growth. With wages still tepid, the BoE is not expected to move on rates any earlier than Q1 of 2015 and that has caused pound to sell off the recent highs as speculators adjust their time frame."

JPY: BoJ Mulling Possibility of Cutting 2014 GDP Forecast

The Japanese Yen caught a safe haven bid today on the back of escalating tensions between Russia and Ukraine. If the conflict intensifies over the weekend, we could see a deeper slide in the Yen crosses when the markets reopen on Sunday. The Nikkei is already poised for a lower open after Friday's slide in U.S. equities. No Japanese economic reports were released at the end of the week but according to people close to the Bank of Japan, policymakers are thinking about lowering their 2014 GDP forecasts as exports fail to offset the drag in consumer demand. If they choose to do so, speculation for late 2014 / early 2015 easing will grow, putting downside pressure on the Yen. The most important Japanese economic reports on the calendar next week are the trade balance and manufacturing PMI index but as usual, risk appetite and the market's demand for dollars will drive the Yen's fluctuations.