Fed taper talk amidst uncertain economic outlook lifts dollar

Loonie Extends Decline Post BOC, Euro Stays Soft Ahead of ECB

Summary: Fed speak lifted the Dollar above its rivals despite the recent slowdown in US jobs growth in August. St Louis Fed President James Bullard said that the US central bank could tapering this year into the first half of next year. John Williams, New York Federal Reserve President said that “it could be appropriate to start reducing the pace of asset purchases this year” if the economy continues to improve, as he anticipates. In contrast, the Fed in its latest Beige Book report, which periodically looks at the nation’s economic picture, said that the US economy had “downshifted slightly” in August. Optimism in investor sentiment has faded amidst a slowdown in the global economic recovery. Which weighed on risk appetite and provided the US Dollar with haven support. The Dollar Index (USD/DXY) which measures the value of the Greenback against a basket of 6 major currencies lifted 0.21% to 92.70 from 92.55 yesterday. Ahead of today’s European Central Bank interest rate meeting, the Euro remained soft, slipping 0.23% to 1.1820 (1.1840). The Dollar extended its advance against the Canadian Loonie to 1.2690, up 0.3% (1.2648) after the Bank of Canada left its key interest rate unchanged at 0.25% and maintained its QE program. Other risk currencies were also lower. The Aussie renewed its drop, settling at 0.7365 from 0.7387 yesterday. Sterling eased to 1.3772 from 1.3782 on the broadly based stronger Greenback. The British currency recovered most of its losses after BOE Governor Andrew Bailey said that the minimum conditions for a rate rise have been met but are not sufficient for one at the present time. The Dollar ended little changed against the Asian and Emerging Market currencies. USD/SGD (US Dollar vs Singapore Dollar) settled at 1.3462 (1.3458) while

The USD/CNH (US Dollar vs Offshore Chinese Yuan) was last at 6.4575 from 6.4605 yesterday.
Wall Street stocks slipped. The Dow finished at 35,005 (35,090) while the S&P 500 dipped 0.15% to 4,512 from 4,517 yesterday. Global bond yields eased. The 10-year US Treasury bond yield settled at 1.34% from 1.37% yesterday. Germany’s 10-year Bund yield was last at -0.33% from -0.32%. Canada’s 10-year Treasury Rate slipped 3 basis points to 1.20%.

Data released yesterday saw Japan’s Current Account surplus slide to +JPY 1.41 trillion in July (+JPY 905.1 billion June). Japanese Q2 GDP beat forecasts at 0.5% from 0.4%. Japanese Economic Watcher’s Outlook Sentiment Index in August eased to 43.7, against estimates at 50.5 and a previous 47.7. French July Current Account Deficit rose to -EUR 3.5 billion, missing forecasts at -EUR 1.4 billion. Canada’s IVEY PMI in August climbed to 66.0, beating estimates at 59.2 and a previous 56.4. US July JOLTS Job Openings climbed to 10.93 million from 10.07 million. US July Consumer Credit eased to USD 17 billion from USD 37.6 billion, missing forecasts at USD 25.0 billion.

• EUR/USD – The Euro dipped further to 1.1820 from 1.1840 yesterday. The shared currency fell under the pressure of the overall stronger Greenback. Overnight low traded was 1.1802 while the overnight high recorded was at 1.1851.
• USD/CAD – Against the Canadian Loonie, the Greenback settled at 1.2690, up 0.3%. Overnight, the USD/CAD pair soared to a recorded high at 1.2762 before easing at the close in New York. Overnight low was at 1.2626.
• AUD/USD – The Aussie extended its decline to finish 0.31% lower at 0.7365. Overnight the Battler slid to a low at 0.7345. Overnight peak for the AUD/USD pair was at 0.7404. Broad-based US Dollar strength and the market’s risk-off stance weighed on the AUD/USD pair.
• GBP/USD – Sterling eased to 1.3772 from 1.3782, also a victim of the stronger Greenback. Bank of England Governor Andrew Bailey’s comment put a floor under the British currency, which saw an overnight low at 1.3726.

On the Lookout: The economic calendar kicked off earlier with the release of New Zealand’s Annual Q2 Manufacturing Sales report, up at 3.9% from a previously revised up 2.7% (2.1%). NZD/USD was little changed at 0.7099 after the data was released.

Primary economic data kicks off with China’s August CPI report (m/m f/c 0.5% from 0.3%, y/y f/c 1% from 1% - ACY Finlogix). China also releases its August PPI (y/y f/c 9% from 9% - ACY Finlogix). Japan releases it’s August Machine Toll Orders (no f/c, previous was 93.4%). Germany starts off European reports with its July Trade Balance (f/c +EUR 13 billion from a previous +EUR 13.6 billion). Germany’s July Current Account follows (f/c +EUR 14.9 billion from previous +EUR 22.5 billion). The European Central Bank is expected to keep its main refinancing rate at 0.00%. The ECB Monetary Statement and Press Conference follows. US Weekly Unemployment Claims kick off North American reports (f/c between 335,000 and 343,000 from the previous week’s 340,000).

The BOC Governor Tiff Maclem speaks at a press conference about the Economic Progress report. US Fed speakers, Daly, Evans, Williams, and Bowman all have speeches at various times and events.

Trading Perspective: As optimism fades in the growing disappointment of the pace of the global economic recovery, expect the Dollar to keep its haven support. Investors and traders will continue to monitor central bank moves and comments from officials. The spotlight is on the Euro today as the ECB it meets on policy. Reuters said it “expects the ECB to claw back stimulus, taking a token step towards unwinding the emergency economic aid it put in place during the pandemic while still signalling copious support for years to come.” If this is the case, the Euro will remain under pressure. If the ECB changes its forward guidance to an earlier exit of its QE support, expect a bullish reaction to the shared currency.

Watch for the Fed speak which comes later in North American time. FOMC members Daly, Evans, Williams, and Bowman are all scheduled to make speeches at various events.

• EUR/USD – The Euro maintained a soft tone against the overall stronger US Dollar heading into the ECB meeting. The Euro settled at 1.1821, down 0.23%. At the start of the week, the Euro was trading at 1.1870. Overnight lows traded was at 1.1802. Immediate support for the shared currency lies at 1.1800 followed by 1.1770. Immediate resistance can be found at 1.1830 and 1.1850. Expect the Euro to remain under pressure unless we get a bullish surprise from the ECB. Likely range today 1.1785-1.1855.

(Source: Finlogix.com)

• USD/CAD – Against the Canadian Loonie, the Greenback rallied to close at 1.2690, a gain of 0.3%. Overnight the USD/CAD pair soared to a peak at 1.2762 after the Bank of Canada left rates unchanged but kept a dovish outlook. Immediate resistance lies at 1.2710 followed by 1.2740 and 1.2770. Immediate support can be found at 1.2660 and 1.2630. Look for a likely range today between 1.2670-1.2770. Prefer to buy on USD weakness.
• AUD/USD – slip-sliding away. The Aussie drifted lower overnight to settle at 0.7365 from its close yesterday at 0.7387. Aussie traders kept their bearish hats on, and for good reason. Australia has struggled to contain the latest spread of the Delta variant and the hoped-for economic recovery has yet to materialise, disappointing many. AUD/USD has immediate support at 0.7340 (overnight low 0.7345). The next support level lies at 0.7320 and 0.7300. Immediate resistance can be found at 0.7380, 0.7410 and 0.7440. Look for the Aussie to trade a likely range of 0.7330-0.7390. The Battler remains heavy, but the specs are short. Trade the range.
• GBP/USD – Sterling eased to 1.3772 from 1.3782. The British currency found support in after comments from BOE Governor Andrew Bailey said that conditions for rate rise have been met but are not sufficient yet. GBP/USD hit an overnight low at 1.3726 before climbing to settle at 1.3772. Overnight high traded was 1.3790. Immediate support can be found at 1.3750 followed by 1.3720 and 1.3690. Immediate resistance lies at 1.3790 (overnight high) and 1.3820. Look for the Pound to consolidate in a likely trading range between 1.3740-1.3810. Prefer to sell rallies, the overall stronger Greenback will push the British currency lower.