It has been a fairly slow start to a busy week in the foreign exchange market. The U.S. dollar traded higher against all of the major currencies with USD/JPY leading the gains. Hawkish comments from FOMC voter Dudley, a strong rise in U.S. yields and last night's surprise trade deficit sent the pair to its highest level in 2 weeks. Dudley acknowledged the slowdown in inflation but spent the better part of his speech talking about full employment, the "very, very high levels of confidence" and the positive outlook for wage growth. In turn, investors completely forgot about the dovish comments from Kashkari and Kaplan on Friday, sending the dollar sharply higher.
There may be skeptics within the Fed's ranks, but as one of the most influential members of the central bank, Dudley's views always carry more weight with investors. Dudley reinforced Yellen's optimism by saying "things are going reasonably well" and now investors will be watching Vice Chair Fischer's speech in Amsterdam (7:15 GMT) tomorrow for further confirmation. If he believes the future is bright, USD/JPY will touch 112 and EUR/USD will sink below 1.11 as it suggests that the Troika of Fed leadership (Yellen, Fischer and Dudley) supports another rate hike this year. However Fischer may not touch on policy at all - even though he is the keynote speaker at a macroprudential policy conference, the event is closed to the press. Some of his comments could leak or he could choose to speak later but there are no guarantees that his comments will turn into headlines. Regardless, the lack of market moving U.S. data means Fed speak will be the primary driver of dollar flows this week.
Even then, the dollar should take a backseat to some of the more important events on this week's calendar including tomorrow's speech by Bank of England Governor Mark Carney, the RBA minutes, the RBNZ rate decision, Canadian retail sales, Eurozone PMIs and Brexit. If we had to organize them in order of importance, the following 5 would be the main events to watch this week:
The 5 Most Important Things to Watch This Week
1. BoE Carney Speech
2. Fed Fischer Speech
3. RBNZ Rate Decision
4. Eurozone PMIs
5. Brexit Talks (only because they'll take some time)
Brexit talks begin this week but it may take some time before there are meaningful headlines. Instead, the focus tomorrow will be on BoE Governor Carney's speech at the Mansion House at 7:30 GMT. It's a private event so we don't know how much he'll delve into monetary policy but after the unexpected hawkishness of last week's Bank of England meeting and the economic/political uncertainty from May's defeat, the BoE's outlook going forward could decide if GBP/USD breaks 1.2830 or 1.2650. Sterling is lower today because investors know that Carney is generally more cautious than peers, having raised concerns about inflation and wages when the Quarterly Inflation Report was released. If he does not sympathize with the optimism of the 3 MPC members who voted to raise rates immediately, GBP/USD could sink quickly to 1.2650. As for Brexit and Coalition talks, we know the Conservative /DUP talks are still underway and May's weakened position ups the chance of a soft Brexit.
The euro also ended the day lower against the dollar, erasing all of its earlier gains. At the start of the NY trading session, EUR/USD was trading above 1.12 after Emmanuel Macron's party in France secured a Parliamentary majority. By sweeping aside other parties, it gives the country's new leader a strong mandate to pursue his pro-EU, business friendly policies. While encouraging, investors moved on quickly and the euro turned negative as buyers swooped up the U.S. dollar. Further losses are likely on a technical and fundamental basis. Technically EUR/USD's rejection of the 20-day SMA puts 1.1130 (last Thursday and Friday's low) in sight. If that level breaks and EUR/USD slips below 1.11, we could see a steeper slide down to 1.10. Fundamentally, we are only looking for near term weakness. Aside from the potential for a further rise in the U.S. dollar, we believe tomorrow's German inflation and Eurozone current account numbers will be softer given the drop in consumer prices and lower German/French current account balances.
Last but certainly not least the commodity currencies were mixed. The Australian and New Zealand dollar saw mild losses while the Canadian dollar ended the day unchanged. AUD led the slide after Moody's lowered the credit ratings for 4 financial institutions. The New Zealand dollar followed the currency lower even though service sector PMI and consumer confidence increased. No economic reports were released from Canada but the central bank's hawkishness continues to drive the currency, encouraging loonie traders to overlook the decline in crude prices today. Tonight the minutes from the most recent RBA meeting are scheduled for release. The Australian dollar rallied after the last RBA meeting as investors latched onto the central bank's neutral stance even though they expressed concerns about the strong currency and weaker wage growth.
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