FX: Another Week of Summer Grind?

By all counts, it was an extremely quiet week in the foreign exchange market.  There was very little change in the U.S. dollar, which traded unevenly against all of the major currencies.  We haven't seen this type of listless trading in months and while the summer holidays in the Northern Hemisphere are partly to be blame, it has more to do with uncertainty.  Investors aren't sure how serious the Federal Reserve is about raising interest rates as the negative surprises in U.S. data point to a slower rather than accelerating recovery.  Even a few of the Fed Presidents who spoke this past week don't seem convinced that the economy is performing well enough to warrant another round of tightening although many are leaning in that direction.  Of course a lot can change between now and December, when the Fed is expected to hike again and it all starts with the next non-farm payrolls report, due for release in early July.

From now until then, there's nothing on the U.S. calendar that could convince investors the Fed is right and the economy is healthy enough to withstand another rate hike before the end of year.  Existing and new home sales were the only reports released this past week and they had very little impact on the greenback.  We also don't expect any big moves from next week's durable goods, consumer confidence, trade balance and revised GDP reports. The only number we're really interested in are personal income and spending but the primary focus will be on Fed speak (Yellen, Williams, Harker and Kashkari take to the podium in London on Tuesday) as investors try to discern where the majority of Fed speakers stand - are they encouraged by the low level of the jobless rate or are they dubious of the outlook given the slowdown in job growth?  As we don't expect much clarity in the coming week from the second tier economic reports on the calendar, we expect skepticism to reign over optimism with USD/JPY coming off its highs for a dip below 111.00.

Meanwhile the clock is ticking in the U.K. Theresa May has about a week to prevent her government from falling apart. In her speech this past week, the Queen set a one week deadline for the House of Commons vote and if May doesn't strike a deal with the Democratic Unionist Party by then and loses the vote, she could be forced out of power.  This catastrophic outcome would create major political uncertainty that could send GBP/USD back down to 1.26.  Although the Tories are optimistic, the DUP is pushing back hard with the party refusing to answer May's calls for 36 hours and demanding GBP 2 billion for Northern Ireland's infrastructure and healthcare programs. Apparently they even held "secret talks" with the Labour and Liberal Democrats to pressure May into accepting their demands.  Chances are she will cave to the DUP just as she is beginning to cave to the European Union on Brexit talks.   With no major U.K. economic reports scheduled for release in the coming week (GDP is generally not revised), Brexit negotiations, the House of Commons Vote and DUP coalition talks will drive sterling trade.  Although GBP dropped to 2 month lows after Mark Carney speech this past week - he said it is not the right time for a rate hike, it bounced back quickly on hawkish comments from BoE Chief Economist Haldane.  Carney is worried about Brexit uncertainty and wage growth but Haldane believes that a hike would only offset part of August stimulus. Although he did not vote for a rate hike, his close alignment with the 3 members who voted for immediate tightening earlier this month leads investors to wonder who else could be pondering a hike.  In the meantime, the political stakes are high and the level uncertainty leads us to believe that GBP will resume its slide back to 1.26 as political troubles often translate to economic ones especially as Brexit and a hung Parliament makes it difficult for the UK economy to grow enough to warrant a rate hike this year. 

The only economic data that we had from the Eurozone this past week were Friday's PMI reports and they failed to take EUR/USD out of its 1.1213 and 1.1119 trading range. Although the Eurozone economy is still growing at a healthy rate, the latest reports show slower growth in German services and manufacturing sectors. France also saw slower growth in services but manufacturing activity accelerated in the month of June. Unfortunately that was not enough to drive overall growth higher so the Eurozone Composite index dropped to 55.7 from 56.8 - economists anticipated a far more modest decline to 56.6.  The details show weaker new export orders, employment and prices.  With that in mind, the overall levels are still strong and reinforce the central bank's economic upgraded economic forecasts. In the week ahead there are a number of important pieces of Eurozone data scheduled for release including Germany's IFO, retail sales and employment reports. We are looking for slightly softer data so 1.13 should hold in EUR/USD.

The commodity currencies in different directions with the Australian dollar snagging the title of the week's worst performer and the New Zealand coming in as the best. Of course, the changes on both sides were modest with AUD falling less than -0.5% and NZD rising by only +0.6%. The Australian dollar fell the first 4 days of the week and rebounded on the last.  The move cannot be attributed to RBA minutes as they provided nothing insightful and allowed the Australian dollar to drift lower on the back of Moody's downgrade of 4 major financial institutions.  With no major Australian data on next week's calendar, we should see buyers come in around 75 cents.  

The New Zealand dollar traded higher on the back of the Reserve Bank of New Zealand's monetary policy announcement. The central bank left interest rates unchanged and rather than express concern about the recent rise in the currency, they said the "lower currency would help rebalance growth." Their decision to overlook the currency's sharp appreciation over the past month is a strong vote of confidence in the economy that should help NZD outperform other major currencies. New Zealand's trade balance is scheduled for release this coming week and we believe that lower dairy prices and a stronger currency will drive the surplus lower, taking NZD/USD off its highs.

Last but certainly not least, the most interesting currency to be trading right now is the Canadian dollar.  It is in a strong downtrend that should continue in the week ahead even though consumer prices rose less than expected in the month of May.  Annualized CPI growth eased to 1.3%, the slowest since November 2016.  Retail sales on the other hand doubled expectations, reinforcing the Bank of Canada's optimism. This past week's wild swings could continue with Canadian GDP scheduled for release and Bank of Canada Governor Poloz and Deputy Governor Patterson speaking on Wednesday. We believe that any gains will be limited to 1.3350 and at worst 1.34 and expect USD/CAD to drift down to 1.31.