US Dollar : Swoon to Swoon

Friday’s US data led to more  USD selling as both US CPI and retail sales for June disappointed.All too familiar themes ensued with the S&P stretching to record highs as the US ten year yields toppled to   2.33 % on a dovish Fed interpretation. And with the odds of any near term US  rate hike extinguished, G-10 currencies soared as the AUD, EUR and CAD all established new  2017 high water marks.

The main hurdle to further Fed tightening is inflation, and it will continue to play the decisive role in central bank policy and will ultimately decide the direction for global macro markets throughout the remainder of 2017.

With less than a 50 % December rate hike probabilities priced in and with no supportive Fed speak on the calendar before July 26th,  the dollar could struggle.  Even more so given the lack of any top tier data to swing sentiment as dealers will be limited to  US housing and PMI as data sources, only secondary metrics. There’s simply not enough meat on the bone on these US  economic data points to push December probabilities much beyond a 50:50 call even on stellar prints.  However with five crucial months of inflationary data to go before December’s debatable Fed rate hike,  the inflation as a transitory debate has a long way to play out yet.

In the absence of any major dollar drivers. G-10 will turn to the latest monetary policy musing by ECB and BoJ, which hold their respective policy meetings on Thursday.

On the one hand, we have the ECB that spooked the bond markets asserting deflationary forces has been conquered. But given the aggressive bond sell off that ensued, the ECB is more likely to temper expectations unfurling some of those market reactions to Draghi’s hawkish delivery. Only a big upside surprise in Eurozone CPI(Monday) would be needed to elevate the policy meeting theatrics. 

On the other hand, the BoJ found themselves back in the spotlight when they threw a bridle on Yen interest rates with   YCC (Yield Curve Control) by conducting an aggressive fixed-rate JGB purchase operation last week. The BoJ is determined to maintain accommodative policy as the JPY NEER is nowhere close to levels that would suggest a policy shift from the  BoJ. But given the global bond markets aggressive sell off on the wake of the hawkish central bank narratives, the Fed and the ECB will, in fact, welcome the BoJ policy direction as this will keep the global bond market sell off in check as well the market’s implied tightening trajectory from running amok.

Given the market’s reaction to only a central bank tapering directive, the real litmus test is when the ECB and FED stop buying bonds. It will happen, and It’s Goodbye  Yellow Brick Road as far as easy money is concerned

China retail sales, industrial production and GDP data will be the key focus for AUDUSD and NZDUSD traders today. Growth is expected to have cooled to 6.8 percent in the second quarter as Beijing tightens the screws on financial risks,  while administrators continue to thwart property speculators and try to reduce pressure on asset bubbles reigning in unbridled credit markets.

EURO

The Euro is trading in rarified air on anticipated shifting yield curve differentials as opposed to anything else suggesting the EURO may slip ahead of this week’s ECB meeting as speculative positions are a bit stretched to the top side.

Japanese Yen

Japan is closed for Marine Day day today, but this week the markets will be focused on the BoJ and their anticipated upgrade to the economic assessment. However, given humdrum inflation developments, there’s little chance the BoJ will make a   move towards monetary tightening.

Australian Dollar

Much to the RBA’s chagrin, the weak USD  storyline has sent the A$ dollar soaring despite an apparently dovish RBA. Sure there are some indications the economy is picking up, but this does not necessarily mean a call to action for the RBA. However,  positioning does suggest the contrary as some start pricing RBA rate hike expectations later this year.