US Stocks Fall, Dollar Dumped, Euro Holds 1.17

It was another day for the U.S. dollar where flows were dominated by Trump's political woes.The greenback's earlier gains were erased by rumors that President Trump's Chief Economic Advisor Gary Cohn plans to resign. Although he hasn't made any comments publicly, there are widespread reports according to several people close to him that Mr. Cohn, who is Jewish is "disgusted and deeply upset" by Trump's recent comments.  For the business community, Cohn is a key member of the administration who is determined to press forward with tax reform. If he resigns, it would send stocks crashing lower taking risk currencies down with it (the market's response to the rumor gives us a taste of the potential reaction). However, shortly after the rumors circulated, they were denied. It is difficult to say whether they will resurface again as Cohn as his eyes set on Janet Yellen's seat when her term expires in February but the fact that the dollar struggled to recapture its gains after the news faded highlights the ongoing turmoil for an Administration that has been too distracted by external factors to focus on fiscal stimulus.  And this explains why the dollar received no support from stronger jobless claims and a smaller decline in the Philadelphia Fed manufacturing index.  Although the greenback could receive a boost from tomorrow's University of Michigan consumer sentiment index, we still expect the path of least resistance to be lower for USD/JPY and look for the dollar index to drop below 93.  Other currency pairs could still see U.S. dollar strength if the moves are driven by risk aversion.

The euro also had an interesting day. For the past week, everyone has been talking about the massive 1.17 option expirations on Thursday but when the option cut passed, there was little additional movement in the currency. The EUR/USD did not crash like many of us anticipated but instead held onto its pre-option expiration gains.  With that in mind, we believe euro should be trading lower on the back of the dovish ECB minutes. After a 13% rally in EUR/USD year to date, the central bank is finally expressing concerns over the currency's gains.  In the account of their last monetary policy meeting, they worried about the risk of the euro overshooting and the impact that it would have on inflation.  They saw conclusive evidence of inflation pick up lacking but also attributed part of the euro's gains to improving conditions in the Eurozone economy.  There's no question that the economy is doing better with the trade surplus rising to 22.3B from 19.0B but the longer the euro remains elevated, the greater strain it puts on external demand and economic data.  Consumer prices fell -0.5% in the month of July but CPI held steady on a year over year basis. Looking ahead, we expect a deeper correction that could take the euro down to 1.1600.  Tomorrow's German PPI and Eurozone current account numbers should not have a significant impact on the currency.  

Sterling on the hand continued to contend with mixed data.  While retail sales growth exceeded expectations on a month to month basis, a sharp downward revision to the June report leaves the year over year rate at 1.3%, which is significantly lower than the 2.8% growth reported in June.  We had a lot of U.K. data released this week and they paint a picture of uneven growth but if prices remain low and wages rise, it could fuel greater consumer demand in the coming months.  Yet that is a big IF because we along with members of the central bank believe that wage growth will slow as Brexit fears grow.  For the time being, Brexit talks could be pushed back and may not restart until December.  After breaking down on Tuesday, GBP/USD has found support at the 100-day SMA and we don't expect big moves in the currency on Friday. 

Following Wednesday's sharp rally, all 3 commodity currencies traded lower today.  The moves were small and at odds with the rebound in commodity prices. The biggest gainer was USD/CAD, which bounced off the 20-day SMA.  Oil prices recovered earlier losses to end the day higher but the loonie was pressured by risk aversion and a drop in international securities transactions. The Australian dollar spent most of the day in negative territory after initially rallying on a slightly healthier employment report.  Although full time employment dropped after two very strong months, the unemployment rate decreased as the participation rate increased - two healthy developments for the labor market. The absolute amount of job growth also exceeded expectations.  The New Zealand dollar's losses were limited by mixed data. On a producer level while output price growth slowed by, input prices increased and consumer confidence ticked higher.  Looking ahead, both AUD and NZD are vulnerable to additional losses with AUD/USD eyeing 78 cents.