Forex Outlook – Will Aug 2016 Be Another Rollercoaster Ride?
Daily FX Market Roundup 08.08.16
It’s August and the dog days of summer are here and in recent years we have learned that the summer heat can fire up intense volatility for the financial markets. We only need to look back at last year’s flash crash or the 2011 Eurozone financial crisis and the 2007 subprime crisis for reminders. Between those years, there was a consistent dollar rally in August 2014 and a steep rise in the greenback the first week of August 2010. The question now is whether we will see another rollercoaster ride in currencies this August. Fundamentally most of the major event risks this month are behind us, central banks made big changes and we saw relatively healthy forex moves last week with USD/JPY finding a nice bottom above 100.50 and EUR/USD peaking near 1.12. Looking ahead there is no immediate risk to the stability in currencies and equities.
However with volatility as measured by the VIX hovering near record lows and stocks reaching record highs, it is easy to become complacent. The European Central Bank and the Bank of Japan will be reviewing their monetary policy stance next month and they could start dropping hints about potential changes, which could spark renewed volatility in euro and yen. Federal Reserve officials have also suggested that September is a “live meeting,” and while we highly doubt they will raise interest rates, hawkish comments combined with good data could send the dollar to fresh highs, breaking ranges in currencies. In terms of actual event risks, the main events to focus on this month will be this week’s RBNZ rate decision and the Jackson Hole Summit at the end of the month. Fed Chair Janet Yellen will be speaking and investors are eager to see whether she also believes that rates could rise this year.
The U.S. dollar ended the day unchanged against the euro and New Zealand dollar but extended its gains versus the British pound, Japanese Yen and Swiss Franc. It lost value against commodity currencies. No U.S. economic reports were released, Treasury yields were unchanged and U.S. stocks dipped slightly after hitting record highs. The only piece of U.S. data worth watching this week will be Friday’s retail sales report. Between now and then, we expect the dollar to remain bid and see potential for further gains. We expect USD/JPY to touch 103 and EUR/USD to engage in a more convincing break of its 200-day SMA at 1.1078.
While stronger than expected German industrial production may have helped euro avoid steeper losses, there has been a lot of volatility in the banking sector and this is one of the main reasons why we believe EUR/USD will break below the SMA making its way towards 1.10. Even though Deutsche Bank stock bounced today, the IMF calls DB the most dangerous bank in the world right now. Banks across Europe are saddled with bad debt and these challenges could prompt further action by the European Central Bank. We are not looking for any immediate moves but we anticipate further cautiousness from ECB officials. Germany’s trade balance is scheduled for release tomorrow and economists are looking for an improvement but weaker manufacturing activity along with lower factory orders leaves open the risk for a downside surprise.
No economic reports were released from the U.K. but sterling remained under pressure. We believe 1.30 will hold because the Bank of England is now in wait and see mode after lowering interest rates last week. Speculators shorted sterling aggressively leading up to the rate decision and with no immediate catalyst to drive the currency lower, GBP/USD should find a bottom in the near future as shorts start to cover. Tomorrow’s U.K. industrial production report could provide a final push lower for the currency but the data was taken pre-Brexit and may not show the same weakness as the PMIs. If that’s true, it could actually provide catalyst for a bounce.
The focus this week is on the New Zealand dollar. Like the BoE and RBA, the RBNZ is expected to cut interest rates by 25bp and if New Zealand also adopts a neutral stance, NZD will rise because 2% is still one of the most generous yields out there. However if they buck the trend and continue to maintain a strongly worded dovish stance, the currency could sink below 71 cents versus the U.S. dollar. The Australian dollar on the other hand traded sharply higher after China’s mixed trade numbers. China reported a trade balance of $52.31b vs. $47.30b, which was better than expected but imports fell -12.5% while exports declined -4.4%. Australia’s job advertisements also showed a decline in the month of July of 0.8% vs. an increase of 0.4% previously. Considering that Australia exports a significant amount of goods to China, the drop should be worrisome but it appears that the country’s generous yield continues to fuel demand for the currency.
We have been trading USD/CAD throughout the day. The Canadian Dollar found some uplifting news from OPEC. OPEC reported that it would hold an informal talk at the energy summit this September as OPEC’s president hopes to find ways to stabilize oil prices. The news was a welcome boost to oil, lifting prices more than 3% intraday. This allowed CAD to shrug off a surprise decline in building permits. Looking ahead Australia business confidence and Chinese inflation data is scheduled for release tonight followed by Canadian housing starts this evening.