FX: Don’t Expect US Data Drama but Beware of Argentina

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Daily FX Market Roundup 07.28.14

Dollar: Don’t Expect Much US Drama but Watch Out for Argentina

EUR: Most Important Piece of EZ Data this Week

What to Expect from GBP this Week

AUD Supported by Stronger Chinese Data

NZD Remains Under Pressure

CAD: Oil and Gold Prices Decline

JPY: Busy Night for Japan

Dollar: Don’t Expect Much Drama from US Data but Watch Out for Argentina

By all counts this is an extremely busy week in the U.S. markets. We have second quarter GDP, the FOMC rate decision and Non-Farm Payrolls scheduled for release along with earnings from close to a third of the S&P 500 companies. At the same time, the twin conflicts in Russia/Ukraine and Israel/Gaza remain in center focus. During my interview on CNBC this morning http://video.cnbc.com/gallery/?video=3000296371, the anchors called this week one of the busiest of the summer. All of these event risks have many investors hoping for a final bump up in volatility before trading volumes thin due to summer holidays in the month of August. However the lack of U.S. monetary policy or data uncertainty means that we don’t expect much drama from this week’s U.S. event risks. Aside from Wednesday’s GDP report, which could trigger a brief burst in volatility because of recent forecast revisions, we don’t expect any durable increase in volatility or significant shift in risk appetite.

The Federal Reserve is widely expected to taper asset purchases by another $10 billion and given the absence of a press conference, the July FOMC statement will most likely contain the same tone and forward guidance as the June meeting. Monetary policy remains “highly accommodative” as the central bank winds down its Quantitative Easing program. The only tweak the Fed could make is to their description of unemployment. Since the June meeting, the unemployment rate declined from 6.3% to 6.1%, challenging the Fed’s view that unemployment continues to be high. However the central bank may opt to push off any changes to their outlook and guidance to late August when they hold their summit at Jackson Hole. Everything from guidance to exit strategy will be discussed at the 3 day meeting that begins on August 22nd and considering that major policy shifts in past years have been decided at this conference, there are high hopes that it will kick off a surge in volatility that will last well into the fourth quarter. This means that for the time being, the best opportunities can be found with relative value and range trading strategies. Consumer confidence is scheduled for release tomorrow and given the drop in the sentiment reported by the University of Michigan and Investors’ Business Daily we are looking for a downside surprise that could fuel a stronger recovery in pairs such as the EUR/USD and GBP/USD.

While U.S. data may not cause much volatility in the financial markets, investors should keep an eye on Argentina who could default on their debt this week because of their refusal to pay holdout hedge funds that bought their junk bonds in 2002. Argentina is in a very different position today than 2001 when they experienced a default that crippled their economy and spilled over to the global markets. This time around, the contagion risk is small because they are isolated from the capital markets but concerns about a potential devaluation and the mere shock of a default at a time when complacency is high could trigger a brief spike in volatility.

EUR: Most Important Piece of EZ Data this Week

This is not just a busy week for the U.S. dollar, but also for the euro. In addition to all of the U.S. event risks that could affect EUR/USD demand, we have a number of important Eurozone and German economic reports scheduled for release but there is one piece of data that everyone is watching carefully and that is Thursday’s consumer price index. We know that inflation is the European Central Bank’s top priority but despite all of stimulus provided last month, CPI growth is expected to be anemic. According to the economists surveyed by Bloomberg, annualized CPI growth is expected to hold steady at 0.5% with core price growth also remaining unchanged at 0.8% in the month of July. Considering that the ECB has a 2% inflation target, these numbers indicate that price pressures are far short of desirable levels. Based on CPI alone, the ECB should be actively discussing ways to increase stimulus further. Combined with the geopolitical tensions that could directly affect the Eurozone economy, it is no surprise to see the CFTC report that EUR/USD short positions are at its highest level since November 2012. The extreme amount of short positioning is one of the main reasons why there has not been much momentum in the EUR/USD’s decline. However traders are clearly anticipating further weakness in the currency pair and if this week’s economic reports reinforce everyone’s concerns about Eurozone growth, EUR/USD could fall to fresh 1 month low. Aside from the CPI report, Eurozone confidence, German retail sales, unemployment and final EZ PMIs are also scheduled for release.

What to Expect from GBP this Week

After 8 consecutive days of losses, sterling rebounded against the U.S. dollar. While the gains have been shallow, we believe the currency could experience a stronger recovery against the dollar in the first half of the week. Eight days is the longest period of time without a rally for GBP/USD since January 2013 and the lack of major U.K. economic reports scheduled for release until Friday means we could see a stronger relief rally in the currency. According to the CFTC’s latest report on speculative positioning, the more moderate tone from the Bank of England has led to a further reduction in long positions. However the gradual sell-off in the currency suggests that many investors are not ready to abandon their belief that the BoE will be next major central bank to raise interest rates. UK housing market numbers are scheduled for release tomorrow and economists are looking for a small increase in mortgage approvals. Healthier housing market numbers would help drive a recovery in sterling but the gains should end on Friday ahead of UK PMI manufacturing report, which we expect to be weak.

AUD Supported by Stronger Chinese Data

The Australian dollar traded higher today on the back of stronger Chinese industrial profits. According to the National Bureau of Statistics, industrial profits grew 11.4% in the month of June on a year to date basis and a whopping 17.9% on a year over year basis. These figures confirm that China’s economy has bottomed and is in the process of recovering. Stronger profitability bodes well for countries like Australia. The prospect of a stronger Chinese manufacturing PMI index should keep the Australian dollar bid this week. The Canadian dollar also rebounded but the gains were small compared to the losses incurred on Friday. The New Zealand dollar on the other hand has not experienced a rally in 6 trading days. The divergent performance of the Australian and New Zealand dollars has been extremely positive for AUD/NZD, which is closing in on its year to date highs. If the currency pair breaks through 1.1040, there is no major resistance until 1.12.

JPY: Busy Night for Japan

The Japanese Yen ended the day unchanged to slightly lower against all of the major currencies. Although there was quite a bit of intraday volatility in U.S. stocks, the S&P 500 ended the day not far from where it started. The rebound in U.S. yields supported the recovery in USD/JPY but the 200-day SMA at 102.08 is capping gains for the time being. No major Japanese economic reports were released on Sunday night but this evening, the jobless rate, job to applicant ratio, retail sales and small business confidence are expected. Given last week’s drop in the manufacturing PMI index and weaker than expected trade balance, we are on the lookout for any sign that Japan’s recovery is losing momentum because if it is, investors will start to talk about the potential for BoJ easing once again.

Kathy Lien
Managing Director

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