Forex: 5 Key Events to Watch in the Week Ahead

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Daily FX Market Roundup 07.11.14

Forex: 5 Key Events to Watch in the Week Ahead

EUR: How Serious is the ECB About Easing?

GBP/USD to Break Out of 1.71 – 1.72 Range

USD/CAD Breaks 1.07 on Surprise Decline in Jobs

AUD: Busy Week for Commodity Currencies

NZD: Oil Prices Drop to 2 Month Low, Gold Bounces

Is USD/JPY Nearing a Bottom?

Forex: 5 Key Events to Watch in the Week Ahead

Get ready for an extremely busy week in the financial markets. Central bankers around the world expressed concerns about low volatility and if there is an opportunity for bigger moves in currencies, it could occur in the coming week. The recent decline in Treasury yields put pressure on the dollar but given the lack of market moving U.S. data, the decline has been relatively shallow. Whether the dollar finds support or extends its losses will hinge on not one, but as many as 4 of next week’s Top 5 event risks:

1. Janet Yellen’s Semi-Annual Testimony on the Economy and Monetary Policy

2. U.S. Earnings – JPM, Google, Goldman and GE

3. Chinese Q2 GDP

4. U.S. Retail Sales

5. U.K. Consumer Prices and Employment

Based on the FOMC minutes, in June the Federal Reserve was optimistic about the outlook for the U.S. economy (they plan to end QE in October) but reluctant to provide a clear timing on tightening. Of these 5 events, the most important will be Janet Yellen’s semi-annual testimony on the economy and monetary policy on Tuesday. Everyone wants to know when the Fed will start raising interest rates so rest assured, members of Congress will pepper her with questions about tightening. While Yellen may acknowledge recent labor market improvements, don’t count on her providing specifics on when rates will rise outside of a long period after Quantitative Easing ends. It is in the central bank’s interest to give the market an opportunity to react to the end of QE before signaling a plan to raise rates. If bond yields spike after QE ends, they could always choose to delay tightening and if there’s no reaction, they could proceed as planned and raise rates in mid 2015. There’s no benefit to providing guidance at this time when their views could change in October. While Yellen’s testimony is not expected to satisfy dollar bulls, we do not see the greenback falling to new lows because at the end of the day, the outlook for the U.S. economy is brightening. Retail sales are expected to rebound in June, lending support to the dollar. The earnings season also kicks into high gear with results expected from JPMorgan, Goldman Sachs, Google and General Electric. Disappointing earnings from Wells Fargo & Co. made investors nervous about next week’s results but a decline in stocks could actually be positive for the dollar versus high beta currencies such as the euro and British pound. Finally, we have a number of important Chinese economic reports scheduled for release including Q2 GDP and industrial production. Last week’s disappointing Chinese trade numbers caused currencies to sell off by raising concerns about the sustainability of China’s recovery. We expect next week’s Chinese economic reports to increase the volatility on currencies and more specifically determine whether AUD and NZD fizzle at current levels or resume their rise.

EUR: How Serious is the ECB About Easing?

Just because no Eurozone economic reports made our list of the top 5 most important event risks for the FX market in the week ahead does not mean that it will be a quiet week for the euro. Investors are still closely monitoring Portugal’s banking situation. While Banco Espirito Sanco, the country’s second largest bank managed to assure investors that its exposure was limited to 1.15 billion euros and its capital exceeds the minimum regulatory requirement by 2 billion euros, there are lingering concerns. EUR/USD may have stemmed its losses but shares of BES turned negative after an earlier recovery. We don’t expect the problems in Portugal to turn into an all out banking crisis for the country, let alone the region but their troubles are a reminder that the Eurozone is not out of the woods. With this in mind, most ECB officials are still not ready to take additional action. According to last night’s comments from ECB member Nowotny, there’s “no need for further ECB action in near future” because inflation expectations are well anchored and exchange rate stabilization has been achieved. German Finance Minister Schaeuble also expressed concerns about widening the ECB’s mandate and said there’s no ESM program now that would even allow OMT. In other words, even if ECB President Draghi continues to say they are ready to take additional action on Monday, the possibility of them doing so in the coming month is low. The German ZEW survey is scheduled for release next week along with Eurozone industrial production, consumer prices, trade and current account balances.

GBP/USD to Break Out of 1.71 – 1.72 Range

Since the beginning of the month, the British pound traded in a narrow 100-pip range against the U.S. dollar. Throughout the week we talked about why the currency pair refuses to break 1.7100 despite back-to-back disappointments in U.K. data. In the coming week we expect GBP/USD to break out of this range. The inflation and employment reports scheduled for release are too important for GBP/USD to ignore and on top of that the Bank of England’s Carney, Kohn, Taylor, Bailey will be testifying to the Treasury Committee on the June Financial Stability Report. If you recall investors were unimpressed by the central bank’s announcements in June. They will now be looking for any plans of more action by the central bank. If inflationary pressures pick up and policymakers suggest that rates could rise this year, GBP/USD will break 1.72 but if inflation slows and the BoE downplays the need for tightening, 1.7100 will give way. Given the strong defense of 1.71 this month, a downside break could trigger a more aggressive reaction than an upside break.

USD/CAD Breaks 1.07 on Surprise Decline in Jobs

A surprise contraction in job growth sent the Canadian dollar sharply lower against all of the major currencies. On what was an otherwise quiet day in the FX market, CAD lost approximately 0.7% of its value versus the U.S. dollar, euro, Japanese Yen and British pound. While our readers may not be surprised by the soft number because we pointed out that the employment component of IVEY PMI fell sharply in June, signaling a deterioration in the labor market, it is clear that market participants did not expect such a weak report. While the jobs number alone would have been enough to drive USD/CAD above 1.07, when combined with the slide in oil prices, we have the beginning of what should turn into a broader uptrend for USD/CAD. More than 9k jobs were lost in June versus a forecast for 20k job growth. Even though all of the jobs lost were part time, the increase in full time work did not stop the unemployment rate from rising to 7.1% from 7%. These latest developments should lead to more caution from the Bank of Canada who meets next week. Going into the meeting, the next resistance for USD/CAD is 1.08, a level that we think will be tested. The Australian and New Zealand dollars on the other hand ended the day slightly lower. While AUD/USD and NZD/USD will be affected by Janet Yellen’s testimony, U.S. earnings, and Chinese data the RBA minutes, New Zealand’s PMI services and CPI reports will also play a role in how these currencies trade.

Is USD/JPY Nearing a Bottom?

Throughout the week, USD/JPY took its cue from U.S. Treasury yields but today, the currency pair held steady as 10-year yields dropped to its lowest level since May. With no valid reason for the persistent decline in U.S. yields, investors are wondering if currencies are decoupling from Treasuries and USD/JPY is nearing a bottom. The lowest level that 10-year yields dropped to this year was 2.44% on May 28th. There was no specific catalyst for the move and as a result yields rebounded quickly. In the coming week, there are no shortages of event risks that will affect USD/JPY but at the end of the day, we continue to believe the 100.75 to 103 range for the currency pair will remain intact. Given recent data improvements, the only possible surprise from Yellen would be in the form of a clear signal of when rates will rise, a development that would be positive for USD/JPY. On the downside, the main risk is a deep sell-off in equities that is driven by major disappointments in earnings and/or another unexpected shock like Portugal’s banking troubles. Even though the Bank of Japan has a monetary policy announcement next week we don’t expect Japanese data to contribute to USD/JPY volatility especially since the BoJ is widely expected to leave rates unchanged.

Kathy Lien
Managing Director

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