As the prime time for summer vacations, August is typically one of the quieter months in the foreign exchange market and with no European or U.S. economic reports on the calendar, we don’t anticipate any big moves today. The EUR/USD, GBP/USD, AUD/USD and NZD/USD are currently trading near 1-month highs and the main question this week is whether there will be enough momentum to sustain these moves. In terms of data, there is enough top tier economic reports to fuel further gains but that could only happen if there were enough surprises in the data. The top 3 event risks this week will be the minutes from the July FOMC meeting, HSBC’s Chinese flash PMI manufacturing numbers for the month of August and the Eurozone’s PMI reports.
Speculation of Fed tapering drove U.S. 10 year yields to 2-year highs last week but the rise in yields has not led to much movement in the U.S. dollar. Part of the reason is the lack of liquidity this month but recent U.S. data disappointments have also made investors worried about the appropriateness of Fed tapering. At the same time positive economic reports from Europe, New Zealand and even China has lent support to other major currencies and in turn hampered the dollar rally.
There is officially only one month left before the September FOMC meeting where the central bank is widely expected to reduce the amount of bonds purchased. Based on the move in Treasuries, Wall Street expects the first reduction to be made next month. Yet the decision is not a done deal because recent economic data has been weak which makes investors particularly sensitive to the FOMC minutes and the central bank summit in Jackson Hole at the end of the week. We will be looking at the July minutes for potential details on the process for tapering as well as the level of conviction within the central bank. We feel that in general, the message from Fed Presidents have been clear – most of them support some type of action over the next 3 months with more leaning towards a sooner vs. later move. If the minutes are hawkish with more members supporting a move despite recent data disappointments, the U.S. dollar could finally see some upside momentum that could keep the EUR/USD, GBP/USD, AUD/USD and NZD/USD in the recent ranges. As for the annual monetary policy symposium in Jackson Hole on Thursday and Friday, comments from policymakers could be interesting, but market-moving comments should be limited because Fed Chairman Ben Bernanke won’t be attending. Two months ago, he dismissed the significance of the meeting by saying, “There’s a perception that the Jackson Hole conference is a Federal Reserve system-wide conference; it’s not.” So don’t expect any fireworks from Jackson Hole.
Across the Pacific, we get the first glance of August Chinese manufacturing PMI numbers on Thursday. While the economy slowed in June, economic data improved in the month of July and it will be important to see if those improvements continued into August. Economists are looking for a stronger number and if they are right, the AUD and NZD could extend their gains but if they are wrong and July proved to be a one-month bounce, it is back to the range for both currencies.
Across the Atlantic, Thursday’s Eurozone PMI numbers will be extremely important for the euro because the currency pair’s resilience has been largely tied to recent upside surprises in Eurozone data. The manufacturing and service sector activity is expected to grow at a stronger pace in the month of August and if the data is good enough, it could take the EUR/USD above 1.34.