Why Dollar Bulls Could Lose Control Next Week

Daily FX Market Roundup 06.10.16

**Headed to Asia for work, next update will be on Monday June 27

For the second day in a row, the U.S. dollar moved higher against most of the major currencies. The University of Michigan consumer sentiment index was stronger than expected but still weaker than the previous month. Americans felt more confident about the current conditions but more concerned about the outlook, which is not a positive sign for the economy or the U.S. dollar. Looking ahead, it will be another lively week for the foreign exchange market. U.S. data and the Federal Reserve’s monetary policy announcement will be the main focus but there are key releases from many parts of the world that can have a significant impact on currencies. This means it won’t be a week where direction is dictated solely by the market’s appetite for U.S. dollars. Instead there will be just as many if not more opportunities for relative value plays in currency crosses. Had last week’s non-farm payrolls report been strong, investors would have been looking for the Fed to set the stage for a July rate hike but now the chance of July tightening has fallen below 20%. Yet the FOMC statement and Janet Yellen’s press conference will still rock the dollar because investors are on the fence about the timing of the next rate hike. If Yellen refrains from saying that rates could rise in the coming month(s) and expresses concerns about the economy, the dollar will extend its slide but if she is even slightly more hawkish than the market expects, the dollar will rise quickly and aggressively. The Fed’s rate decision is on Wednesday and U.S. retail sales are scheduled for release on Tuesday which means consumer spending will shape the market’s expectations for FOMC. There is also a Bank of Japan monetary policy announcement but with the upward revision to GDP, no changes are expected. BoJ Governor Kuroda could strike a dovish tone that may send the yen slightly lower but the impact on the currency should be limited.

It was a difficult week for sterling. The currency traded lower for 4 out of the last 5 trading days and broke below the lower bound of its wide 1.4350 to 1.4700 trading range. All of this week’s U.K. economic reports were better than expected but stronger underlying fundamentals failed to lend support to the currency. Brexit headlines have ruled sterling trade and we expect that to remain the case in the coming days. The clock is ticking and we are less than 2 weeks away from the E.U. referendum and the polls are still not showing any clear majority. Rallies in pound have been sold as everyone knows that the greatest danger for the U.K. economy, the British pound and financial markets around the world is Brexit. However with many banks and forex dealers raising their margins on GBP and other currencies ahead of the referendum, we could also see a nasty short squeeze before the vote. It will be a big week for the British pound for a number of reasons. Aside from the approaching Brexit vote, the U.K. has an exceptionally busy economic calendar that includes a Bank of England monetary policy announcement, UK consumer prices, retail sales and employment. For the past few weeks sterling completely ignored fundamental data and we would not be surprised if they looked past next week’s reports as well. The BoE is not expected to change monetary policy but the minutes will reveal a cautious tone as policymakers express serious reservations about providing an outlook in light of Brexit uncertainty.

The euro also remained under pressure after rejecting 1.14. Unlike the U.K. and the U.S., the Eurozone has very little market moving data on the calendar, which means the performance of euro will be determined by the market’s appetite for U.S. dollars. The Eurozone industrial production, trade balance and consumer price reports scheduled for release rarely trigger more than a hiccup in the currency. Earlier this week ECB President Draghi made it clear that he has no immediate plans to increase stimulus as they just began their corporate bond-buying program on June 8th and will start TLTRO June 22nd. It should be no surprise that European policymakers want to save their bullets in case Britain votes to leave the European Union and financial markets respond violently so between now and then, they won’t overstress the need for more stimulus. That means EUR/USD will most likely take its cue from the German – U.S. yield spread. The Swiss National Bank meets as well – no changes are expected but the SNB may share their concerns about Brexit and their frustration with the recent appreciation of their currency.

USD/CAD traded higher today despite surprisingly strong employment numbers. More than 13K jobs were created in the month of May, which was slightly better than the 1.8K forecast but the job growth mix was very encouraging with a rise of 60.5K full time jobs and drop of -46.8K part time jobs. The unemployment rate also fell to 6.9% from 7.1%, the lowest level since July 2015. Although part of the improvement can be attributed to the decline in the participation rate, economists actually expected a rise in the jobless rate. The government says 19K jobs were due to census hiring but even at +41K, the numbers are strong. The Bank of Canada won’t be pressed to lower interest rates with this type of report and that should keep USD/CAD from rising much further as long as oil prices hold steady or better yet, rise.

The Australian and New Zealand dollars continued to move lower against the greenback but with the Federal Reserve poised to leave interest rates unchanged, the yield advantage of AUD and NZD should limit losses for the currencies. The Reserve Banks of Australia and New Zealand made it clear this week that they have no immediate plans to ease monetary policy. AUD and NZD soared as a result and we believe that pullbacks should be bought against the U.S. dollar and other major currencies. Chinese data has been decent and Sunday’s industrial production and retail sales reports shouldn’t pose much threat to these currencies. Australia has employment reports and New Zealand has its GDP numbers scheduled for release next week. NZ GDP is expected to be strong thanks to the improvement in trade activity. Australian employment on the other hand could soften with the manufacturing and service sectors reporting job losses. We like buying AUD/USD on the 73 handle and NZD/USD closer to 70 cents.

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