The U.S. dollar ended the week lower against most major currencies but its resilience in the face of weak retail sales is a sign of strength for the currency. At one point on Friday, the dollar was down more than 1% against most of these pairs but it recovered nicely especially against the British pound, Australian and New Zealand dollars. This strength reflects the underlying demand for dollars and signals the potential for further gains in the week ahead as the vulnerabilities of other countries become more apparent.
US DOLLAR
Data Review
- Retail Sales 0.0% vs. 0.4% Expected
- PPI Final Demand -0.4% vs. 1.0 Expected
- Business Inventories 0.2% vs. 0.1% Expected
- U of Michigan Confidence 90.4 vs. 91.5 Expected
Data Preview
- Japanese GDP- Potential upside surprise given stronger trade and retail sales
- Empire Manufacturing- Manufacturing activity is expected to improve
- US Housing Starts, Building Permits and CPI (MoM)- Potential for downside surprise given drop in gas prices
- FOMC Meeting Minutes- Likely to be optimistic given positive one of last FOMC statement
- Philadelphia Fed Business Outlook- Manufacturing activity is expected to improve
Key Levels - USD/JPY
- Support 100.00
- Resistance 103.00
US Consumer spending stagnated in the month of July and dropped -0.1% excluding auto and gas purchases. Producer prices fell -0.4% which was a huge surprise considering that economists anticipated a 0.1% rise. Consumer confidence on the other hand strengthened, according to the University of Michigan consumer sentiment survey but the increase may not have been as large as some many have hoped. While the dollar took a hit this week we believe that a recovery is ahead. The recent increase in wage growth and decline in gas prices should bolster consumer consumption in August. At the end of the day, there is nothing more influential to the direction of currencies than interest rates and we saw that very clearly this past week as the dollar traded higher against all of the major currencies after the Reserve Bank of New Zealand moved to lower interest rates. The economic slowdown and easier monetary policies abroad has made the greenback shine in comparison and that’s something investors won’t forget in the coming week.
Since the rebound in job growth in June, a number of Federal Reserve officials have been talking about the possibility of a rate hike this year with Fed President Williams confirming their view this past week. In the week ahead, we look forward to U.S. consumer prices, housing data and manufacturing reports. While interesting, the more important and market moving events for the dollar should be the speeches from Fed Presidents Lockhart, Bullard and Williams because investors will continue to watch for signs of greater commitment to a 2016 rate hike. There was a tremendous amount of volatility in USD/JPY on talk that the Bank of Japan may need flexibility because they are running out of bonds to buy. This drove USD/JPY to a low of 100.97 and while the pair recovered quickly in the days to follow it ends the week not far from those levels. For Japan, the main focus will be second quarter GDP, which is expected to be weaker. We believe that the downside in USD/JPY is limited to last week’s low and continue to look for the pair to drift towards 103.50.
BRITISH POUND
Data Review
- Industrial Production (MoM) 0.1% vs. 0.1% Expected
- Manufacturing Production (MoM) -0.3% vs. -0.2% Expected
- Total Trade Balance (Jun) -£5084 vs. -£2550 Expected
- MPC McCafferty Says More Easing Possible if Data Weakens
- RICS reports sharp drop in House Price Balance
Data Preview
- CPI - Potential for upside surprise given smaller drop in BRC shop prices
- Jobless Clams - Potential for downside surprise given manufacturing reports biggest drop in almost 3.5 years. Construction reports first drop since May 2013. Services reports unchanged employment
- Retail Sales – Potential upside surprise given sharp rise in BRC retail sales
Key Levels - GBP/USD
- Support 1.2750
- Resistance 1.3100
Sterling was the only currency to end the week lower versus the greenback. U.K. data was weaker than expected with manufacturing production plunging and the trade deficit increasing. NIESR also estimated weaker GDP growth in July but the primary driver of GBP/USD weakness was the views from Monetary Policy Committee member McCafferty and the RICS house price report. As reported by our colleague Boris Schlossberg, “McCafferty noted that if UK economic data turns down the central bank could slash rates further taking them towards the zero level while increasing QE at the same time. Mr. McCafferty is considered one of the more hawkish members of the committee and was one the four votes against raising the target of QE at the last BoE meeting” – explaining why his comments had such a significant impact on the currency. According to RICS, prices rose at the slowest pace in three years in July and new sales declined which suggests that the housing market is already adjusting to Brexit and with UK consumer so heavily leveraged to housing, the sharp decline in that asset value is likely to impact consumer spending going forward. Looking ahead it is going to be a busy and volatile week for the British pound with UK consumer prices, retail sales and employment report scheduled for release. Chances are data will be softer as the country starts to feel the Brexit sting. Support in GBP/USD is at the July low near 1.2800 and near term resistance is at 1.3150.
EURO
Data Review
- GER Industrial Production (MoM) 0.8% vs. 0.7% Expected
- GER Trade Balance €24.9b vs. €23.0b Expected
- GER Current Account €26.3b vs. €23.0b Expected
- GER CPI (MoM) (JUL F) 0.3% vs. 0.3% Expected
- GER GDP (QoQ) (2Q) 0.4% vs. 0.2% Expected
- EZ GDP 0.3% vs. 0.3% Expected
- EZ Industrial Production 0.6% -1.2% Prior
Data Preview
- EZ Trade Balance and GER ZEW Expectations Report- Investor confidence is hard to predict but stronger GE trade and weaker French trade
- EZ Current Account- Potential for upside surprise given Much stronger GE current account, slightly weaker French current account
- EZ CPI Potential for downside surprise given stronger GE CPI. Weaker FR CPI
- ECB Minutes- Likely to remain dovish
Key Levels - EUR/USD
- Support 1.0950
- Resistance 1.1250
Lastly, it was a very quiet week for euro, which remained confined between the 100 and 200-day SMA around 1.1075 and 1.1250. German industrial production and second quarter GDP numbers beat expectations, helping the euro extend its gains on Friday. Of course, the softer U.S. retail sales report also helped. However we believe that gains will be capped near 1.1250 as the Eurozone has its own banking sector troubles. In the coming week we have the German ZEW survey, the “ECB minutes,” current account, CPI and trade balance scheduled for release.
AUD, NZD, CAD
Data Review
Australia
- NAB Business Confidence (July) 4 vs. 5 Previous
- Westpac Consumer Confidence August 2% vs. -3% Previous
- China Trade Balance (Jul) $52.31b vs. $47.30b Expected
- CNY Industrial Production (YoY) (JUL) 6.0% vs. 6.2% Expected
- CNY Retail Sales (YoY) (JUL) 10.2% vs. 10.5% Expected
New Zealand
- RBNZ Cuts Interest Rates 25bp, Says More to Come
- Business NZ Performance of Manufacturing Index (JUL) 55.8 vs. 57.6 Prior
- NZD Retail Sales Ex Inflation (QoQ) (2Q) 2.3% vs. 1.0%
Canada
- No Data
Data Preview
Australia
- August RBA Meeting Minutes- Likely to be neutral as per RBA statement
- AU Employment Report – Drop in employment component of services and construction but offset by sharp rise in manufacturing so tough call but improvement expected by economists.
New Zealand
- Employment Change Report – Potential upside surprise given rise in employment component of business PMI
Canada
- Retail Sales and CPI Report - Very weak employment numbers offset stronger wholesale trade so tough call
Key Levels
- Support AUD .7500 NZD .7000 CAD 1.2800
- Resistance AUD .7700 NZD .7300 CAD 1.3200
All three commodity currencies ended the week stronger against the U.S. dollar. The top story was the Reserve Bank of New Zealand’s monetary policy announcement. NZD/USD spiked sharply to a high of 0.7340 after the RBNZ cut interest rates because investors hoped for 50bp of easing instead of the 25bp delivered. However when the dust settled market participants realized that not only did the RBNZ cut rates to 2%, but they talked of doing more. Wheeler did not feel a one-shot 50bp cut was necessary but he made it clear that further easing will be required. It was not a “may” but a “will.” RBNZ projections account for 60bp of easing, which means another 25bp this year is very likely especially if we do not see a meaningful decline in NZD/USD. The knee jerk rally was completely overdone with a pullback in line with fundamentals. For the Reserve Bank, the main goal of easing was to bring NZD down and they will continue to take steps to guide the currency lower verbally and physically. It won’t be long before NZD/USD tests 71 cents. The Australian dollar followed in the footsteps of NZD, which is not common but the same spike in NZD/USD also occurred in AUD/NZD post RBNZ. No market moving data was released over the past week from Australia but we learned that consumer confidence improved and business confidence weakened. Chinese data on the other hand was softer with retail sales and industrial production growth slowing. While the trade balance surged, imports plunged which is bad news for Australia. Looking ahead, there’s some high level events for Australia and New Zealand. We have the RBA meeting minutes on the calendar along with Australian and New Zealand employment reports.
Unlike AUD and NZD, the Canadian dollar strengthened consistently throughout the week with USD/CAD falling to a 3 week low. To some investors this move may be a surprise after the horrendous employment and trade balance reports but oil was the main driver. Prices jumped more than 4% on talk of possible action to stabilize crude prices sent the commodity soaring even though the discussion won’t be occurring until the informal meeting at the end of next month. The chance of an actual change in production is unlikely but during a quiet week, it was enough to send USD/CAD sharply lower. Traders should continue to watch oil prices in the coming week but Canadian retail sales and consumer prices on Friday will also be very important.
Good luck to all.
