US DOLLAR
Data Review
- Current Account Balance (2Q) $-119.9b vs. $-121.0b Expected
- Advanced Retail Sales -0.3% vs. -0.1% Expected
- PPI Final Demand (MoM) 0.0% vs. 0.1% Expected
- Philly Fed 12.8 vs. 1 Expected
- Empire Manufacturing -1.99 vs. -1 Expected
- Industrial Production -0.4% vs. -0.3% Expected
- CPI (MoM) 0.2% vs. 0.1% Expected
- USD CPI Ex Food & Energy (MoM) 0.3% vs. 0.2% Expected
- U. of Michigan Confidence (SEP P) 89.8 vs. 90.6 Expected
- U. of Mich. Current Conditions (SEP P) 103.5 vs. 107.6 Expected
- U. of Mich. Expectations (SEP P) 81.1 vs. 79.7 Expected
Data Review
- Housing Starts and Building Permits- Housing market to be supported by lower rates
- BoJ Policy Rate- BoJ likely to remain dovish
- FOMC Rate Decision- See below for full FOMC outlook
- Chicago Fed- Tough call as stronger Philly Fed offset by weaker Empire State manufacturing activity
- Existing Home Sales- Existing home sales are hard to call but low rates should help
Key Levels - USD/JPY
- Support 101.50
- Resistance 102.00
September is typically a busy month in the foreign exchange market and weeks like the one ahead are the reasons why volatility spikes after Labor Day. We have three monetary policy announcements on the calendar along with the Eurozone’s flash PMIs for the month of September. These are just some of the most important reports on a long list of Tier 1 economic data that could kick off big moves in currencies.
The main focus will be on the Federal Reserve’s monetary policy meeting and the U.S. dollar. The Fed meeting is on Wednesday and the outcome could dictate how all of the major currencies trade for the rest of the week. We are not looking for the Federal Reserve to hike rates and based on the 20% probability of a hike according to September Fed Fund futures, the market shares our view. However there’s a very strong chance that Janet Yellen will set the stage for tightening in December. Federal Reserve meetings are always important but in September Janet Yellen holds a press conference and the central bank releases their latest economic projections. We would be shocked if the central bank hiked rates in the face of falling consumer consumption, slower job growth, and significantly weaker activity in the manufacturing and service sectors but an argument can still be made for December tightening.
The only reason why some investors think a rate hike is possible this month is because U.S. policymakers have suggested so. We’ve heard a number of Federal Reserve Presidents/Governors say their goals are being met and rates need to rise. And the only reason why the Fed would pull the trigger is to avoid hiking right after the election and before the holiday season. With all of this in mind, we do not believe the central bank will raise interest rates next week but they WILL take the opportunity to remind investors that a hike is on the table for December. As traders, what this means is the dollar is a buy on dip pre and post FOMC as investors latch onto the idea the Fed is still the only major central bank talking / thinking about tightening.
The Bank of Japan also has a monetary policy announcement. Despite the Japanese government’s persistent stimulus programs, we’ve seen very little momentum in the economy. Recent economic data showed further deterioration and there’s now talk that the BoJ may be considering delving deeper into negative rates. More needs to be done but the central bank’s hands have been tied for some time and intervention has not been seriously considered. Chances are the BoJ will leave policy unchanged but there could be some operational changes with the central bank buying fewer long term bonds and more short term bonds which is mildly Yen negative. They could also remove their timeline for reaching their 2% inflation target. All of these are minor changes and investors will probably end up disappointed and for this reason, we could see further Yen weakness.
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