The Forex Week Ahead

The Forex Week Ahead: August 8th –  August 12th

Mon: CNY – FDI, Trade Balance, JPY – Trade Balance, EUR – German Industrial Production, EZ Investor Confidence,  CHF – CPI

Tue: CNY – CPI, CHF – Unemployment Rate, GBP – Industrial Production, Manufacturing Production, Trade Balance, NIESR GDP Estimate

Wed: CNY – New Yuan Loans, AUD – Consumer Confidence, Gvnr Stevens Speaks in Sydney, USD – Crude Oil Inventories, NZD – RBNZ

Thu: AUD – Consumer Inflation Expectations

Fri: CNY – Industrial Production, Retail Sales, EUR – German CPI, German GDP, Italian GDP, EZ Industrial Production, EZ GDP, USD – Retail Sales, UoM Confidence

Overview

USD Having been heavily sold on the back of a non-committal FOMC meeting and dismal 2Q growth readings, the US Dollar was able to recover some ground as traders rushed to buy the currency in response to the latest employment report. Following June’s bumper print, the July NFPs similarly beat expectations printing 225k vs 180k expected. In its recent meeting the Fed cited diminished near term economic risks and a strengthening labour market. With the latest labour market data showing clear positive momentum traders are now beginning to reprice September and December rate hike chances. USD moves out of the limelight this week with Consumer Confidence on Friday the only valuable reading.

EUR ECB’s latest macroeconomic projections for the euro area showed that the economy is expected to grow 1.6% in 2016 (previous: 1.4%) and 1.7% in 2017 and 2018. HICP inflation is expected to remain very low in 2016, at 0.2% (previous: 0.1%), strongly dampened by the past fall in energy prices. For 2017, a significant increase in headline inflation to 1.3% is anticipated while declining economic slacks may push up inflation somewhat further to 1.6% in 2018. A raft of key EZ data this week could help Euro break the range within which it has traded post-Brexit.

GBP BoE slashed rates by 25bps to a record low of 0.25% in a unanimous vote while asset purchase targets were raised by £60bn to £435bn with a 6-3 vote. BOE also decided to purchase corporate bonds of up to £10bn at yesterday’s meeting. BOE Governor Carney signaled intention to further cut rates to near zero this year but discounted the case for negative rates at this juncture. While this year’s growth forecast is maintained at 2.0%, next year growth forecast was severely downgraded to just 0.8%, from a previous estimate of 2.3%. Focus this week turns to Industrial & Manufacturing Production data though given that this data is for the pre-Brexit period it will lose some value. GDP Estimate for July will be the headline domestic print of the week.

JPY BoJ Deputy Governor Kikuo Iwata suggested the central bank had no plans to reduce the amount of assets it buys or change the composition of assets in purchases in a way that would tighten monetary policy. Japan’s foreign reserves fell to $1.26 trillion at the end of July and the Japanese government did not conduct any intervention between 29 June and 27 July, according to the Ministry of Finance said on Friday. Trade Balance data the only standout print this week with risk and USD flows to be the main JPY driver.

AUD The Reserve Bank of Australia cut rates to record lows this week amidst an environment of persistent low inflation.  Despite the move, AUD remained bid as Australian rates still look attractive compared to other nations. Ten-year domestic debt yields are at 1.83% compared to 1.53% in the United States and -6 basis points in both Germany and Japan. The Aussie’s resilience has in turn led the market to price in a 50-50 chance of yet another cut by November. RBA Statement on Monetary Policy showed that inflation is not forecast to return to the banks 2%-3% target range until end 2018. Traders will be paying attention to a speech by RBA’s Stevens this week for any further colour on the likely Australian rate path.

CAD  The Canadian Dollar was weighed on initially this week by continued pressure in Oil markets which remain weighed by supply-demand imbalance concerns. Data on Friday added further pressure as, although the Unemployment rate remained unchanged at 6.8% in July, the Net Change in Employment was significantly below expectations at -31k vs 10k expected. July services employment can be volatile due to swings in the education sector. An absence of key domestic data this week will leave CAD once again dictated by USD and Oil flows.