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Boris and Kathy Forex Weekly 10/7/2017

Posted on: 10 July 2017 , by: Boris & Kathy , category: Market Review

FX Weekly with Boris and Kathy

At first glance, it was a mixed week for the U.S. dollar, which saw gains versus the British pound, Japanese yen, Australian and New Zealand dollars but incurred losses against the euro and Canadian dollar.

However, the greenback’s end of week performance tells us that investors are snapping up dollars ahead of Janet Yellen’s testimony on the economy and monetary policy this week. They are banking on her optimism and expecting hawkish comments from the Fed Chair. 

Spot Returns Month to Date 10/7/17


Data Review

  • NFP Change 222k vs. 178k Expected
  • Unemployment Rate 4.4% vs. 4.3% Expected
  • Average Hourly Earnings 0.2% vs. 0.3% Expected 
  • ISM Services/Non-Manufacturing Composite 57.4 vs. 56.5 Expected
  • ISM Manufacturing 57.8 vs. 55.3 Expected
  • ISM Employment 57.2 vs. 53.5 Prior
  • Construction Spending 0.0% vs. 0.3% Expected
  • Factory Orders -0.8% vs. -0.5% Expected
  • Durable Goods Orders -0.8% vs. -1.0% Expected
  • ADP Employment Change 158k vs. 188k Expected
  • Trade Balance -$46.5b vs. -$46.3b Expected

Data Preview

  • Beige Book Release- Likely to be positive but we do not trade reports
  • Producer Prices - Potential for downside surprise given Drop in import prices
  • Retail Sales & Producer Prices – Slowdown in wage growth is negative for retail sales
  • U. of Mich. Sentiment Report- Potential for downside surprise given IBD/TIPP index drops to 10 month low

Key Levels - USD/JPY

  • Support 112.00
  • Resistance 115.00

This week is Fed Chair Janet Yellen’s semi-annual testimony before Congress and the U.S. dollar’s performance tells us that investors are banking on her continued optimism and hawkishness.  While Friday’s labour market was mixed, the overall report was good enough for dollar bulls who have turned a blind eye to any negative reports and trusting in the Fed.  The argument is compelling with all 3 members of the Fed leadership (Yellen, Fischer and Dudley) pointing to the improvements in the U.S. economy as reasons for policy normalisation.  The 222K increase in non-farm payrolls in June and the upward revision to jobs in May is enough for Yellen to maintain her credibility and justify her positive labour market assessment.  While the unemployment rate ticked up to 4.4% from 4.3%, it has been low for some time so it is not a major concern particularly since the participation rate and average weekly hours increased. The slowdown in wage growth, on the other hand, is a bigger problem especially as earnings in May were revised lower but investors dismissed that as they hope wages will rebound in the months ahead on stronger service and manufacturing activity and uptick in jobs. As we also believe that Yellen will put on a brave face and focus on the improvements in the U.S. economy, stressing the need for policy normalisation at Wednesday’s testimony, the dollar should trade with a firm bias for most of the week. We see USD/JPY making a run for 115 and GBP/USD sinking down to 1.28.




Data Review

  • PMI Manufacturing 54.3 vs. 56.4 Expected
  • PMI Construction 54.8 vs. 55.0 Expected
  • PMI Services 53.4 vs. 53.5 Expected
  • PMI Composite 53.9 vs. 53.9 Expected
  • Industrial Production -0.1% vs. 0.5% Expected            
  • Manufacturing Production -0.2% vs. 0.4% Expected
  • Visible Trade Balance -£11,860b vs. -£10,850b Expected
  • Trade Balance Non-EU -£3,796b vs. -£2,450b Expected
  • Total Trade Balance -£3,037b vs. -£2,500b Expected
  • NESIR GDP Estimate 0.3% vs. 0.2% Prior

Data Preview

  • Employment Report- Potential for upside surprise as services reported strongest increase since April 2016.  Manufacturing jobs also up

Key Levels - GBP/USD

  • Support 1.2700
  • Resistance 1.3000

In the U.K., softer data cast doubt on the hawkish comments from the Bank of England.  Since their last monetary policy meeting, we’ve seen Bank of England Governor Carney join McCafferty, Haldane, Saunders and Forbes in supporting less policy accommodation.  That means 5 of the 8 members of the Monetary Policy Committee could vote for a rate hike this year. Three have already done so and it may not be long before Carney and Haldane follows suit but it is difficult to imagine how the UK central bank could seriously consider tightening soon with data consistently falling short of expectations.  Service, manufacturing and construction sector activity slowed in the June while industrial and manufacturing production turned negative. This along with a stronger pound in May caused the trade deficit to increase.  As our colleague Boris Schlossberg noted “The high inflation rate, along with tepid investment flows caused by the uncertainty of Brexit is wreaking havoc with UK growth and the only way that cable could regain its footing is if the government of PM May moves closer to the soft Brexit position, thus mitigating the worst effects of the exit from the union. At present, there is little evidence that Ms. May has the political will to change course and that leaves the currency vulnerable to further selloff especially if the drumbeat of negative economic data gets louder over the next few months.” In the coming week, U.K. labor data is scheduled for release and while the claimant count is expected to fall (the PMIs report strong job growth), average hourly earnings growth could slow. If GBP/USD breaks 1.2850, we could see the pair slide as far down as 1.27 while the hawkishness of the ECB could take EUR/GBP to 90 cents.


Data Review

  • ECB Account of Meeting Minutes confirm that central bank is thinking about reducing stimulus
  • GE Manufacturing PMI 59.6 vs. 59.3 Expected
  • EZ Manufacturing PMI 57.4 vs. 57.3 Expected
  • EZ Unemployment Rate 9.3% vs. 9.3% Expected
  • EZ PPI -0.4% vs. -0.2% Expected
  • GE Services PMI 54.0 vs. 53.7 Expected
  • GE Composite PMI 56.4 vs. 56.1 Expected
  • EZ Services PMI 55.4 vs. 54.7 Expected
  • EZ Composite PMI 56.3 vs. 55.7 Expected
  • EZ Retail Sales 0.4% vs. 0.3% Expected
  • GE Factory Orders 1.0% vs. 1.9% Expected
  • GE Retail PMI 54.5 vs. 55.0 Prior
  • GE Industrial Production 1.2% vs. 0.2% Expected

Data Preview

  • GE Trade and Current Account Balance- Potential for upside surprise given Higher factory orders and GE industrial prod.
  • EZ Industrial Production- Potential for upside surprise given Much stronger German and French industrial production
  • GE CPI Revisions- Revision to German CPI is hard to predict. 
  • EZ Trade Balance- Will update after German trade but French trade balance was stronger

Key Levels - EUR/USD

  • Support 1.1300
  • Resistance 1.1500

By all counts, it was a relatively good week for the euro. The single currency recovered from earlier losses to end higher against most of the major currencies and only slightly lower against the U.S. dollar.  Unlike some other central banks who have been hawkish in the face of mixed to deteriorating data, this week’s Eurozone economic reports validated the European Central Bank’s positive views. The manufacturing and service sector indices in the Eurozone were revised higher and retail sales increased. In Germany, we also saw factory orders and industrial production rise, reinforcing the recovery in the manufacturing sector and the region’s economy.  Looking ahead we expect the euro to be supported by the upcoming German trade balance and Eurozone industrial production reports along with the continued hawkishness of ECB officials.  According to the ECB’s account of their last monetary policy meeting released this past week, the “governing council considered whether to adjust their QE easing bias.”  They decided against it at the time but this revelation confirms that the central bank is getting ready to taper asset purchases. Even ECB member and Bundesbank President Weidmann agreed that the recovery opens door to ECB policy normalization and Nowotny added that QE is not a permanent policy tool. We oftentimes see this type of uniformity in the central bank’s comments when they are trying to prepare the market a major change in policy and that’s exactly what we think the ECB is doing.  As such, we continue to expect euro to outperform other currencies, particularly sterling, the Australian and New Zealand dollars whereas EUR/USD could underperform if the U.S. dollar continues to rise. 


Data Review


  • RBA Keeps Rates Steady at 1.50% as Expected
  • AiG Manufacturing PMI 55.0 vs. 54.8 Prior
  • Building Approvals -5.6% vs.-1.3% Expected
  • Caixin China PMI Manufacturing 50.4 vs. 49.8 Expected
  • Retail Sales 0.6% vs. 0.2% Expected
  • Services PMI 54.8 vs.51.5 Prior
  • Caixin PMI Composite 51.1 vs. 51.1 Prior
  • Caixin PMI Services 51.6 vs. 52.8 Prior
  • Trade Balance $2471m vs. $1100m Expected
  • Construction PMI 56 vs. 56.7 Prior

New Zealand

  • Global Dairy Price Auction show prices decline 0.4%


  • Net Change in Employment 45.3k vs. 10.0k Expected
  • Unemployment Rate 6.5% vs. 6.6% Expected
  • Full Time Employment Change 8.1 vs. 77 Prior
  • Part Time Employment Change 37.1 vs. -22.3 Prior
  • IVEY PMI 61.6 vs. 58.0 Expected
  • Manufacturing PMI 54.7 vs. 55.1 Prior
  • Building Permits 8.9% vs. 1.0% Expected
  • International Merchandise Trade -1.09b vs. -0.50b Expected

Data Preview


  • Chinese Trade Balance- Chinese data is hard to predict but the trade balance will be market moving

New Zealand

  • No Data


  • Bank of Canada Rate Decision and July Monetary Policy Report- Bank of Canada will most likely to hawkish

Key Levels

  • Support AUD .7500 NZD .7150 CAD 1.2700
  • Resistance AUD 7650 NZD .7350 CAD 1.3000

Meanwhile the best performing currency this week was the Canadian dollar, which hit a fresh 10 month high against the greenback. The Bank of Canada meets this week and not only are traders positioning for hawkish comments but there’s even hope for a rate hike. There’s been widespread improvement in Canada’s economy since their last monetary policy meeting in May with solid job growth translating into stronger consumer spending. On Friday we learned that 45K jobs were added in the month of June, driving the unemployment rate down to 6.5% from 6.6%. Although most of the jobs were part time, the uptick in the participation rate and the fact that Canada did not lose full time jobs (after adding a whopping 77K in May), reflects labour market strength. GDP growth and building permits are up and while the IVEY PMI index fell slightly from the previous meeting, the manufacturing index rebounded sharply in June after pulling back in May. The only serious areas of concern are low inflation and the stronger currency. The Canadian dollar appreciated more than 6% over the past 2 months, increasing the pressure on inflation.  For this reason we don’t think the Bank of Canada will raise interest rates this week but they should maintain their hawkish views which means any relief rally in USD/CAD should be shallow.

Canada Economy - Central Bank Meeting

The Australian and New Zealand dollars peaked this past week below key resistance levels.  For AUD/USD, the key level was 77 cents and for NZD/USD 0.7350.  Although most recent Australian economic reports were better than expected including retail sales which increased 0.6%, 3 times more than anticipated, manufacturing and service sector activity accelerated and the trade surplus ballooned, Aussie was faced with heavy selling after the Reserve Bank of Australia left interest rates unchanged.  Part of the weakness had to do with the central bank’s ongoing concerns about the strong currency but the main reason why AUD tumbled is because the RBA is not drinking the same Kool-Aid as the central banks who have been so eager to share their hawkish bias. With no major Australian economic reports scheduled for release this week, AUD should continue to underperform other major currencies with AUD/USD resuming its slide. The same is true for the New Zealand dollar, which was hit by lower dairy, house and commodity prices.  Card spending and consumer confidence numbers are the only pieces of New Zealand data scheduled for release this week and we believe that 0.7350 resistance in NZD/USD should hold.

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