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Boris and Kathy Forex Weekly 3/7/2017

Posted on: 03 July 2017 , by: Pepperstone Support , category: Market Review

FX Weekly with Boris and Kathy

This week marks a new month, a new quarter and the beginning of the second half of the year.

While many U.S. traders will be off enjoying their July 4th holidays Monday and Tuesday, the rest of us are thinking about new opportunities. What makes this time even more interesting is the recent shift in monetary policy guidance by major central banks. In June, Fed Chair Janet Yellen, ECB President Mario Draghi and Bank of England Governor Mark Carney all turned hawkish. Although we haven’t heard much from Bank of Canada Governor Poloz, both of his Deputy Governors have suggested that rates could rise. These “new” views caused a flurry of activity in the foreign exchange market that first involved short covering and then later buying. So as we head into the new month and quarter investors will be looking to data for confirmation. 

Spot Returns Month to Date 3/7/17

US DOLLAR

Data Review

  • Durable Goods Orders -1.1% vs. -0.6% Expected
  • Durables Ex. Transportation 0.1% vs. 0.4% Expected
  • Consumer Confidence 118.9 vs. 116 Expected
  • Conference Board Present Situation 146.3 vs. 140.6 Prior
  • Conference Board Expectations 100.6 vs. 102.3 Prior
  • Advance Goods Trade Balance -$65.9b vs. $66.0b Expected
  • Wholesale Inventories 0.3% vs. 0.2% Expected
  • Retail Inventories 0.6% vs. -0.2% Prior
  • Pending Home Sales -0.8% vs. 1.0% Expected
  • GDP (Annualized) 1.4% vs. 1.2% Expected
  • Personal Consumption 1.1%vs. 0.6% Expected
  • GDP Price Index 1.9% vs. 2.2% Expected
  • PCE Expenditure 2.0% vs. 2.1% Expected
  • Personal Income 0.4% vs. 0.3% Expected
  • Personal Spending 0.1% vs. 0.1% Expected
  • Real Personal Spending 0.1% vs. 0.2% Expected
  • PCE Deflator -0.1% vs. -0.1% Expected
  • PCE Core 0.1% vs. 0.1% Expected
  • Chicago PMI 65.7 vs. 58.0 Expected
  • U. of Mich. Confidence 97.1 vs. 94.5 Expected
  • U. of Mich. Current Conditions 112.5 vs. 109.6 Expected
  • U. of Mich. Expectations 83.9 vs. 84.7 Expected

Data Preview

  • ISM Manufacturing- Stronger Empire offset by weaker Philly
  • Factory and Durable Goods Orders- Durable goods orders are volatile but can be market moving
  • FOMC Meeting Minutes- Potential for upside surprise given Fed minutes likely to be positive given Yellen hawkishness
  • Challenger Job Cuts and ADP Employment Change- These reports are hard to predict but very market moving ahead of NFP
  • Trade Balance- Will update after the ISM manufacturing report
  • NFP Change- This NFP report is very important given the Fed's hawkishness and the softness of previous report. It needs to be very good to support the USD rally

Key Levels - USD/JPY

  • Support 110.00
  • Resistance 114.00

Fed President Bullard (who is not a voting member of the FOMC) vocalized the market’s concerns when he said the Fed is raising interest rates against a backdrop of relatively weak growth and downside inflation surprises. However, Bullard is the minority as many other U.S. policymakers (including Vice Chair Fischer and FOMC voter Dudley who spoke this week) support Janet Yellen’s positive view of the economy. There were some bright spots in U.S. data as well including the uptick in consumer confidence, smaller U.S. trade deficit, stronger manufacturing activity in the Chicago region, stronger confidence and an upward revision to Q1 GDP growth. 

Unfortunately, these reports were not meaningful enough to prevent losses in the greenback leaving investors divided on whether a year end rate hike is truly coming. Before buying what the Fed is selling, they want to see a significant pickup in job growth and stronger average hourly earnings. The next non-farm payrolls report (due on Friday) will be a crucial test for the greenback and a deciding factor in determining whether EUR, GBP, CAD and other major currencies hit new highs. The Fed minutes should be hawkish but NFPs are the main focus. We expect USD/JPY to trade in a 110.50-113 range ahead of the jobs report and to breakout if the data impresses or disappoints in a meaningful way. 


BRITISH POUND

Data Review

  • CBI Retailing Reported Sales 12 vs. 2 Expected
  • CBI Total Dist. Reported Sales 17 vs. 15 Expected
  • Nationwide House Prices 1.1% vs. 0.1% Expected
  • Net Consumer Credit 1.7b vs. 1.4b Expected
  • Mortgage Approvals 65.2k vs. 64.0k Expected
  • GfK Consumer Confidence Survey -10 vs. -7 Expected
  • Current Account -16.9b vs. -16.9b Expected
  • GDP (QoQ) 0.2% vs. 0.2% Expected

Data Preview

  • PMI Manufacturing- Potential for upside surprise given rise in CBI index
  • Services and Composite PMI - Will update after PMI Mfg and GfK
  • Industrial, Manufacturing Production and Trade Balance- Will update after PMI Manufacturing

Key Levels - GBP/USD

  • Support 1.2800
  • Resistance 1.3100

The most surprising shift came from Bank of England Mark Carney who only weeks ago raised concerns about low wage growth. At the ECB Forum in Sintra, Portugal this past week, he said: “some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional.” These words caught the market off guard and took GBP/USD above 1.30 in a week with no losses. Looking ahead, GBP has 2 things going for it – the first is the BoE’s hawkishness and the second is Prime Minister May’s survival of the Queen’s vote. The minority government narrowly defeated Labour, allowing May to keep her job. This week’s PMI reports will be extremely important in reinforcing the central bank’s hawkishness and the rise in sterling. If manufacturing and service sector activity accelerate, we should see GBP/USD close above this year’s high of 1.3050.


EURO

Data Review

  • GE IFO Business Climate 115.1 vs. 114.5 Expected
  • GE IFO Expectations 106.8 vs. 106.4 Expected
  • GE IFO Current Assessment 124.1 vs. 123.2 Expected
  • Draghi says central bank will have to be prudent to gradually adjust its monetary stimulus to the economic recovery
  • GfK Consumer Confidence Survey 10.6 vs. 10.4 Expected
  • EZ Economic Confidence 111.1 vs. 109.5 Expected
  • EZ Business Climate Indicator 1.15 vs. 0.94 Expected
  • EZ Industrial Confidence 4.5 vs. 2.8 Expected
  • EZ Services Confidence 13.4 vs. 12.8 Expected
  • EZ Consumer Confidence -1.3 vs. -1.3 Expected
  • GE CPI 0.2% vs. 0.0% Expected
  • GE Retail Sales 0.5% vs.0.3% Expected
  • GE Unemployment Change 7k vs. -10k Expected
  • GE Unemployment Rate 5.7% vs. 5.7% Expected
  • EZ CPI Estimate (YoY) 1.3% vs. 1.2% Expected
  • EZ CPI Core (YoY) 1.2% vs. 1.0% Expected

Data Preview

  • GE and EZ Manufacturing PMI- Revisions are hard to predict but if changes will be market moving
  • EZ PPI- Potential for downside surprise given fall in German PPI
  • EZ Retail Sales – Potential for upside surprise given strong German and French retail sales
  • ECB Account of Meeting Minutes- Potential for upside surprise given optimism of ECB
  • GE Industrial Production- Will update after GE factory orders

Key Levels - EUR/USD

  • Support 1.1300
  • Resistance 1.1500

Meanwhile, the euro is on a tear. It is almost hard to believe that the currency is up 1000 pips or 10 full cents since the beginning of the year. The European Central Bank started the year with an extremely accommodative monetary policy stance and they walk into the second half with a completely different attitude. ECB President Draghi hasn’t uttered the word taper yet but there’s no question that they are laying the groundwork for removing stimulus. The ECB is an extremely calculating central bank that likes to set expectations for major policy changes months in advance so that when the actual change is made, investors have it fully discounted, making the market impact minimal - and that’s what they are doing now. At the very start of last week, Draghi kicked the ball in motion by saying they may change policy to a neutral stance. EUR/USD shot up in response, almost too quickly, prompting the ECB to come out and say that the market misjudged Draghi’s speech. However as he did not confirm this misinterpretation at the central bank panel a few hours later, investors took the ECB’s comments as nothing more than an attempt to slow the rise in the euro. They bid EUR/USD back up in response sending the pair to a 1 year high. As Eurozone data continues to support the ECB’s hawkishness, it won’t be long before 1.15 is in the rearview mirror.  


AUD, NZD, CAD

Data Review

Australia

  • HIA New Home Sales 1.1% vs. 0.8% Expected
  • CNY Manufacturing PMI 51.7 vs. 51 Expected
  • CNY Non-Manufacturing PMI 54.9 vs. 54.5 Prior

New Zealand

  • Trade Balance 103m vs. 419m Expected
  • Building Permits 7.0% vs. -7.4% Expected

Canada

  • GDP 0.2% vs. 0.2% Expected
  • Industrial Price Product -0.2% vs. 0.4% Expected
  • Raw Materials Price Product -1.8% vs. 0.0% Expected

Data Preview

Australia

  • AiG Performance Manufacturing PMI and Caixin Manufacturing PMI - AU and Chinese PMIs are difficult to predict but can be market moving
  • Retail Sales Potential for downside surprise given sharp drop in sales component of PMI services
  • RBA Cash Rate Target- RBA is likely to maintain their neutral stance
  • AiG Services PMI - Will have to see how manufacturing PMI index fares
  • Trade Balance- Will have to see how manufacturing PMI index fares

New Zealand

  • No Data

Canada

  • Building Permits and International Merchandise Trade- Potential for downside surprise given Sharp drop in IVEY PMI
  • Net Change in Employment and Unemployment Rate- IVEY released after employment report so no trade

Key Levels

  • Support AUD .7600 NZD .7200 CAD 1.2700
  • Resistance AUD .7750 NZD .7500 CAD 1.3200

With USD/CAD dropping to 1.30, many traders are wondering how much further the currency will fall. Like the euro, loonie has the support of data and policy guidance. In mid June, Bank of Canada Deputy Governor Wilkins set the loonie on an upward course when she said they may need to assess whether less stimulus is needed. This past week, Deputy Governor Patterson explained that the central bank is less dovish because they feel that the economic shock from oil is largely behind them. We haven’t heard much from Poloz who had multiple opportunities to address policy so investors interpreted his silence as an endorsement of hawkish views. Yet it may be difficult for the positive trend of Canadian data to continue in light of the big improvements seen the previous month. Canada’s trade, IVEY PMI and employment reports are scheduled for release and we are looking for softer numbers all around. We’ve already seen GDP growth slow in the month of April. So while USD/CAD is in a strong downtrend, we could see a relief rally back to 1.32 in the coming week.

The Australian dollar which climbed to fresh 3 month highs will be in play this coming week. In addition to the latest PMI reports, retail sales and trade balance, the Reserve Bank of Australia also has a monetary policy announcement. When they last met, the central bank expressed concerns about the appreciating currency and weak growth in total hours worked but these warnings fell on deaf ears as investors focused on their neutral policy stance. Going into this month’s meeting, we’ve seen further improvements in the labor market, rally in iron ore prices and stronger Chinese import demand but businesses are nervous, home loans are falling and the trade surplus shrank significantly in the month of April. So the central bank has no reason to change their views and if anything could express greater concerns about the rising currency. With that in mind, there is significant resistance for AUD/USD between 0.7700 and 0.7750. Unlike AUD and CAD, the New Zealand dollar struggled to extend its gains this past week as a smaller trade surplus offset stronger business confidence. With no major economic reports on this week’s calendar, NZD should take its cue from the market’s appetite for U.S. and Australian dollars.

AU Economy - Changes Since Last RBA Meeting


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