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Boris and Kathy Forex Weekly 31/7/2017

Posted on: 31 July 2017 , by: Boris & Kathy , category: Market Review

FX Weekly with Boris and Kathy

We’ve drawn to a close with yet another brutal week for the U.S. dollar.

The greenback experienced losses against all of the major currencies except for the Swiss franc. Although the dollar only experienced modest declines on a percentage basis, these small changes mask the bigger story, which is that the greenback dropped to 2-year lows against the euro, sterling, Australian, Canadian and New Zealand dollars. Friday’s U.S. GDP report sealed the dollar’s fate with weaker than expected growth sending the currency tumbling. The U.S. economy expanded by only 2.6% in the second quarter slightly less than the 2.7% consensus forecast. While this is a significant acceleration from last quarter’s levels, investors honed in on the downward revision to Q1 growth, the headline miss and the dramatic slowdown in price growth. Even the uptick in personal consumption or the positive revision to the July University of Michigan consumer sentiment index failed to help the greenback. 

Spot Returns Month to Date 31/7/17


Data Review

  • Fed Leaves Rates Unchanged, Says Balance Sheet Normalization to Begin “Relatively Soon”
  • GDP Annualized 2.6% vs. 2.7% Expected
  • Personal Consumption 2.8% vs. 2.8% Expected
  • Core PCE 0.9% vs. 0.7% Expected
  • Markit Manufacturing PMI 53.2 vs. 52.2 Expected
  • Services PMI 54.2 vs. 54.2 Expected
  • Composite PMI 54.2 vs. 53.9 Prior
  • Existing Home Sales -1.8% vs. -0.9% Expected
  • House Price Index 0.4% vs. 0.5% Expected
  • Consumer Confidence 121.1 vs. 116.4 Expected
  • New Home Sales 0.8% vs. 0.8%
  • Durable Goods Orders 6.5% vs. 3.9% Expected
  • Durables Ex Transportation 0.2% vs. 0.4% Expected
  • Trade Balance $-63.9b vs. $-65.5b Expected
  • U. of Mich. Confidence 93.4 vs. 93.1 Expected
  • U. of Mich. Current Conditions 113.4 vs. 113.2 Prior
  • U. of Mich. Expectations 80.5 vs. 80.2 Prior

Data Preview

  • Chicago PMI and Pending Home Sales- Potential downside surprise given drop in Empire & Philadelphia Fed index
  • Personal Income, Spending and PCE Deflator- Stronger earnings offset by weaker retail sales so tough call
  • ISM Manufacturing- Will see after Chicago PMI but Empire State and Philadelphia Fed index declined
  • ADP Employment Change- ADP is hard to predict but will be market moving going into NFP
  • ISM Non-Manufacturing, Factory and Durable Goods Orders- Will have to see ISM Manufacturing
  • Change in NFP’s, Unemployment Rate and Trade Balance- Non-Farm Payrolls is exceptionally market moving but difficult to predict and best traded reactively

Key Levels - USD/JPY

  • Support 110.00
  • Resistance 112.50

The dollar was set on a downward course this week by the Federal Reserve’s monetary policy announcement. Although the Fed did exactly what the market anticipated it was not enough. They left interest rates unchanged, acknowledged that inflation declined and set the stage for reducing asset purchases in September by saying balance sheet normalization will begin “relatively soon.” These tweaks were all anticipated but somehow investors wanted more. The problem is that everyone is growing skeptical of another rate hike by the central bank this year as Fed Fund futures show only a 40.8% chance of tightening by December. Consumer demand, inflation and wage growth are weak and if Friday’s non-farm payrolls report does not impress, all hope could be lost for the U.S. dollar. Despite mixed data, Federal Reserve officials have been pounding the table about the need for additional policy normalization and while the market wants to believe them, they need one piece of unambiguously positive data. With how much the greenback has been sold, traders won’t be looking for much - non-farm payroll growth is expected to rise by only 180K versus 222K in June. As long as job growth exceeds 170K AND wage growth rises 0.3% or more AND the unemployment rate drops from 4.4% to 4.3%, the dollar will soar. However if wage growth grows by 0.2% or less and the unemployment rate holds steady, even another 200K increase in payrolls may not be enough to save the dollar. Aside from NFPs, ADP, pending home sales, manufacturing and non-manufacturing ISM numbers are scheduled for release – all of these numbers will be used to shape the market’s expectations for the jobs report. 



Data Review

  • GDP (QoQ) 0.3% vs. 0.3% Expected
  • GDP (YoY) 1.7% vs. 2% Previous
  • CBI Business Optimism 5 vs. 0 Expected
  • CBI Trends Total Orders 10 vs. 12 Expected
  • CBI Trends Selling Prices 9 vs. 20 Expected
  • GfK Consumer Confidence Survey -12 vs. -11 Expected

Data Preview

  • BoE Rate Decision & Quarterly Inflation Report – Very difficult call, read note below
  • PMI Manufacturing- Potential for downside surprise given Lower CBI index
  • Services and Composite PMI- Will update after PMI manufacturing but GfK confidence down

Key Levels - GBP/USD

  • Support 1.2900
  • Resistance 1.3200

Sterling will be a big focus this coming week with July PMIs, the Bank of England’s monetary policy announcement and Quarterly Inflation Report scheduled for release. The BoE meeting will be particularly important as data has been at odds with the central bank’s guidance. When they last met in June, the market was surprised that 3 members voted for an immediate rate hike. At the time their hawkishness came in the face of softer data but rising inflation created a deep divide within the central bank. MPC members Forbes, Saunders and McCafferty voted for a hike and in the weeks that followed, it appears that Haldane and Carney share their hawkish views and if all 5 vote for a hike, it would be a majority. Of course, that is unlikely as the central bank as a whole has not prepared for the market for an August hike. But they often like to telegraph major changes in their Quarterly Inflation report so that could be the big announcement this week. If the BoE statement / Quarterly report is hawkish and/or one more member votes in favour of tightening, GBP/USD will hit fresh 2 year highs above 1.32. Based on the central bank guidance’s we have every reason to believe they will prepare the market for policy normalization but data is not on their side. We’ll have to see how the next PMI reports fare (both the manufacturing and services reports are due before the rate decision) but retail sales, consumer confidence, wage growth and inflation weakened since the last monetary policy meeting.

UK Economy - Changes Since Last BoE Meeting


Data Review

  • GE Manufacturing PMI 58.3 vs. 59.2 Expected
  • GE Services PMI 53.5 vs. 54.3 Expected
  • GE Composite PMI 55.1 vs. 56.3 Expected
  • EZ Manufacturing PMI 56.8 vs. 57.2 Expected
  • EZ Services PMI 55.4 vs. 55.4 Expected
  • EZ Composite PMI 55.8 vs. 56.2 Expected
  • GE IFO Business Climate 116.0 vs. 114.9 Expected
  • GE IFO Expectations 107.3 vs. 106.5 Expected
  • GE IFO Current Assessment 125.4 vs. 123.8 Expected
  • GE GfK Consumer Confidence Survey 10.8 vs. 10.6 Expected
  • EZ Economic Confidence 111.2 vs. 110.8 Expected
  • EZ Business Climate Indicator 1.05 vs. 1.14 Expected
  • EZ Industrial Confidence 4.5 vs. 4.4 Expected
  • EZ Services Confidence 14.1 vs. 13.4 Expected
  • EZ Consumer Confidence -1.7 vs. -1.7 Expected
  • GE CPI 0.4% vs. 0.2% Expected

Data Preview

  • EZ Unemployment Rate and CPI Estimate- Better than expected GE CPI data offset by weaker FR CPI data
  • GE Unemployment Change and Unemployment Claims, GE and EZ Manufacturing PMI- Potential for upside surprise given Rate of private sector employment accelerated slightly and remained historically sharp
  • EZ GDP- German and French GDP released after EZ data so no prediction
  • GE and EZ PMI Services and Composite PMI Revisions- Revisions to PMI are difficult to predict but if changes are made, will be market moving
  • Retail Sales- Will update after GE Retail sales but weaker FR spending

Key Levels - EUR/USD

  • Support 1.1600
  • Resistance 1.1800

With all of these big events on the calendar, the euro could end up taking a backseat. While the latest Eurozone economic reports were mixed (the PMIs were down but German IFO increased), the currency is supported by the European Central Bank’s hawkishness. In the coming week, Eurozone inflation, GDP and retail sales numbers are scheduled for release. Traders will be looking for these numbers to validate the ECB’s views but these reports will be less market moving than many of the other pieces of data and event risks on this week’s calendar. The most important thing to keep in mind is that the market is bullish euros so if the RBA disappoints or NZ data is soft, we could see strong gains in EUR/AUD and EUR/NZD. EUR/GBP will be driven by the BoE and UK PMIs, while the EUR/USD is likely to remain firm ahead of the U.S. non-farm payrolls report unless there’s a major upside surprise in ADP or non-manufacturing ISM. 

After years of slumber, EURCHF woke up this week, staging multi month highs and taking out the 1.1400 level for the first time since its crash more than 2 years ago. The weakness in the franc is driven by fundamental factors as the market is coming to a realization that central bank policy divergence is starting to kick into high gear. The ECB is clearly turning away from quantitative easing as growth in the region improves while the SNB will remain resolutely dovish keeping its interest rates at -75bp for now. As yields in German bunds rise the EURCHF pair is likely to rise with them. The pair still remains well below the 1.2000 ceiling set by the SNB in 2014 and therefore has plenty of upside left, especially if growth in the EZ region accelerates. After years of stagnant price action, EURCHF could become an active pair again as macro players and short term specs become attracted to the new volatility, especially because it is thematically based rather than just a function of short term central bank manipulation.


Data Review


  • CPI QoQ 0.2% vs. 0.4% Expected
  • CPI YoY 1.9% vs. 2.2% Expected
  • PPI QoQ 0.5% vs. 0.5% Previous
  • PPI YoY 1.7% vs. 1.3% Expected

New Zealand

  • Trade Balance 242m vs. 250m Expected


  • Wholesale Sales 0.9% vs. 0.5% Expected
  • GDP 0.6% vs. 0.2% Expected

Data Preview


  • CH Manufacturing and Non-Manufacturing PMI- Chinese data is market moving but hard to call
  • AiG PMI Manufacturing- Potential for downside surprise given Strong AUD and cautious RBA signals weaker data
  • RBA Cash Rate Target- RBA likely to be negative AUD but rate decisions best traded reactively
  • PMI Services and Trade Balance- Will have to see PMI manufacturing
  • Retail Sales - Will have to see PMI services

New Zealand

  • Employment Report- Gradual slowdown in Manpower employment index and small dip in PMI components


  • International Merchandise Trade, IVEY PMI and Employment Report- CAD employment is very market moving but IVEY released after labor data so difficult to predict

Key Levels

  • Support AUD .7900 CAD 1.2200 NZD .7300
  • Resistance AUD .8150 CAD 1.2700 NZD .7500

The Australian, New Zealand and Canadian dollars climbed to multi-year highs this past week but the rejection of 80 cents for AUD/USD and NZD/USD’s struggle near 75 cents screams of a top. Whether that happens or not should hinge on upcoming economic reports and rate decision but we’ve seen how AUD and NZD can defy fundamentals in favour of carryFor example, it wasn’t until the U.S. dollar rebounded on Thursday did AUD/USD and NZD/USD finally peak. Weaker consumer price growth in Australia and cautious comments from Reserve Bank Governor Lowe failed to hurt Aussie. The same is true of a herd disease in New Zealand and the previous trend of softer data. AUD and NZD climbed to 2-year highs despite these negative developments. However, the Reserve Bank could have tougher words for the market when they meet this week. We know that RBA Governor Lowe is worried about wage growth and the strong currency so there’s absolutely no reason to expect that they would say anything to suggest that a rate hike is on the table. Just this past week he said Australia doesn’t “need to move in lockstep with global peers” because did not ease as much. With that in mind, the labor market is very strong, business confidence and activity is up thanks in part to the increase in Chinese demand last month. If the RBA emphasizes the negative impact of the strong currency and low inflation, AUD/USD could extend its losses below 79 cents. However in an environment of a falling USD and rising AUD, if they keep their statement virtually unchanged, the preservation of yield could be enough to lift the Australian dollar. Aside from the RBA rate decision, manufacturing and service sector PMI numbers are scheduled for release along with retail sales, the trade balance and Chinese PMIs. For the New Zealand dollar, another dairy auction and the second quarter employment report top the calendar. We are looking for relatively subdued numbers that should weigh on the currency but the New Zealand dollar will also be affected by yield and risk appetite. The labor market is expected to have suffered from the recent weakness in business activity and decline in dairy prices with the risk validated by a gradual slowdown in the Manpower employment. 

AU Economy - Changes Since Last RBA Meeting

After 4 weeks of persistent strength, the Canadian dollar continued to extend its gains against the U.S. dollar. On Thursday it seemed as if a bottom could be in place for USD/CAD but stronger than expected GDP growth in the month of May renewed the uptrend. The economy expanded by 0.6%, 3 times more than expected. This acceleration drove the year over year rate from 3.3% to 4.6%, the strongest in almost 17 years. So while it may be tempting to pick a bottom in USD/CAD, this pace of growth indicates that there is room to raise interest rates. Earlier in the week, there were reports that Prime Minister Trudeau is unhappy about the central bank’s latest rate hike. Whether it's true or not the uptrend in oil prices and Canadian fundamentals justifies the central bank’s decision. However, for an export dependent nation like Canada the 10% rise in the currency over the past 2 months will eventually catch up to the economy and in turn the loonie. At some point, the data improvements will turn into data disappointments and that could start with this week’s Canadian employment report as a slowdown in the labour market is expected after 2 very strong months of job growth. 

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