By Kathy Lien, Managing Director of FX Strategy for BK Asset Management
Summer must be here because it was an extremely quiet day in the forex market. Aside from the Canadian dollar’s big move on the back of stronger retail sales, the EUR/USD was confined to a 40-pip range, GBP/USD to a 30-pip range and USD/JPY to a 50-pip range. Normally we don’t see ranges this tight unless it’s a holiday and more typically in July and August. However with no U.S. major economic reports released Thursday, USD/JPY fluctuated in a tight range for most of the week as the market eyes Janet Yellen’s optimism with caution. Traders have been reluctant to expose themselves to big positions. The U.S. dollar saw very little change versus sterling, yen and the Swiss franc, appreciating slightly against the euro and Australian dollar but declined against the Canadian and New Zealand dollars. The mild uptick in jobless claims and leading indicators failed to have any impact on the greenback. Of the 2 Fed Presidents who spoke, Powell did not touch on monetary but Bullard (who is a nonvoter this year) felt the projected path of rates was unnecessarily aggressive. Nonetheless, USD/JPY traded with a negative bias for most of the day as the Yen benefitted from the Bank of Japan’s upgraded economic assessment and Treasury yields fluctuating between flat and negative. Markit Economics’ manufacturing- and service-sector PMI reports are scheduled for release Friday along with new home sales. Fed President Mester is also scheduled to speak and it is important to know that she is a hawk so USD/JPY could drift up to the top of its 111.78-110.85 range.
Thursday's two best-performing currencies were the Canadian and New Zealand dollars. A rebound in oil prices, uptick in Canadian rates and better-than-expected data forced USD/CAD to give up all of Wednesday’s gains. Consumer spending rose 0.8% in April with retail sales ex autos rising a whopping 1.5%. These numbers more than doubled expectations representing a strong recovery from the previous month, especially on a core-consumption basis. The Canadian dollar remains in play Friday with the consumer price report scheduled for release. Although economists are looking for slower price growth, the Bank of Canada’s hawkishness puts the risk to the upside. Ultimately, as long as USD/CAD holds below 1.34, the path of least resistance will be lower with a potential move down to 1.31. Oil prices would have to stabilize for that to happen and we think crude should find support near $40 a barrel.
As for the New Zealand dollar, it extended its post-RBNZ gains. The central bank left interest rates unchanged and rather than express concern about the recent rise in the currency, they said the “lower currency would help rebalance growth.” However after rising 4% vs. the USD since May, NZD only managed to rise 0.3% on Thursday as there’s significant resistance between 0.73 and 0.7350. Unlike NZD and CAD, AUD/USD fell for the fourth day in a row. With no Australian economic reports released overnight, the only drivers of AUD weakness were the marginal declines in iron ore and copper prices along with AUD/NZD selling. The recent decline in commodity prices combined with the rally in AUD/USD between May and June puts downside pressure on inflation, in effect cementing the RBA’s neutral bias. We expect AUD/USD to drift down to 75 cents and possibly even dip briefly below that level.
Meanwhile, investors refused to buy sterling as UK Prime Minister May’s fate looks more dismal by the day. Apparently members of the Democratic Unionist Party in Ireland refused to answer May’s calls for 36 hours. This is a reflection of how tense the negotiations have become, at times teetering on the brink of collapse with the DUP pushing for more funding — they are asking for as much as GBP 2billion in government spending on infrastructure and healthcare. May’s job is still at risk and for all of these reasons, we think GBP should be trading lower. Political troubles can translate into economic ones and between Brexit and the hung Parliament, we think it will be difficult for the Bank of England to raise interest rates this year.
Last but certainly not least, the euro traded slightly lower against the greenback Thursday ahead of Friday’s PMI reports (Manufacturing, Services And Composite). These are the most important pieces of data due for Eurozone this week and economists are leaning toward softer numbers. However even if the data is marginally weaker, the economy is improving. Moody’s will also update its Sovereign Debt rating for Germany and if there are any changes, it will be an upgrade, not a downgrade.