FOMC, BoJ and UK GDP top busy docket
Report prepared by Ahmed Shibley
The US Dollar has advanced for five consecutive weeks — although the pace hardly resembles the unconstrained bull trend through the first quarter of 2015. Fundamental appeal for the Greenback is thawing just as the docket looks to deliver explosive event risk like the FOMC rate decision and 2Q US GDP update. The list of ground-shaking updates — such as the aforementioned — and hearty tab of slightly more terrestrial listings presents a high probability of exceptional volatility. However, those same erratic conditions can undermine the development of consistent trends. Will the headline-crowding local event risk align to the heavy drivers from abroad to provide a trend, or will there be so much conflict that any violent activity stays contained to its 18-month range?
Heading into the new trading week, it is immediately apparent that whether we are looking for scheduled motivation from the US or abroad to engage the Dollar; it is likely to come in the second half of the week. The bulk of the heaviest-hitting data, meetings and speeches are Wednesday or later. Top listing for the global financial media is Wednesday’s FOMC rate decision — yet I do not believe it carries the greatest market-moving potential of all the items. Monetary policy as a general theme is growing in prominence once again, and speculation surrounding the Fed’s path to normalization is intensifying — though perhaps not for the same reasons that we have seen in the past.
Through previous phases of Dollar advance (such as the 9 consecutive month rally through March 2015), much of the lift came through the competitive yield view of the US in contrast to its liquid counterparts. The probability that the Fed would lift rates — even if ‘gradual’ and from an effectively zero bound — appealed to investors that were facing alternatives destined for falling or negative rates. With a firm sense of FOMO (fear of missing out) driving investors to anything that provides even a marginal yield advantage, the general luster of rate hikes in the US shown bright. That appeal has faded over the past year with the chase for tepid returns cooling and the Fed having to push back its follow up to December, but there is still some speculative juice to this speculation given the dramatic contrast to the likes of the ECB, BoJ and PBoC.
There is little chance that the Fed hikes at this upcoming meeting with even the Fed Fund futures 10 percent probability looking generous. Where there is potential to ease dovish skepticism and lift the Dollar is through rhetoric that reinforces at least one hike in 2016 as December futures only place a move at 47 percent. Yet, what appetite to front-run some negligible increase to rates will pale in comparison to the appeal that arises from the sentiment that arises from the central bank merely feeling confident in keeping with a gradual pace of removing accommodation. In contrast to major counterparts who are still tempting ever more extreme and event experimental easing efforts to avert economic and financial trouble, any hawkish view poses a vote of stability that will draw safety and speculative interests alike.
Reinforce
The other high-profile data point on the US docket will be the 2Q GDP update. The forecast calls for a robust acceleration in pace to 2.6 percent from the stifled 1.1 percent clip in the opening quarter. That would reinforce rate forecasts and the draw of a stable draw for global capital. It may also set the bar high and the buoyancy of optimism in this regard could be significantly undermined by a substantial miss. That being said, the important events from global counterparts’ dockets may buffer and even exaggerate the Dollar’s appeal. A weak UK 2Q GDP reading would speak to a weak foundation even before Brexit. The Eurozone 2Q GDP stats and ECB bank stress test results face growing fear over Euro-area stability. And, the BoJ is under pressure to pursue deeper accommodation to match the government.
The British Pound finished the week almost exactly unchanged against the Dollar despite clear disappointments in UK economic data. A busy economic calendar in the days ahead could nonetheless have a lasting impact on trader sentiment, and the stakes are high heading into a critical Bank of England interest rate decision in two weeks’ time.
The upcoming release of UK Q2 Gross Domestic Product growth numbers will give investors a close look at the economy’s relative strength heading into the UK Referendum. And though we will have to wait some time before we see the ultimate impact of the so-called “Brexit” on GDP, any signs the economy was faltering before the vote would almost certainly worsen outlook after the fact. Recent industry surveys suggested the UK economy contracted at its steepest pace since the Global Financial Crisis through July. The disappointing figures forced an immediately sell-off in the GBP, and interest rate traders now predict a near 90 percent chance that the Bank of England will cut interest rates at their August 4 meeting.
Suffice it to say economic sentiment remains gloomy for the world’s sixthlargest economy. And yet by the same token the weight of expectations on future economic data is so low that even a small positive surprise could force an important British Pound relief rally. Recent CFTC Commitment of Traders data shows large speculators are now at their most net-short GBP/USD since the week of June 3, 2013.
Clearly the GBP remains in a strong downtrend, and yet it is demonstrably true that extremely one-sided short positioning raises the risk of sharp shortcovering rallies. We need only look to the British Pound’s fast rally on July 20 following unexpected comments out of Bank of England voting member Kristin Forbes. Forbes stood in sharp contrast to BoE Governor Mark Carney as she suggested the central bank’s Monetary Policy Committee should not cut interest rates until there is more evidence of a post-Brexit economic slowdown. It is certainly newsworthy that a voting member would so candidly break rank and speak out against rate cuts. Yet her words alone do little to change broader outlook for the future of Bank of England policy, and the yield-sensitive British Pound now trades almost exactly where it stood before she made such remarks.
Traders should thus brace for British Pound volatility as any surprises out of GDP figures, and ultimately the focus remains on whether the Bank of England will move to cut interest rates and ease policy at their August meeting. The broad trend favors further British Pound weakness and the macroeconomic backdrop supports calls for GBP declines. Yet the risk is clear — extremely onesided positions raise the risk of sharp relief rallies. Caution is advised in trading the Sterling given the clear uncertainty ahead.
The diverging paths between the Federal Open Market Committee (FOMC) and the Bank of Japan (BoJ) may encourage market participants to adopt a long-term bullish bias for USD/ JPY, but the fresh batch of central bank rhetoric may heavily impact the nearterm outlook should the policy statements show a greater willingness to retain the status quo.
Even though the advance 2Q U.S. Gross Domestic Product (GDP) report is anticipated to show a meaningful pickup in economic activity, forecasts for a slowdown in the core Personal Consumption Expenditure (PCE), the Fed’s preferred gauge for price growth, may push the committee to buy more time as officials argue market-based measures of inflation compensation weak, while ‘most survey-based measures of longer-term inflation expectations are little changed.’ In turn, another unanimous vote to retain the current policy may produce headwinds for the greenback, with the dollar-yen at risk of giving back the advance from earlier this month as market participants continue to push out bets for the next Fed rate-hike.
At the same time, the BoJ may stick to the sidelines as Prime Minister Shinzo Abe pledges to unveil a ‘bold’ fiscal stimulus package to encourage a stronger recovery, and Governor Haruhiko Kuroda may continue to defy market expectations as the central bank head appears to be ruling out the possibility for ‘helicopter money.’ With that said, the BoJ may keep the door open to further embark on its easing cycle, but more of the same from the central bank may derail speculation for more nonstandard measures as the board continues to monitor the impact of the negative-interest rate policy (NIRP). Moreover, the weakening outlook for the global economy may spur greater demand for the Yen as Japan’s Balance of Payments (BoP) report is anticipated to show the Trade Balance returning to a surplus in June, and USD/JPY may largely conform to the downward trend from earlier this year as the region turns to its historical role as a net-lender to the rest of the world.
Gold prices are weaker for a second consecutive week with the precious metal off by more than 1% ahead of the New York close on Friday. The losses come alongside a quiet week off economic data with equity markets on a slow grind higher into the close of the week. The outlook for gold remains broadly unchanged and heading into next week, a near-term recovery may offer another opportunity to take prices lower.
Anticipated
All eyes will once again fall on the FOMC next week with the central bank interest rate decision slated for Wednesday. Fed Fund Futures are showing the first material expectation (>50%) for a rate hike to be in March 2017 and although no change is anticipated tomorrow, traders will be looking for any changes to the policy statement / vote count that could suggest the committee may look to hike rates at the next quarterly monetary policy meeting on September 21st. Expectations for higher interest rates will tend to weigh on gold which does not pay a dividend, and with markets more-or-less on a steady footing, the near-term outlook for bullion prices remains vulnerable.
In addition to FOMC, the advanced read on U.S. 2Q GDP on Friday may spur added volatility in gold prices. Consensus estimates are calling for an annualized print of 2.6% q/q, up from just 1.1% q/q with personal consumption expected come in at 4.1%, up from 1.5%. We’ll want to keep a close eye on the core personal consumption expenditure (PCE) — which is the Fed’s preferred gauge on inflation — with estimates calling for a 0.3% decline to 1.7% q/q. With inflation continuing to be the laggard of the Fed’s dual mandate, a weaker-thanexpected read could put a near-term floor under gold prices as interest rate expectations are pushed out further.
Gold prices are weaker for a second consecutive week with the precious metal off by more than 1% ahead of the New York close on Friday. The losses come alongside a quiet week off economic data with equity markets on a slow grind higher into the close of the week. The outlook for gold remains broadly unchanged and heading into next week, a near-term recovery may offer another opportunity to take prices lower.
All eyes will once again fall on the FOMC next week with the central bank interest rate decision slated for Wednesday. Fed Fund Futures are showing the first material expectation (>50%) for a rate hike to be in March 2017 and although no change is anticipated tomorrow, traders will be looking for any changes to the policy statement / vote count that could suggest the committee may look to hike rates at the next quarterly monetary policy meeting on September 21st. Expectations for higher interest rates will tend to weigh on gold which does not pay a dividend, and with markets more-or-less on a steady footing, the near-term outlook for bullion prices remains vulnerable.
In addition to FOMC, the advanced read on U.S. 2Q GDP on Friday may spur added volatility in gold prices. Consensus estimates are calling for an annualized print of 2.6% q/q, up from just 1.1% q/q with personal consumption expected come in at 4.1%, up from 1.5%. We’ll want to keep a close eye on the core personal consumption expenditure (PCE) -which is the Fed’s preferred gauge on inflation- with estimates calling for a 0.3% decline to 1.7% q/q. With inflation continuing to be the laggard of the Fed’s dual mandate, a weaker-thanexpected read could put a near-term floor under gold prices as interest rate expectations are pushed out further.
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