Dollar, euro policies diverge, eyes on BoE, ECB

The US Dollar regained upward momentum last week, as expected. The currency emerged from a week loaded with high profile event risk with the strongest advance since late April. A hawkish monetary policy announcement from the Federal Reserve and a decidedly dovish one from the ECB did most of the work. The latter sank the EUR/USD exchange rate, which echoed as broader strength for the US unit. The docket thins out in the week ahead, with Friday’s release of June PMI surveys amounting to the only truly eye-catching bit of economic data. That puts the spotlight on a generous offering of commentary from Federal Reserve officials. A firmly hawkish narrative that reinforces the message from last week’s FOMC meeting might help reinforce an upside bias. Simmering trade war worries might re-emerge as well. The markets are yet to reckon with deepening fissures between the world’s top economies seen at the G7 leaders’ summit as well as growing friction between the US and China. Investors were too taken with immediate concerns – the Trump/Kim summit, policy calls from the FOMC and ECB – to digest the potential risks fully. The time to do so may be at hand. The White House seems intent on pushing ahead with trying to bully its way to better trade arrangements. The objects of its assault seem increasingly united in pushing back however, coordinating efforts and preparing biting retaliatory measures. That sets the stage for a trade spat that might substantially disrupt critical supply chains and hurt global growth, triggering risk-off liquidation. If such a move were to gain tangible momentum, the US Dollar may enjoy another sharp push upward. While markets would probably mark down the scope for Fed tightening against the backdrop of souring sentiment, traders primarily concerned with capital preservation are unlikely to be deterred as the greenback’s unrivaled liquidity revives its haven appeal. Looking at an average performance of the Japanese Yen against its major peers, the currency experienced a volatile week but was on course to finish it mostly little changed. It first fell as optimism ahead of the Trump/ Kim summit lifted sentiment. However, it found itself rising in the aftermath of the Fed and ECB rate decisions later on. However, its performance towards the end of last week could be a prelude to what is in store next. The Bank of Japan rate decision helped send the Yen cautiously lower, but a deterioration in sentiment on trade war fears beforehand was driving some Asian shares down. During the former, the central bank did not have much to offer as rates were left unchanged and they continued to reiterate the status quo. Speaking off, the upcoming Japanese inflation report is unlikely to generate much Yen volatility. In general, local economic data tends to have a limited impact on the unit given its relatively minor implications for monetary policy. The one exception is what the BoJ is trying to bolster, CPI data. Even then, Japan’s May inflation data on the 21st is expected to remain mostly in line with April’s measurements and below target. Thus the focus for the anti-risk Japanese unit ahead will arguably be risk trends as they were towards the end of last week. So what happened there? Reports crossed the wires that US President Donald Trump approved tariffs on $50 billion of Chinese goods. Not surprisingly, China was reported readying up to retaliate. Meanwhile, Mexico was mulling tariffs on US corn and soy. Asian stocks declined as the Yen rose. With the Fed, ECB and BoJ now behind us, the markets have to keep settling with an uncertain reality around global trade tensions which are still heightened. Last week, we also had the G7 leaders summit where Mr. Trump deepened a rift between the US and its major allies. This opened the door for further retaliation and that is what we saw indeed. Keep in mind that earlier this month, China threatened to withdraw ‘all’ commitments in talks with the US on trade such as finding ways to reduce its surplus with them. As such, brewing trade tensions between the US, its allies and China paves the way for sentiment to continue deteriorating. With that in mind, the anti-risk Japanese Yen is likely to appreciate ahead and the fundamental forecast will have to be bullish. The Australian Dollar faces a lack of major, first-tier domestic economic data in the coming week and, given that last week’s full calendar saw AUD/USD appreciably lower, it might be reasonable to assume that a sparser calendar might bring some reprieve. For, to be sure, last week was rough on the currency. RBA Governor Philip Lowe sounded once again like a man in absolutely no hurry to raise interest rates when he spoke in Melbourne. He praised the economy’s strong employment record and lauded rising business investment. However, he also lamented the paucity of wage settlements and longed aloud for wage gains of 3%. With inflation stuck at 1.9% corporate Australia seems unlikely to offer such largesse. Official Australian employment data were mixed. Overall job creation missed forecasts in May and was dominated by part-time hiring gains, even as the unemployment rate fell. The coming week won’t bring anything of comparable importance to the data table. Investors will get a look at the minutes of the last RBA policy meeting but, given that Lowe has already spoken since, these seem unlikely to add much to what’s already known –that the record low, 1.50% Official Cash Rate won’t be going anywhere soon. And that means that the Aussie is likely to remain embattled even if the data flow is light. The contrast between the RBA’s attitude and that of the US Federal Reserve remains very stark. The Fed hiked rates last week and, as long as the data give it the leeway, seems set to do so again this year at least once and probably twice. Given that it’s hard to get too bullish about the AUD/USD backdrop. Last week’s rate move took the Fed Funds target rate band wholly above the OCR for the first time since the financial crisis and the spread between the two seems all-too likely to widen further in the US Dollar’s favor. So much for interest rate differentials, AUD/USD is also under a bit of technical pressure thanks to bulls’ failure to build on June 6’s peaks. Of course, the US Dollar might retrace too, particularly if global trade war worries are stoked by more tariff threats from the White House. Gold prices are taking a hit as we move towards the close of this week, currently down -1.89% so far on the day and -2.35% from the high set just ahead of Thursday’s ECB rate decision. While Gold prices held support fairly well through the Fed’s rate hike on Wednesday, the ECB meeting the following morning produced considerable US Dollar strength as the ECB announced stimulus-taper in a very dovish manner. As rate expectations out of Europe fell, the Dollar ran-higher and this provided a bit of pressure to Gold prices through the latterportion of Thursday trade. It was shortly after the US open this morning that the selling really got underway, however, and Gold fell down to a fresh 2018 low, finding a bit of support just north of $1,275. OPEC’s 174th ordinary meeting is set to take place on June 22nd with the JMMC scheduled to meet the day before, while OPEC/non-OPEC ministers are due to meet on the 23rd. As we head to the meeting, expectations are for a relaxing of the current oil supply quota’s, which has been increasingly suggested by oil kingpins Saudi Arabia and Russia that the supply switch has been turned on. Both Saudi Arabia and Russia look to maintain market stability amid possible supply shocks from rapidly declining production from Venezuela and potential production losses from Iran (following US withdrawal from nuclear deal), while demand growth remains robust as evidenced by reports from the EIA, IEA and OPEC. Additionally, compliance among OPEC members is over 160%, largely due to declining Venezuelan production.