Will new quarter, cenbank detail spur volatility

TReport Prepared by Ahmed

Shibley

he U.S. Dollar put in a precipitous decline this week, setting yet another new low as price action fell below the election night swing from November of last year. This means that we’re now looking at an -8% decline in the Greenback, peakto-trough, from the 2017 high to this morning’s low; and surprisingly, the Federal Reserve has remained persistently hawkish throughout this period as we’ve now seen three rate hikes in the past seven months. But this recent decline probably has less to do with the Fed and more to do with what else is happening in U.S. economic data relative to the rest of the world; which has opened the possibility of the European Central Bank moving closer to exiting their stimulus program, or perhaps even the prospect of an actual rate hike from the Bank of England in the U.K.

This theme really came to life on Tuesday and Wednesday of this week when the who’s who of global Central Banks met in Europe. While Janet Yellen echoed the cautiously-confident tone that she’s become so wellknown for, Mario Draghi delivered a speech that many market participants construed in a hawkish light: The Euro jumped-higher and continued runningup for most of the week, and the decline in the Dollar really began to show as DXY plummeted down to fresh eight-month lows. The day after Mr. Draghi’s comments we heard that an ‘unnamed ECB source’ indicated that the speech was ‘misjudged’, as the intent was to be more balanced in nature rather than signaling any potential tightening of policy. But by then, it was too late, and markets seemed to care little about this anonymous source’s opinion as Euro strength and Dollar weakness just continued to run after a momentary dip in both trends were soundly pounced upon.

The bane of the Dollar appears to be the softening in U.S. data that’s been gaining prominence since mid-March, right around the Fed’s previous rate hike. The Citi Economic Surprise Index measures where U.S. data prints relative to expectations, with higher values indicating stronger data relative to lower expectations, and the index was at 57.9 on March 15th. Since then, the index has cratered lower and just last week we saw this indicator hit a five-year low below -70.0, its weakest level since August of 2011. So, while the Fed remains really confident about near-term conditions and economic outlook, the data simply has not supported that feel-good euphoria and, frankly, it has not kept pace with stronger expectations for growth and inflation in Europe. This has filtered into spot rates, and is playing a key role in the Dollar’s downtrend as the currency is down by almost 1/12th of its value so far in 2017, even with the Federal Reserve maintaining a hawkish outlook, looking to continue with rate hikes.

On that topic of data - next week is a big one for the Greenback, despite the holiday-shortened backdrop in U.S. markets with Tuesday being Independence Day. Monday is a halfday across U.S. equities exchanges, and the ISM Manufacturing Survey is released at 10 AM ET. Matters thicken considerably on Wednesday afternoon, as we get the meeting minutes from the Fed’s rate decision in midJune, and this should be very interesting considering the topics of balance sheet reduction along with the four hikes that the Fed says they are expecting out to the end of 2018. And then on Friday, we get the ‘tip of the spear’ on the data front with the release of NonFarm Payrolls for the month of June. The current expectation is for +180k jobs to have been added in the most recently completed month, an improvement from the +147k print that was seen for May.

For the British Pound, last week was dominated by comments from Bank of England Governor Mark Carney, whose remark that “some removal of monetary stimulus is likely to become necessary” was interpreted as bringing closer an increase in UK interest rates.

Speech

What took the markets by surprise was that just the week before a speech by him was interpreted as being dovish. And to add to the confusion there were comments from the central bank’s chief economist in between, which appeared to contradict his boss’s first statement. In fact, as so often with central bankers, the explanation could be that Carney used rather careful language that some market analysts oversimplified.

He actually said that “some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC [the bank’s monetary policy committee] continues to lessen and the policy decision accordingly becomes more conventional.”

The trade-off he was talking about was presumably the one between slow growth and high inflation, which makes UK monetary policy decisions particularly difficult. So essentially he was saying only that if growth picks up and inflation fails to come down a decision to raise rates will become easier. If the markets were to begin to understand that and reinterpret Carney’s comments, it’s quite possible that the Pound will ease back again after the gains it made in their wake. It’s also important to note that the 1.3000 to 1.3030 level has proved to be strong resistance for GBPUSD.

Mario Draghi of the European Central Bank, the Bank of Canada’s Stephen Poloz and even the Brexittossed Bank of England’s Mark Carney all sang variations on the same theme. And that theme was that ultraaccommodative monetary policy’s sell-by date is very nearly here.

For the Aussie market then, there’s only one question in hand as a new week starts. Will the Reserve Bank of Australia swell this chorus?

The RBA will give us its July monetary policy decision on Tuesday, when the Official Cash Rate is firmly expected to remain at its 1.50% record low. Assuming it does, all will hinge on what the RBA says to the market in the aftermath.

AUD/USD has reportedly risen in the last few days precisely on the expectation that RBA Governor Philip Lowe will indeed join his international colleagues and warn that ultra-low rates’ best days are behind them.

But are the markets getting ahead of themselves here? It may yet be too early for a credible shift in the neutral tone that the RBA struck in June. It’s surely arguable that not enough has changed on the inflation or likely-growth fronts since to warrant any change.

Rate

Moreover, bets on any actual rate increases from the RBA remain long shots. According to index provider ASX, futures markets do not yet fully price a rise at any meeting between now and November 2018. That said, the yield curve now implied by 30-day cash-rate futures suggests somewhat higher rates than it did at the start of last week; just not a full, quarter percentage point rise.

Clearly if there is any shift in RBA rhetoric then it will have to be in the hawkish direction and, if it is, then the Aussie can expect the sort of support which the Euro, British Pound and Canadian Dollar enjoyed last week.

However, on the basis that it’s too soon to expect a definitive tonal shift, those buying AUD/USD in expectation of one could be disappointed. It’s a bearish call for AUD/USD this week.

Gold prices were down this week with the precious metal off by 0.98% to trade at 1243 ahead of the New York close on Friday. The losses come alongside weakness in broader equity markets with all three major US indices flat / lower on the week. However, with concerns over a broader shift in the tone of global central bankers and growing doubts regarding the future of fiscal policy, gold is caught between a rock and hard place with the technical outlook also highlighting a near-term consolidation range.

Rhetoric from the FOMC, ECB, BoE & BOC continued to weigh bullion as concerns mounted that global central banks are becoming more inclined to scale back on their accommodative policy stance. The result has fueled a sell-off in bonds (rally in yields), putting pressure on non-yielding assets like gold.

Highlighting the economic docket next week are the U.S. ISM figures, FOMC minutes and the June NonFarm Payrolls report. With the Fed looking to begin offloading its massive $4.5 trillion balance sheet, U.S. data will need to continue to perform - as it stands markets are pricing just a 54% chance the central bank will hike in December. For gold, the outlook heading into the monthly open remains precarious with the decline now approaching broader up-trend support as sentiment begins to level off.

Crude oil prices may stage a larger recovery over the days ahead as data coming out of the U.S. Energy Information Administration (EIA) highlights the risk for a more meaningful shift in supply.

The EIA’s monthly update showed U.S. production narrowed to 9.08M b/d from 9.1M b/din March, with the slowdown led by a 5.8% contraction in the Gulf of Mexico. The recent downtick in U.S. output may keep oil afloat in July, but a broader look at the data set instills a long-term bearish outlook for energy prices especially as the Organization of the Petroleum Exporting Countries (OPEC) remains unwilling to implement deeper production cuts.

After bottoming out in 2008, crude oil outputs have increased at an exponential rate, with U.S. production moving back towards the fastest pace of growth since 1970. If the resurgence in shale persists, energy prices stand at risk of trending lower in the second-half of the year as the slowdown from 2015 largely dissipates. Near-term outlook for USOIL remains constructive, with the topside targets in focus as it extends the series of higher highs & lows from the previous week. The Relative Strength Index (RSI) also highlights the risk for a larger recovery as it bounces back from oversold territory and clears the bearish formation carried over from late-May. Keep in mind the broad outlook in weighed to the downside as USOIL preserves the downward trending channel from earlier this year, with the RSI reflecting a similar dynamic.

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