Dollar to clarify reversal ambitions, BoE ahead
This was a rather busy week for US drivers, with the bulk of attention being focused on the latter portion of the week. On Wednesday, we heard from the Federal Reserve for their July rate decision; and then a couple of pieces of high-impact data on Thursday and Friday kept the Greenback on the move. The net takeaway at this point has been another extension of USD-weakness as the currency crossed the 10% marker for its move-lower in 2017. After setting a fresh 14-year high on just the second day of trading in the New Year, bears have been in charge as USD is now sitting at fresh one-year lows while losing -10.2% of its value from that point to the low set after FOMC.
The big driver for this week seemed to emanate from the Federal Reserve’s statement accompanying the rate decision. There was no press conference, and no updated forecasts; but in the Fed’s statement the bank mentioned that balance sheet reduction may begin ‘relatively soon’. This was largely inferred to mean their next meeting on September 20-21, and while the Fed has said previously that they anticipate invoking balance sheet reduction while also continuing to normalize rates, markets don’t appear to be buying that thesis just yet. US data remains rather soft, and the Fed even voiced concern about lackluster inflation in that statement on Wednesday; and this makes for a difficult environment for tighter operating conditions, much less tightening on dual fronts with both higher rates and balance sheet reduction.
The current issue revolving around the Dollar’s price action is just how far it’s moved in 2017. As we remain pinned down near one-year lows, USD is oversold on a variety of metrics, and sentiment has posed a dramatic downshift in 2017 as speculators have abandoned the long-Dollar thesis that was so commonplace as we came into the year. This is relevant — because prices move based on supply and demand as opposed to directly responding to fundamentals. While fundamentals can drive supply and demand, a market that is light on supply because anyone that might want to sell is already short can be vulnerable to spikes-higher as positive data begins to show.
On that topic of data — we discussed this as we came into July and this theme is still very much alive: US data has been a large disappointment so far in 2017, and this, combined with the Fed’s focal shift towards the balance sheet — is likely the primary culprit for the aggressive move-lower in the Dollar. As we came into the year flying-higher on the back of the reflation trade, with the US Dollar setting a fresh 14-year high on the second day of trading, expectations for economic growth in the United States were continuing to improve. But the actual data that we’ve seen so far in 2017 has been largely a disappointment; and with expectations being cyclical in nature like many other market factors, outlooks around future data prints have been moving-lower in response, making it easier for positive data to show-up against a diminished range of expectations.
This week saw a quick blip of strength develop in the Dollar the morning after that rate decision; and this was on the back of the release of US Durable Goods numbers that came-in rather strong. But on Friday morning, a lackluster GDP release with some rather large revisions for prior quarters brought the bears back, and prices tumbled back-down towards that recently set low. Next week brings a few high-impact data points, two of which are expected to be very important: Tuesday morning brings year-over-year PCE up to the month of June, and Friday morning brings Non-Farm Payrolls for July. PCE (Personal Consumption Expenditure Price Index) is a key variable relevant to inflation, and this is the Federal Reserve’s preferred metric on the matter, while NFP represents a primary driver on the employment front. Inflation in particular has been a pain point for the US economy this year, so any signs of life on that front could be a big positive for the US Dollar. The downside with PCE is that it’s laggy, and the data that we’ll see next week will be for activity up to the end of June. But in the NFP report to be released on Friday morning, Average Hourly Earnings contained within the report will offer a more updated picture of inflationary pressure in the US economy, and this may even garner more attention than the actual headline print provided that the data shows within a reasonable range of the +175k expectation. Also on the calendar are Fed speeches from John Williams and Loretta Mester on Wednesday. Given the pensive nature of the Fed’s stance around the balance sheet, comments from either of these voting members can elicit volatility across the USD-spectrum.
The forecast for USD will be set to neutral for next week. While the down-trend is extremely attractive, the stretched nature of the move denotes caution for continuation approaches. The litmus to attract new sellers into the market is likely quite high, and with diminished expectations on the US data front, a ‘short squeeze’ may not be too far off in the distance.
The Bank of England’s monetary policy committee will likely leave its benchmark interest rate unchanged at 0.25% Thursday and make no changes to either its £435 billion asset-purchase program or its £10 billion corporatebond buying. However, the meeting could still have an impact on GBP/ USD and EUR/GBP.
The MPC is expected to vote 6-2 to leave the UK’s monetary settings where they are so the first risk is that more than two MPC members vote for a rate rise. The second is that the tone of the quarterly Inflation Report is hawkish and the third is that BoE Governor Mark Carney takes a hard line at his post-decision press conference.
This perhaps means that the principal risk for GBP traders is a stronger British Pound that reinforces the current upward trend in GBP/USD, caused largely by a weaker US Dollar.
AUD/USD stands at risk for a nearterm pullback as it initiates a bearish sequence, but the Reserve Bank of Australia’s (RBA) August 1 interest rate decision may trigger fresh yearly highs in the exchange rate should Governor Philip Lowe & Co. alter the course for monetary policy.
Even though the RBA is widely expected to keep the official cash rate at the record-low of 1.50%, the accompanying statement may boost the appeal of the Australian dollar if the central bank shows a greater willingness to move away from its easing-cycle. The RBA may highlight a hawkish outlook as the ‘Australian economy is expected to strengthen gradually, with the transition to lower levels of mining investment following the mining investment boom almost complete,’ and Governor Lowe and Co. may start to prepare Australian households and businesses for higher borrowing-costsas ‘the data available for the June quarter had generally been positive.’
In contrast, mixed data prints coming out of the US economy may continue to drag on the dollar as it tames expectations for three Fed rate-hikes in 2017. Even though the US Non-Farm Payrolls (NFP) report is expected to show the economy adding another 180K jobs in July, a downtick in Average Hourly Earnings may encourage the Federal Open Market Committee (FOMC) to retain the current stance throughout the remainder of the year as inflation continues to run below the 2% target. In turn, the bullish AUD/USD behavior may persist over the days ahead as Fed Fund Futures still highlight a 50% probability for a move in December.
Gold prices rallied for the third consecutive week with the precious metal rallying 1.9% to trade at 1268 ahead of the New York close on Friday. The advance comes alongside continued weakness in the greenback with the DXY trading at the yearly lows. Although our broader outlook on bullion remains unchanged, prices are at risk for a near-term correction as we head into the August open.
US 2Q GDP figures released on Friday showed the economy grew at an annualized pace of 2.6% q/q, slightly missing consensus, with the Core Personal Consumption Expenditure (PCE) topping expectations with a print of 0.9% q/q. The data did little to shift expectations for a December interest rate hike with markets still pricing a roughly 50/50 chance the Fed will hike again this year. News that North Korea has conducted yet another missile test spurred a late-week push higher in gold prices which stretched into near-term resistance just ahead of the European close.
This week was a week like no other for Crude Bulls as trading started with news out of St. Petersburg that OPEC had reached a further agreement to cut exports from Saudi Arabia (the defacto head of OPEC), the U.A.E. and Kuwait. Saudi also said they would look to ‘forcefully demand participation’ of compliance to the production curb deal that has been extended to March 2018. After briefly punching below Friday’s low on Monday morning, Crude Oil closed the trading day higher consecutively for the rest of the week until settling near $50/bbl. The total gain was nearly 9% on the week and the environment and sentiment picture (more below) seem to point to more gains to come. What a difference a week can make!
On Wednesday, news of falling US inventories that aligned with rising demand as evidenced by a 7.2m bbl inventory draw and a decline against other products such as distillate and gasoline touched an aggregate low not seen since early 2016 and helped to provide evidence that the supply glut is indeed shrinking. On an individual basis, Crude stockpiles fell to the lowest levels since January while the EIA shared that the demand for fuel had rising to the highest June level in a decade.
Two related currency markets worth watching in addition to crude oil is the US Dollar and the Canadian Dollar. The USD, which fell deeper this week to a new 14-month low after the Federal Reserve’s statement when they decided not to hike rates showed a likely preference for fewer rate hikes than previously expected is the pricing currency for Oil. Therefore, a weaker USD may provide a further boon to commodities, Oil included. The Canadian Dollar, which ended the week trading aggressively higher and the strongest relative G10 currency showed the seven straight month of GDP growth may also see marginal gains as Oil, a key export becomes more valuable and adds even more to GDP export value.
Combining the positive fundamental picture above with the chart below, and you may find further reason to anticipate further gains. The price of Crude Oil has recently broken above the top of a falling (bearish) price channel that has framed price action for most of 2017. Therefore, if the fundamental picture of rising demand and a weaker USD holds, we could see a move to the lower-$50s in WTI, and mid-$50s in Brent.
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