As usual for Monday price action is light as we wait for global participants to re-enter the markets. Read through mu Currencies Update in order to prepare for the upcoming week.
The USD remains the strongest currency in the longer term. The market is expecting the Fed to raise rates around September. Recent NFP readings have been positive in terms of jobs added. However the report for June showed no growth in Average Hourly Earnings, which is negative for the US economy. Overall, core inflation has been trending higher. Although we expect bullish sentiment on the dollar to remain in the near term, it is near its long-term highs against many counterparts and therefore may be susceptible to pullbacks. Such pullbacks will likely provide buying opportunities. The recent FOMC statement showed the Fed are on track to raise rates in the context of an improving economy. If the market or the Fed see a deterioration of the Greece situation as a threat to global financial stability, then we may see rate hike expectations pushed back.
EUR: Talks regarding Greece’s new bailout proposal continue to dominate any euro-related news. The Eurogroup have given Greece until Wednesday, July 15 to enact fiscal reforms. Already a fundamentally weak currency due to extremely loose monetary policy, we are waiting for the Greek situation to be resolved one way or another before assessing medium-term direction. An exit by Greece from the Eurozone will see selling in euro whereas a sustainable resolution will likely see a relief rally.
GBP is looking at a rate hike around the middle of 2016 and is therefore a fundamentally bullish currency in the long term. The latest jobs numbers showed much better than expected average earnings figures and this is very bullish for the pound as it brings forward the timing for rate liftoff. Two of the nine MPC members are close to voting for a rate increase. GBP has had a strong rally over the past several months and is currently near long term highs against most counterparts. Barclays forecast the BOE to hike rates in Q1. The recent budget update has caused the market to become cautious about buying pounds as the spending cuts are thought to translate into lesser consumer demand, therefore lower inflation and potentially later rate hikes. We are looking out for any comments from BOE officials regarding the actual effect of the budget on monetary policy.
AUD: Low commodity prices and a slowdown in China has put bearish pressure on the AUD. Overall the bias for AUD is on the bearish side, until we see more data. The resumption of the downtrend in base metals, namely iron ore, has seen AUD take another leg lower, currently at 6-year lows versus the greenback.
NZD has a new official cash rate of 3.25% after the RBNZ cut rates on June 11. The Bank has left the door open for further easing and as such the Kiwi dollar is a bearish currency in the medium term. The recent GDP reading showed a huge miss and this adds weight to the chance of another rate cut, with some banks calling for two more cuts in 2015. Kiwi is at multi-year lows. Credit Suisse’s OIS market is pricing an 92% chance of a cut at the July 23rd meeting. Dairy prices have been declining for 16 consecutive weeks.
CAD has become a more bearish currency since the poor GDP reading for April, which followed on from the poor Q1 figures – which collectively show four months’ of contraction. Approximately 1/3rd to half of analysts are expecting a cut at the meeting on Wednesday, July 15. The OIS is pricing a 35% chance of a cut at that meeting. A nuclear deal with Iran may see oil supply expectations increase which will pressure the price of WTI and correspondingly, CAD.
JPY remains bearish due to QQE. Safe-haven flows caused by the Greek crisis have seen yen strengthen in recent weeks. USDJPY was over 500 pips off this year’s highs as of early July. The Greek situation will direct the price of yen in the near term.
CHF is fundamentally a weaker currency given the SNB’s negative interest rates. The franc has seen some bouts of strength in recent weeks on safe-have flows due to Greece, but has also seen aggressive and sudden weakening which is highly likely a result of the SNB intervening to weaken their currency. CHF often will take direction from the EUR with which its correlation over the last 50 trading days is approximately 75%.
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