There is no trade call today because it is Monday and we wait for the market to reset into a clearer trading environment. Read through my 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. Yellen’s recent testimony has given bullish sentiment back to the dollar; she was optimistic on the outlook for US economy and reaffirmed that rate rises will begin this year.
EUR: The current bailout deal for Greece is being voted on by various European national parliaments. If the proposal is passed by all governments then it will look probable that Greece will be given the third bailout that they desperately need. At the recent ECB press conference Draghi did not cause any noteworthy moves in European assets as he reiterated that the QE program is going along as planned. The euro remains fundamentally weak and the EURUSD dropped after the Greek deal was announced as investors refocus on policy divergence between the ECB and the Fed.
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 bullish for the pound as it brings forward the timing for rate liftoff. Two of 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. Recent hawkish comments from Carney and MPC member Miles have boosted bullish sentiment in sterling. The recent jobs report shows the first increase in unemployment in 2 years which took a bit of the shine off the revelation that wage growth accelerated at the fastest pace in 5 years.
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 in recent weeks, currently at 6-year lows versus the greenback. Chinese growth will largely determine direction in the AUD in the medium-term. With the other commodity-linked currency’s central banks (BOC and RBNZ) cutting, it is likely that RBA may have to follow suit this year.
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 a 100% chance of a cut at the July 23rd meeting. Dairy prices have been declining for 18 consecutive weeks and recent CPI missed economists’ estimates.
CAD weakened significantly on July 15 when the BOC cut rates. This was only 50% expected by the markets, hence the abrupt move. Governor Poloz was also dovish. This has confirmed our bearish bias on CAD and we expect the currency to weaken against the USD and GBP over the medium-term. A further leg lower in WTI will add to bearish sentiment on the Canadian dollar.
JPY remains bearish due to QQE. Safe-haven flows caused by the Greek crisis have seen yen strengthen in recent weeks, but these have largely been retraced and did provide excellent chances to buy yen pairs at lower levels.The BOJ have revised down their forecasts for CPI in coming years and their next move may include an adjustment to their inflation goal and stimulus program.
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 likely a result of the SNB intervening and selling the 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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