By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
- Will August be Another Great Month for the Dollar?
- Euro: No Syriza Party Referendum this Weekend
- GBP: Historic Week Ahead for UK – Super Thursday
- No Love for NZD and AUD
- NZD Drops 1%
- CAD Hit Hard by Persistent Oil Decline
Will August be Another Great Month for the Dollar?
July was a great month for the U.S. dollar and a tough month for other major currencies. The greenback increased in value against many of its global counterparts, hitting multi-year highs in the process. At month's end as investors look forward to August, everyone is wondering whether the dollar will have enough momentum to charge ahead. August is traditionally one of quietest months in the financial markets with traders around the world taking off for their summer holidays. Volume declines and liquidity decreases, which in some cases can mean consolidation and in others, continuation. For the forex market, August is not always a month of consolidation. In 2014, for example, EUR/USD hit year-to-date lows on a weekly basis in August while in 2012, it reversed violently, rising close to 400 pips. 2013 and 2011 were years of consolidation. For 2015, we expect lower liquidity to translate into greater volatility for the currency market, starting….next week.
With three monetary policy meetings, three employment reports, Chinese Data, PMI/ISMs and a Dairy Auction on the calendar, Forex will be the market to trade next week. The dollar dictated the direction for all currencies this past week, but going forward, relative growth and monetary-policy divergence will return to focus. We anticipate an extremely active and volatile week with developments that could set the trend for days to weeks to come. The action heats up with the official Chinese PMI reports followed by revisions to Eurozone PMIs, the RBA rate decision, Bank of England meeting and US non-farm payrolls. Of course there’s a long list of other important economic reports that are also due for release but these are the most important events on the calendar and we’ll discuss the other reports later in this note.
Given how far the dollar has run in the past few weeks, unambiguously positive data is needed to drive the greenback higher. For the U.S. the focus will be on jobs. The Federal Reserve made it clear that it wants to see more improvement in job growth before pulling the trigger on tightening. Economists are looking for payrolls growth to hold steady around 225K and that will be good enough. As long as there aren’t significant misses in any of the underlying components, which includes an increase in average hourly earnings, the dollar could hold onto its gains. However if wage growth slows, the unemployment rate rises or payrolls increase by less than 200K, then the greenback is in trouble.
Euro: No Syriza Party Referendum this Weekend
Of all the major economies, the Eurozone has the least market-moving economic reports on the calendar. PMI revisions and German manufacturing data are the only items scheduled for release. However that does not mean that the EUR/USD isn’t in play. In fact between all the U.S. economic reports and the ongoing focus on Greece, euro will see just as much as volatility as the other major currencies. Originally Greece was scheduled to hold a party referendum this weekend as a way to challenge the dissenters but the vote has now been scrapped, which means that it won’t be a weekend of uncertainty for the euro. However August is a crucial month for Greece and major progress needs to be made in the talks to avoid a Grexit. As it stands, Greece does not quality for IMF relief because of its high debt levels and lackluster reforms. The IMF wants debt relief and so far we haven’t heard much from the Germans on their willingness to ease Greece’s burdens. Meanwhile investors shrugged off weaker economic reports as the removal of the referendum risk this weekend allowed investors to breathe a sigh of relief. While Eurozone core CPI rose more than expected in July, German retail sales dropped a whopping 2.3% in June as the Eurozone unemployment rate ticked up to 11.1%.
GBP: Historic Week Ahead for UK – Super Thursday
Next week is a historic week for the British pound because for the first time ever, the Bank of England will deliver its monetary policy announcement, release the minutes and its Quarterly Inflation Report at the same time on “Super Thursday”. Forty five minutes later, BoE Governor Carney will hold a press conference similar to the one that ECB President Draghi holds after his meetings. This is part of Carney’s goal to increase the transparency for the BoE but for the forex market and will mean heightened volatility for the currency. In the past we had to wait 2 weeks for the minutes to be released but now we will know immediately how many members voted for or against the move. Sterling will be in center focus next week beginning as early as Monday with the PMI manufacturing report scheduled for release. Investors expect a hawkish monetary policy announcement with more than 1 policymaker voting against the majority. How aggressively they position for that will be determined by the PMI manufacturing- and service-sector reports released before the meeting. This glut of data and event risk will make for a very volatile week for sterling and given recent comments from U.K. policymakers, we believe that the risk will be to the upside for the pound.
No Love for NZD and AUD
The commodity currencies continued to extend their losses with the Australian dollar falling to a fresh 6-year low and the New Zealand dollar closing on a multi-year low. Investors are nervous about all of the major event risks next week and Friday’s price action indicates that they are positioning for softer Chinese data. A number of Chinese economic reports are scheduled for release – official and private. Earlier this month, Caixin reported a surprise decline in manufacturing activity that refuted all of the “better” official data from the government. On Saturday, China will release its own PMI reading and if the report confirms a slowdown in the manufacturing sector, Chinese stocks could fall to fresh lows. On Sunday we get the revisions to the Caixin report and later in the week, the PMI service and composite indices. It's no secret that China is slowing and the meltdown in stocks has returned. Still, it's just a matter of whether the government allows its data to reflect that stagnation. The weakness in China is also expected to have taken a big toll on Australia’s economy. We expect next week’s Australian PMI reports to show a slowdown in manufacturing- and service-sector activity. We are also looking for dovish comments from the RBA. The New Zealand dollar has been hit the hardest, falling more than 1% intraday. While dairy prices and Q2 employment numbers are the only reports scheduled for release, investors are clearly not optimistic about either event risk. Canada also has its IVEY PMI report on the calendar as well as trade and employment. However the focus for the loonie is oil and investors are not happy with the persistent decline in the commodity.