AUD Ready To Rally Should CPI Curb RBA Cut Outlook

Though the US dollar didn’t move far Tuesday, its decline was universal. At this point, the Dow Jones FXCM Dollar Index (USDollar) has worked itself into a position where a technical break from congestion is inevitable. However, a breakout / breakdown does not automatically equate to meaningful trend development. Follow through and momentum fall to more fundamental means. Given the diligence of the S&P 500 climb and the recent return of the negative correlation to the USDollar, it would seem that the greenback is destined for a bearish breakdown. Yet, just as we should be skeptical about the conviction behind equities climb to record highs, we should doubt the bearish drive behind the benchmark currency. Risk appetite is crucial to drive high return assets like stocks higher, which in turn negates the need for a safe haven like the dollar. Given the current valuation applied to the richly priced US stock indexes and the troubles still facing the local and global economy, the drive is dubious at best. The true threat to the currency though would be a realization that near-term Taper expectations were overdone. Yet, we won’t find any definitive progress reports on that front until next week’s July NFPs, 2Q GDP and July 31 FOMC rate decision.

Australian Dollar Ready to Rally Should CPI Curb RBA Cut Outlook
There are two themes that can generate short-term volatility for the Australian dollar, and both cater to risk appetite trends. A general shift in the appetite for risk (return potential versus the fear of volatility) always carries the greatest potential for this investment currency. Yet, we have not seen a definitive move in investor sentiment for some time. More immediate and more probable a market-mover is the Aussie dollar’s other angle on the risk theme: its own yield. The currency has been ravaged over the past few years as the Reserve Bank of Australia (RBA) has embarked on a crusade to cut the benchmark rate. That said, at the last rate decision and in the subsequent minutes, the RBA seemed to soften its stance against further rate cuts. Despite the subtle change in sentiment, though, swaps still see a 65 percent probability of a 25bp rate cut when the central bank meets next month. That can change if the upcoming 2Q CPI data shows an accelerating pace of inflation.

Euro: Officials Upgrade Growth Outlook, Markets Look for Data
There were a number of optimistic forecasts delivered by different officials and groups this past session in Europe. The Bank of Spain upgraded its 2Q GDP expectations to a tame 0.1 percent contraction through the period, while France’s Finance Minister Moscovici asserted the country was “out of recession” in an interview. However, the market doesn’t readily take such policy officials at their word. They are required cheerleaders for their respective economies and thereby their assessments often lean to the ‘optimistic’. What the markets want is cold, hard data. The Eurozone consumer confidence report for July from this past session offers a taste of that. The -17.4 reading was the highest in two years and pads hope of a return to growth for the many beleaguered Eurozone members. The real fundamental weight comes tomorrow however with the region’s PMI figures. These monthly reports are good, timely proxies for the official GDP reports.

Japanese Yen Floundering in Post-Election Growth-High
There seems to be little will to drive the yen crosses forward or to reverse them. Following the Coalition government’s win in the Upper House Parliamentary elections this past weekend, there was little of the growth-positive carry trade build up (yen selling) that developed so much traction on the Bank of Japan’s commitments to monetary policy. The ‘Third Arrow’ of Prime Minister Abe’s economic plan has certainly overcome a hurdle, but much has already been priced into the exchange rate to reflect the outlook for growth. What the yen crosses really lack for is risk appetite that drives forward carry trade appetite. The current level of high-carry pairs like AUDJPY and its underlying yield differential is significantly divergent. However, closing that gap (reversing the yen crosses such that the yen rallies) requires something else that hasn’t developed – risk aversion. There has been a stubborn commitment to equities and even carry despite the tepid prospects.

Canadian Dollar Advances Across the Board after Strong Sales Report
The Canadian dollar offered up the most consistent and deliberate move amongst the majors Tuesday thanks to the release of a particularly market-moving piece of event risk. The May retail sales report - despite its implications for domestic consumption and thereby general growth - is typically overlooked by the FX market. Yet, the data leveraged its influence with a 1.9 percent jump from the headline number and 1.2 percent surge ‘ex autos’ that far outstripped expectations. Not only was the monthly increase the biggest in three years, but the C$40.4 billion in consumption through the period was the most on record. As aggressive as that reading is however, it won’t offset the influence of underlying risk trends nor will it materially move up the time frame for the Bank of Canada’s first rate hike.

British Pound Climb Slowing as 2Q GDP Release Approaching
In a switch from the trend established through Monday, the sterling slipped against all but the dollar Tuesday. It’s climb has been notable for its consistency, but was notably restrained. That is to be expected considering the fundamental them that bulls have mounted their offense on will meet a key update in the 2Q GDP reading due in less than two days’ time. For event risk, the BBA reported home loans grew to a slower pace than expected (37,278); but the data is hardly a game changer when it comes to underlying growth trends. The same is true for tomorrow’s CBI Trends report – a manufacturing survey. Pairslike GBPUSD may find volatility in the coming 24 hours via cross winds from more active pairs, but the pound itself will likely just be along for the ride unless a policy official speaks on a more hawkish policy position.

Gold’s Follow Through after $1,300 Break Sluggish…As Expected
Following the biggest daily rally in 13-months, gold’s advance this past session was noticeably restrained. While the four consecutive day advance and to five-week highs still carries a bullish bearing, the level of momentum the metal maintains tells us how far this current leg can reasonably run. The break that started this week was no doubt leveraged by the technical implications around the round $1,300-figure and the drop in short speculative futures exposure noted in the COT figures from last week. To sustain the drive, we need greater substance for bulls to bite on. The argument of ‘paper’ unwinding versus ‘physical’ demand will likely claim any responsibility for further gains and be ignored should the advance still. Far more tangible is the balance of demand via its anti-currency status. For short-term interest a USDollar breakdown can offer another drive higher. Yet, the real weight is in Fed Taper speculation – which doesn’t have key known catalysts this week.