USD: Coming on strong
As progress on tax cuts remain elusive, we expect the dollar to remain range bound for the time being. Monetary policy continues to push along at a predictable clip. The Fed’s view of a slow and steady recovery is pushing a slow and steady path of interest rate rises, and they are unlikely to change their tune without a change in economic conditions.
There is little to speak of from data this week. Weekly jobless figures on Thursday will be watched, but the PMI figures on Friday will take the cake for ‘most-watched’. Investors are looking for a further pickup in June as business sentiment improves.
New York Fed President Bill Dudley led what will be a stream of Fed speakers this week. Dudley spoke at a business roundtable, with little deviation from the Fed’s approach last week. While inflation is still lower than they would like, the Fed continues to focus on a robust labor market. “We think if the labor market continues to tighten, wages will gradually pick up, and with that, we’ll see inflation get back to 2%.” With a view of continuing economic expansion, the dollar took gains Monday morning and could continue to rally if the others toe the line.
EUR: All is calm, all is bright?
Political instability that characterized Europe’s outlook in the first few months of the year has all but evaporated. Pro-European centrist Emmanuel Macron was elected as the President of France a few weeks ago, and this weekend’s parliamentary vote gave his party the strongest majority in 15 years. With the support of the legislature, Macron will have an easy time pushing through economic reforms he promised during the campaign.
As the political climate in Europe stabilizes and the economy continues to expand, investors in North America have been ramping up their purchase of investments in Europe, leaving their currency exposure unhedged on bets that the euro will remain strong. Speculative traders have also increased their euro longs for the sixth week in a row.
A few policymakers from the ECB due to speak this week, Nouy and Lautenschläger on Monday, Cœuré Tuesday, and Hakkarainen on Thursday. On the data front, we have producer prices from Germany Tuesday, consumer confidence on Thursday, and the widely-followed Markit PMI survey of business conditions across the EU Friday.
GBP: Living on a prayer
Today marks the start of Brexit negotiations, but we don’t expect results this early on and this will likely have minimal impact on the pound. Burgeoning rumors of Theresa May stepping down as Prime Minister have been squashed by her office, with an official statement from Downing Street that denies she considered stepping down. The British people continue to trust that she is the best leader to secure a good Brexit deal.
The pound is declining this morning after what looks like continued contention between policymakers at the Bank of England. Kristin Forbes was one of three committee members who voted to raise rates in their June meeting. Forbes has been a vocal proponent of this action for some time now, but most analysts were not expecting her to attract two other members as her term ends this month, but she continues to lay on the horn. Speaking this morning, Forbes said that the bank is underestimating inflation pressures. She directly opposed Governor Mark Carney’s continued assertion that higher CPI inflation is a temporary effect of a weaker currency.
Governor Carney will be speaking tomorrow morning, and we are closely watching him for any hints of wavering from his firm stance. Carney continues to support keeping interest rates at current levels, despite calls for raising rates from policymakers.
The BoE Financial Policy Committee (FPC) meets Wednesday. Some analysts are expecting them to discuss ending the Term Funding Scheme which would lay the groundwork for the bank to raise interest rates despite Carney’s insistence that they will continue to hold.
AUD: Clouds on the horizon
Aussie dollar starting the week on the back foot on disappointing figures out of China. Their largest trading partner saw new home prices rise at the slowest pace in nine years. With little ahead for Chinese data, we may see further moves in the Aussie dollar driven by other external factors such as commodity prices and risk appetite. If iron ore prices continue to decline as researchers at Citibank suggest, we could see this weigh on AUD.
Tuesday, we look to the domestic side for minutes from the Reserve Bank of Australia’s most recent meeting where they left rates unchanged at 1.5% for the ninth meeting in a row. The RBA has taken a neutral tone of late, balancing risks ahead of the economy.
CAD: Grab your tracksuit, we’re running with oil
Tracking a seven-month low, the Canadian dollar kicked off Monday morning as the worst performing major currency. We expect CAD traders to continue watching oil, taking the loonie on a side-car to the trajectory of crude oil prices.
Later in the week, we may see a renewed focus on domestic developments. Friday we have inflation data for May, and investors are expecting a decline from a month earlier what disappointed expectations.
JPY: A few things to watch
Japan starting the week off kilter after the trade deficit widened significantly in May. An increase in imports drove the unexpected gap, but this does not necessarily spell doom-and-gloom for the broader outlook. Exports logged the biggest growth in more than two years, so while they were not enough to outweigh the expansion in imports, trade continues to pick up.
The Bank of Japan releases their monetary policy meeting minutes on Wednesday, and early Friday morning we also get Manufacturing PMI data to shed some insight on the manufacturing sector.
Otherwise, we anticipate this pair to track the dollar’s movements outside of any surprise risk-off themes.