USD: What you don’t know can hurt you
Even as the DXY dollar index sits near 8-month lows, we could be poised for further downside over the coming week. We are expecting a fair degree of sensitivity ahead of former FBI Director James Comey’s testimony on Thursday. Despite some speculation that President Trump will invoke executive privilege to block Comey from testifying, investors are watching the event with great anticipation. Comey is scheduled for three hours of questions from the Senate Committee, which will be followed by a closed-door session not available to the public. While Comey’s public remarks will draw much attention, their tone and scope could invite fresh speculation from the closed-door sessions.
A quiet domestic calendar puts all the more focus on politics and the hearing. Comey is expected to be asked about his conversations with the President, more specifically President Trump’s request for Comey to drop the investigation into ties between the Trump campaign and Russia.
EUR: Super Mario vs. the hawks
Eurozone PMIs held at six-year high in May, yet much of the euro’s focus this week pivots around the ECB meeting. Investors continue to call for a more hawkish tilt from the bank, and are looking for even the tiniest morsel to satiate their hunger. ECB President Mario Draghi has been reticent to give any leeway however, defending the bank’s substantial degree of monetary policy as a necessity to support the economy.
Should the ECB change to a more neutral stance on the risk outlook or hints towards the exit path from their highly accommodative policy, this would be a euro positive. But the geopolitical risk that the UK elections bring to the region paired with a cautious Draghi may leave hawkish investors empty-handed.
GBP: Sterling hinges on election results
Like the city of London, the pound stood defiant in the face of terror. A brutal attack on London Bridge and the Borough Market area left seven dead and 21 injured, but the pound quickly recovered later though the morning.
The bigger story for sterling this week is the much-anticipated UK elections on Thursday. As polls narrow and investors get jittery, all eyes are on the UK electorate. The results of the election will have a large impact on Brexit negotiations which begin June 19th. If Theresa May’s Conservative party fails to gain a majority in Parliament, she would be forced to work under a coalition or minority government, making the chances of infighting more prominent and likely depressing the pound. Should she gain a smaller majority than the 17-seat lead she began with, this may also hurt her position, as the future of London’s financial sector will rely heavily on what is garnered from the break-up negotiations with the European Union.
AUD: Flying high with Chinese PMIs
Aussie dollar enjoyed a push higher Monday morning after Chinese PMI data showed services expanding at the fastest pace since January. China’s services sector is growing at its fastest pace since January according to the Caixin Purchasing Manager’s Index. The pickup “reflected a quicker increase in total new businesses,” however we are cautious on how much this expansion will translate into an economic boost for Australia. Manufacturers only saw a “marginal rise in production” as they continue to reduce the number of employees. Goods producers also saw the slowest increase in output in eleven months.
The domestic calendar in Australia is fairly heady this week, frontloaded with the Reserve Bank of Australia’s meeting tomorrow. Since their last policy meeting, investor bets on a rate cut before year-end have doubled, but as the economic outlook for Australia remains somewhat hazy, the RBA is expected to hold policy this meeting. GDP growth figures on Wednesday morning are expected to show moderate expansion in the second quarter.
CAD: Oil trades could carry to Friday
Canadian dollar gave up overnight gains against the dollar to trade flat as North American traders started their Monday morning trading. The moves closely tracked oil prices which were volatile on rising tensions in the Persian Gulf.
Saudi Arabia is leading a push to isolate Qatar. Qatar’s purported backing of extremists and conspiring with Iran have Bahrain, Egypt, the UAE, and Yemen joining the Saudis’ efforts. The five countries have not only severed diplomatic and economic ties, but are blocking all travel in and out of Qatar and notified Qatari citizens that they must leave. While oil initially spiked on this announcement, we have seen those gains taper as investors anticipate only a minimal impact on supply.
The Bank of Canada’s press conference Thursday is not expected to make many waves, but employment on Friday will be closely watched. Net employment change has been all over the place against consensus expectations, and if we see another significant surprise to the upside or downside, we will likely see CAD move with it.
JPY: What to expect when you’re expecting risk
The yen is stable against the USD Monday morning, sustaining Friday’s drop from the 111s to the mid-110s. We anticipate a fair amount of risk-trading to pick up ahead of a few key geopolitical events this week, including the UK election and former FBI Director James Comey’s scheduled testimony on Thursday. If British Prime Minister Theresa May’s party fails to capture a majority in Parliament, this would jeopardize the UK’s negotiating position with the EU and could spark a move into safe havens like the yen. While the UK elections are a bilateral risk event, Comey’s testimony is more dimensional. There is speculation that President Trump may invoke executive privilege to block the testimony altogether, an action which may look incriminating and thus push the dollar lower. If Comey does testify, he has a three-hour Q&A with the Senate Committee followed by a closed-door session which will surely draw much speculation from investors.