FX Week Ahead Preview: Is it "End Of Days" For The Greenback

FX Week Ahead, courtesy of Rajan Dhall from fxdaily.co.uk

Coming off the back of another bad week for the USD, we look to a barren period for the data schedule in the US, so markets will have to determine whether to extend this weakness based on the evidence so far. 

Friday's hit on US rates was more a function of the softer retail sales data than the inflation read, where the core year on year was unchanged at 1.7% as forecast.  However, with seasonal factors supportive of a pick up in consumer spending in June, there was little improvement on the weak May readings in retail, and USD sellers were back in with force.  The greenback ended the week on its lows across the board, but this was tempered to a degree against the JPY and CHF.

Even though the JPY is still seen to be a little undervalued at current levels vs the USD, the consistent BoJ policy to keep the key 10yr JGB rate near/at zero is underpinning the spot rate to a degree, but this also depends on whether the global risk tone can be maintained.  Despite the backdrop of tensions over North Korea, as well as the ever present risk of president Trump sparking a trade war (with anyone), equities continue to grind higher with their Teflon (Kevlar) coated armour, so the carry trades will naturally follow.  On this note, watch out for the China GDP numbers Sunday night and any material drop from the annualised growth rate of 6.9% from Q1 - Q2 forecast at 6.8% and risk sentiment would easily stomach that.

Japan are off on Monday - for Ocean Day - but on Wednesday the BoJ meeting is again set to maintain their accommodative stance, just as they publicly communicate on a near weekly basis over the news wires - so nothing new here. 

The BoJ outlook should show some improvement however, in line with the modest upgrade to their growth forecasts, but JPY divestment and outflow is expected to continue so cross JPY should attract more of the trading next week.  Initially, USD/JPY may test 112.00 again as Asia react to Friday's numbers, but strong demand is noted at this level, if not a little lower into the mid 111.00's. 

There are however, other areas where USD bears are likely to feel just as comfortable, but not without some noteworthy event risk ahead.  EUR/USD has been the primary route up until last week, where we saw limits reached into 1.1500.  We failed to touch this level after a number  of attempts, but dips remain shallow as the positioning for QE tapering later this year remains aggressive.  More insider/source stories this week anticipated the ECB meeting in September to be the catalyst, but we have to negotiate Thursday's meeting first.  President Draghi and his colleagues are keen to fend off any excessive market reactions, but we have already seen German 10yr hitting 60bps this week, and while this has not been fully reflected in EUR/USD price action, EUR/CHF has offered less resistance on the upside.  Pre 1.1100 may offer some resistance, but 1.1125-35 is the next top of note - last seen in May last year.  If the market refocuses on EUR/USD again, we sense a tough grind higher, but a move into the 1.1500-1.1600 range nevertheless.  This still looks an overstretch in the time frame achieved, but we doubt traders will be deterred from bidding into 1.1300 again, unless EU CPI on Monday slips. 

EUR/GBP has taken some of the slack however, but this is all down to renewed GBP strength.  The focus in the next 5 days will be on whether Cable can build on the gains seen through 1.3000.  This is all based on the political mess which has detracted from the hard stance espoused by Theresa May, as her snap election result has backfired hugely - and lifted GBP!  Who knew!!!  There are still plenty of twists and turns to negotiate, and even though some of the Sterling undervaluation is justified, the reasons for the latest moves will be questioned at these levels. 

A softer Brexit is still presumptuous at this stage, and with London as a financial sector set to lose out to some degree (Euro swaps clearing) , there WILL be an impact on the UK economy.  Over the weekend, ex PM Blair has been 'sounding out' possible sentiment on an EU turnaround, but both Labour and Tory ministers have swiftly responded, with usual mantra the leave means leave.  It looks inevitable, but a softer approach will help.  EU talks said to start this week, and we have the exit payment to negotiate on first - this will give EUR/GBP a bid on its own (and some), once it is decided upon!  Currency jitters are likely to return soon as a result, but how soon?  Cable sees strong resistance from 1.3145 to 1.3190, while EUR/GBP sees demand into 0.8700, if not the mid 0.8600's. 

On the data front, UK inflation is due out on Tuesday, where the headline rate is expected to stay at 2.9%.  It is for this reason that certain members at the MPC have turned hawkish, so Gilts will react accordingly.  Retail sales on Thursday will be just as influential, with forecasters looking for a rebound from the heavy drop seen in May.

Good times for the CAD at the moment, and this is all on the recognition of the healthy data some of us have been pointing to when USD/CAD was pushing through 1.3600 (ahem).  I remember at the time, calls for 1.4000 when we cleared 1.3500 initially, and how the mood has changed.  More room for the CAD to appreciate for sure, and perhaps to 1.2200-1.2000 towards the end of the year, but that is some 3-5 months away, so perhaps some consolidation first.  NAFTA renegotiations hang over Canada as they do over Mexico, but the risks are greater for Mexico as the Canadian benefits have matched those of the US. 

On the domestic front, the strong data of late has been tempered by inflation, and we get the latest readings which could tame the CAD rally.  1.2825-30 and 1.2950-1.3000 are the initial upside areas where USD/CAD sellers will look to join in on this party, and based on the mood in the USD, we have to wonder if we will even seen these levels before we test 1.2500!

AUD/USD ended the week on a very strong note, pushing up into and through most of the 0.7750-0.7850 target range. The upper end is the top of a major breakout point, and this could underline a stronger base in the 0.7200-0.7300 area lower down, but we expect a move on 0.8000 higher up - which is not outside the realms of possibility - will have the RBA getting hot under the collar again.  Exchange rate levels threaten imbalances to exports and growth, and along with the RBNZ, prompt verbal intervention when nearing these levels, with 0.7500 in NZD/USD likely set to do the same.  The latter somewhat unconvincingly worked through orders in the 0.7330-50 zone last week but failed to hold above here, so perhaps traders are anticipating central bank speak a little earlier. 

In Australia, we have the June employment report midweek to look to, with the RBA meeting minutes offering little more than we already know due to the detailed statement under a fortnight ago.  Monday night offers up the NZ inflation data, while on Tuesday we have the global dairy auctions (Fonterra). 

All very quiet in the Scandies, but gains in the NOK and SEK vs the USD have taken us to and through some key levels, and say more about the fate of the greenback than anything else. 

Have a great trading week!


Rick Cerone Sun, 07/16/2017 - 16:43 Permalink

As long as there is a fat finger pressing  zeros on the money machine at the Fed, there is nothing to worry about. Force will be used to keep the empire viable. Patriotic sacrifices may be required from some during these times of uncertainty that will put our confidence in our great system to the test. Comrades, unite to keep the homeland strong.

Sudden Debt Rick Cerone Sun, 07/16/2017 - 16:47 Permalink

That's what the government is telling youBut if you compare America from the 1990's against today 2017you'll see that there's a hughe difference.The frogs are boiled and most don't realize but the American empire was destroyed because of this printing.The entire middleclass is gone because of what they did in the last decade.Americans who work need foodstamps to survive. That's not what should happen in a rich country.Most Americans don't even have 500 dollars in their account. That's what the printing presses have done. Inflation is eating the paychecks away and as Americans suck in math, they'll most likely will never figure it out unless you do a math test where numbers are represented by dognuts or drugs.

In reply to by Rick Cerone

Sudden Debt Sun, 07/16/2017 - 16:40 Permalink

Americans better prepare for an end of days of the greenback because all the other currencies like the euro will strenghten and will stay afloat for years more then the dollar which means that there won't be a rescue for Americans in the first 5 to 10 years.Americans should also prepare for 10% inflation for the comming years, year aftter year with declining incomes while Azia and Europe will increase and gain more power.America is now already the poorest 1st world country in the world where most of the population lives below the poverty line.That's why Americans who still can should leave the country now and avoid the venezuela script that's prepared for them.

Sudden Debt JLO Sun, 07/16/2017 - 18:45 Permalink

no more creditline, no more products.A can of cola will cost you 50 dollars in the end.Sure, in the beginning it will look wonderfull but in Venezuela it also looked wonderfull for the first 2 years untill they figured out the economy blew up and all the rich moved their money out. 

In reply to by JLO

Silver Savior Sun, 07/16/2017 - 20:25 Permalink

If I could fully bypass trading dollars I would. The spread on what it takes to aquire them and what they are worth is huge. They are not worth working for but other people can't seem to get their heads out their asses and see this shit for what it really is. An unbacked promise tainted with the quadrillions of derivatives.

Nobodys Home Silver Savior Sun, 07/16/2017 - 21:59 Permalink

I'd gladly give you whatever a hamburger is worth in silver on Tuesday, for a hamburger today....
Oh! But that would probably increase your profit by Tuesday.
Wimpy was a currency speculator! If I pay you in Fed res notes on tuesday for a hamburger today, with inflation and currency manipulation I got that hamburger cheaper! Not to say silver isn't manipulated, but it's a better bet in my small mind.

In reply to by Silver Savior

Ben A Drill Sun, 07/16/2017 - 21:37 Permalink

When I see no more public pensions just a 401k like the rest of us, only then will I think gold and silver will go up and the $US Dollar go down along with the stock market.

Nobodys Home Sun, 07/16/2017 - 21:53 Permalink

What fvcking greenback? The greenback was dead many years ago.
We have Feral Reserve your ass for slavery notes now.
No different from the SDR except it's a global currency that isn't a global currency.
FRN...One currency to bind them,
SDR... one currency to rule them all!