Overview
A short week this week and lighter trading is expected with US markets closed for the July 4th Independence Day holiday tonight. However we also have a raft of economic data being released over the next few days, culminating in the US Non-farm payroll figure for June out on Friday night. Also of note are the Fed minutes for the June meeting released on Wednesday, then the private payroll figure (ADP jobs report) coming out on Thursday. Away from the US, the RBA has its rate decision later this afternoon and a monetary report will be released by the ECB on Thursday. There is plenty of information to drive volatility on currency and equity markets. While the US Fed started its tightening cycle back several months , a point to watch is the more hawkish tone now emerging from some of the other Central banks, as a greater focus on financial stability risks emerges.
If this message becomes stronger it would indicate that the low interest rate Quantitative Easing climate is coming to an end. Markets have pretty much traded within pre-existing ranges ahead of Friday’s jobs data as they position themselves ahead of the releases, with the market questioning USD near-term direction and the data this week should give a clearer indication whether the Fed will hike again as early as September.
Australia
The more hawkish tone from other Central banks, throws the question as to whether the RBA will follow suit at this afternoon’s rate announcement. We think not, given the recovery in the Aussie economy only recently begun to emerge, but an increase in any hawkish rhetoric would be a future indicator. The AUD is currently sitting around 0.7668 against the US down from the 0.7694 high overnight. The tone is bearish on the firmer USD, but we expect 0.7645 support to hold ahead of the RBA this afternoon, with 0.7580/5 limiting upside moves. A dovish RBA statement could see further weakness, but 0.7575 would need to be broken to extend declines.
New Zealand
The New Zealand dollar was lower overnight, back below the 0.7300 level against the USD. It seems to have problems holding above the 0.7300 mark, with upside capped at 0.7345 and is increasingly looking over stretched at these levels. Continued good US data this week may set the NZD on course for a push towards the 0.7200 level, via immediate support at 0.7250. With the tone of the major Central banks beginning to turn more hawkish this will put pressure on the NZD viz-a-vis its major trading partners, and although NZ fundamentals remain solid, todays NZIER Business confidence was up 1% to 18% for Q2 (Q to Q), look for the NZD to drift lower.
United States
Light volume in both US currency and equity markets last night, trading in shortened holiday hours. On the data front the June manufacturing ISM was better than expected, up at 57.8 against 54.9 which was the strongest reading since August 2014. Looking ahead to Friday’s non-farm payroll figure, we expect the jobs increase to be around 170k for the month and the unemployment rate to be unchanged at 4.3% in June. Last month’s payroll gain of 138 k, while below consensus, was still above the level needed to absorb growth in the working-age population. Yet, as more previously discouraged job seekers re-enter the labor force, we may see a slight uptick in the labour force participation rate. The USD has strengthened against its major trading partners, although traders are wary of the upcoming data releases and we do not expect major range breakouts ahead of Friday. The USD/JPY pair surged to its highest in two months, as a better inclination towards the greenback undermined the safe-haven yen. The pair traded as high as 113.45 early US session, but has drifted back to currently trade around the 113.25 level.
United Kingdom
The GBP reached a high against the USD of 1.3028 on Friday , buoyed the fresh hawkish stance from the BoE, with Governor Mark Carney recently suggesting that the central bank could remove some of the current stimulus. However it has found trading above the 1.30 level tough going and was knocked lower from the 1.2975 level accelerated its downslide after the UK manufacturing activity slowed more than expected in June. In fact, the Markit’s UK manufacturing PMI retreated sharply to 54.3 in June, down from previous month’s 56.7 and well below consensus estimates pointing to a reading of 56.5. If more data continues to show a weaker trend, the BoE will have to re-evaluate tightening timetables. Now around 1.2940, continued selling interest has dragged the pair further towards 1.2925-20 horizontal support, which if broken would turn the pair vulnerable to extend the slide further below the 1.2900 handle towards testing its next support near 1.2860-55 region. On the upside, 1.3025-30 region remains immediate resistance, above which a fresh bout of short-covering could lift the pair beyond yearly high resistance near 1.3050 region and pave way for continuation of the near-term upwards trajectory towards reclaiming the 1.3100 handle…this is unlikely ahead of the US figures over the next few days.
Europe
The EUR has pulled back from the 12 month highs at 1.1445 made on Friday, dropping to a low of 1.1354 on the stronger USD tone. This pull back was despite some better data from the Eurozone. The final revision of the EU June Markit manufacturing PMIs showed that the sector’s growth extended into the end of the second quarter, with the index up to 57.4, a fresh six-year high, and above flash estimate of 57.3. However across the region, readings were mixed with the German index up to 59.6, its highest in 74 months according to Markit, while Spain and French figures suffered modest downward revisions. Unemployment in the EU surged to 9.3% in May, above previous 9.25, but below from the 10.2% printed a year earlier. Overall a mixed picture , but has a bearish tone, the EUR/USD is currently at 1.1365 with immediate support at 1.1340, then followed by Thursday’s low of 1.1290. Resistance is first at 1.1380 then 1.1420.
Japan
The JPY suffered its biggest drop in two months as renewed enthusiasm for the USD saw the USD/JPY surge from 112.18 to a two month high of 113.46 as the safe-haven status lost some lustre. A surge in business confidence levels to a 3 year high had helped the JPY, but this gain was offset by the Tokyo election, as Abe´s Liberal Democratic Party suffered a large defeat, with the opposition Koike’s Tokyo Citizens First party and its allies taking 79 seats in the 127-seat assembly. Currently the USD/JPY is back at 113.22 and as long as major support at 112.90 is not broken the JPY could rally back to threaten resistance at 114.05
Canada
The CAD remains strong to open this week, however the USD/CAD pair snapped five consecutive days of losing streak and staged a minor recovery to reverse major part of Friday’s slide to 5-month lows a t 1.2945. A modest pick-up in the US demand remained key theme through early European session at the start of a new trading week and has been one of the key factors that could be attributed to the pair’s recovery back closer to the key 1.30 psychological level. The sentiment surrounding the Canadian Dollar has turned very bullish in wake of the recent hawkish BoC rhetoric, pointing to a possibility of a rate hike sooner rather than later. Hence, it would be prudent to wait for a strong follow through buying interest before confirming that the pair might have bottomed out in the near-term. Another push back to the 1.2945/50 is likely, but US data this week market moving.
Major Announcements
• US Final GDP 1.4% vs 1.2% expected
• UK current Account -16.9b vs -17.2b expected
• Chinese Manufacturing PMI 50.4 vs 49.9 expected
• US ISM Manufacturing PMI 57.8 vs 55.0 expected
• Australian Retail Sales 0.6% vs 0.2% expected