GBP: Additional QE Continues to Hurt, UK CPI May Not Help
· The dovish BOE Quarterly Inflation Report leads to lower GBP rate forecasts
· The UK claimant count rate rose to a 14-year high in July
· GBP/USD likely to move with stocks, thus vulnerable to pullback
· If this week’s CPI report results are too low, could raise fears of more QE, drop GBP further
The past week of price action for the British pound marked little more than a period of consolidation, though the currency did lose against every major except the Canadian dollar. From a technical perspective, GBPUSD remains above a rising trend line at 1.6450 connecting the July and August lows, and a break lower would open the door to 1.6200.
Ultimately, macroeconomic factors are working against the British pound, as conditions have yet to show any signs of improvement despite the Bank of England’s aggressive rate cuts and quantitative easing (QE) program. Indeed, the BOE’s decision to expand their QE program to 175 billion pounds on August 6 may have done more harm than good, as the original 125 billion pounds had little to no impact on lending and money supply, so tossing in another 50 billion pounds may not make real difference, unless part of the plan was to weaken the GBP in order to help UK exports. Since the August 6 announcement, the British pound has fallen 2 percent against the Japanese yen and by 1.45 percent versus the US dollar.
Main GBP Economic Events
Looking ahead to this coming week, are two potentially market moving events
First, the UK’s consumer price index (CPI) reading for the month of July is expected to fall for the first time in six months at a rate of -0.3 percent. If CPI falls more than projected, the British pound could pull back sharply as the markets will anticipate that the BOE will expand their quantitative easing efforts even further before year end. On the other hand, if CPI holds strong, the currency could rally in response.
Then, on Wednesday, the minutes from the BOE’s last meeting will hit the wires. Since the central bank’s August 6 policy statement and August 12 Quarterly Inflation Report have already revealed their dovish bias and dour outlooks, the minutes may not shake up the British pound too much. Nevertheless, a positive or negative surprise could move the GBP hard.
CHF: Possible Reversal as CHF Approaches Bottom of Trading Range?
· Swiss Producer and Import prices fell to -6.1% which was the largest decline in 34 years
· USDCHF: US Dollar Swiss Franc May Be Reversing Its Downtrend
The Swiss Franc steadily advanced throughout the week against the dollar and euro as the pairs continue to trade off of technical levels. The USDCHF remains range bound between 1.0600 and 1.0900 as the threat of Swiss National Bank intervention has put in a floor and lack of dollar support has filed to break above resistance levels. The dollar has started to find support again on waning risk appetite which could lead to another re-test of resistance, but giving the recent trading pattern a fall back to 1.0600 remains a strong possibility. The EURCHF has also failed to break above resistance at 1.5350 and a break below the 20-Day SMA leaves support at 1.5196-50 Day SMA. There was little in the form of fundamental releases with only the producer & import price report showing a decline of -6.1% against expectations of -5.8%, which was the largest decline in 34 years. The increasing deflation risks only strengthen the argument for further SNB intervention which could remain a supportive factor for the franc crosses.
The lack of conviction from dollar and euro bulls could lead to more Swiss franc gains in the coming week until we see support levels threatened.
Main CHF Economic Events
There are also a number of key fundamental releases that should be watched despite their lack of potential impact as they may give insight into the level of deflation risks and the potential course of action from the central bank.
The Swiss trade balance may show that exports continue to decline as they did in May by 2.6%, which would further encourage the desire for a weaker domestic currency.
Retail sales for June will get the week started and a consecutive decline in domestic growth will leave the economy without any sources of growth.
Ultimately, the Swiss Franc rarely trades on fundamentals and technically there exists downside potential, but as we have seen over the current trading range reversals can come before testing the lower bound.
CAD: Pressed By Sentiment, BoC Intervention Threats
· Canada runs its longest trade deficit since 1975
· Canadian dollar revives its correlation to crude just when risk appetite shot higher
· Has USDCAD made its last gasp bear wave before a major reversal takes hold?
After an exceptionally volatile period for the currency market, the Canadian dollar came through as a significant loser this past week. Risk aversion was clearly a factor with the Japanese yen appreciating an astonishing 4.38 percent against the loonier; but that wasn’t the full story. A critical look shows us that the currency actually closed the week lower against all its major counterparts (including follow commodity bloc members Australian and New Zealand dollar).
While fundamental traders should keep track of risk appetite and the commodity correlation going forward; there are more provoking concerns building under the surface that could spark a trend in the otherwise anchored USDCAD sooner rather than later.
For immediate impact, no other event (though it is certainly a low probability occurrence) would have the market-moving influence that an announcement of FX intervention could exact. This may seem an extreme move outside the realm of economic reality; but talk of just such a measure has grown louder over the past few months.
For those skeptical that such a move could be made, the BoC states on its website that the central bank “may intervene in the foreign exchange markets on behalf of the federal government to counter disruptive short-term movements in the Canadian dollar.” The government made voiced its concern repeatedly in the past months, and just this past week when Finance Minister Jim Flaherty said there are “indications of speculation in the Canadian currency that is not justified in market terms.”
So far, this is just ‘jawboning;’ but the threat’s impression on the market may have its intended effect without actual action from BoC Governor Mark Carney. Many believe that policy officials are not likely to pursue such an aggressive course of action as it could end up being ineffectual in such a deep market. However, if they do indeed believe it is artificially inflated through speculation; all they have to do is undermine traders’ confidence – and something so fickle can give way easily under the right conditions.
As everyone knows, many traders are still hurting from trying to fight the Swiss National Bank’s successful intervention to lower the CHF, and that factor alone could make mere verbal threats sufficient to curb enthusiasm for the CAD.
On the topic of speculation, the premium built into the loonie through a perceived sense that the economy could recovery more quickly than its major trade partners (especially its primary counterpart – the US) already seems to be in jeopardy as data erodes forecasts. Now with the US on the verge of turning a positive growth reading, Canada is expected to match or best its neighbor.
However, monthly data to this point has shown a 10th monthly contraction and a 3.5 percent contraction in the year through May (the worst performance since 1982). Looking ahead to the August 31st release of the June and second quarter data; prospects for a positive quarter are certainly diminished as unemployment rises, manufacturing contracts and foreign demand is even further strained by protectionist efforts.
Main CAD Events
As for data over the coming week, most of the indicators are considered secondary. International securities transactions is considered lesser capital inflow; wholesale sales are overlooked as the market waits for the retail data; and the Leading Indicators composite index struggles to offer an early warning on the direction and intensity for the change of growth.
A more unique reading though is the CPI data. This is an indicator that has come back into vogue recently – not as a gauge for yield forecasts – but as a means for gauging the economic influence of inflation. If a serious problem of deflation should develop, the central bank could find itself in trouble with few options left to it beyond quantitative easing. Alternatively, a rebound in price pressures without growth to support it makes stagflation, rising prices without growth that typically causes it.
AUD: Likely to Strengthen As RBA Hints At Higher Rates Before Year’s End
· Australian Wage Growth Slumps in 2Q
· NAB Business Confidence Hits Two-Year High
· RBA hints on interest rate increases plus improving exports fueled by China growth give current uptrend potential staying power
AUD/USD is one of the few pairs that remain sensitive to interest rate developments and currently bullish forecasts for AUD yields points to further rallies for the AUDUSD. It is undeniable that high Reserve Bank of Australia interest rates bolstered demand for the domestic currency through recent years. Through the recent financial crisis, traders aggressively shed exposure to the Aussie as the forex carry trade collapsed. The more recent rally in global equity indices has clearly reversed said trend, and the Australian Dollar now trades at its highest levels since the Lehman Brothers bankruptcy. Absent a noteworthy correction in global risk sentiment, the AUDUSD is likely to continue trading off of bullish interest rate forecasts, based mostly on the past week’s comments by RBA Governor Glenn Stevens.
During the semi-annual testimony, Mr. Stevens held an improved outlook for $1T economy and curbed expectations for further easing as policymakers see no need for another round of government stimulus. The central bank Governor said inflation expectations remain well-anchored, while Australia’s terms of trade remained strong, and expects the jobless rate to hold below 8.5% as businesses continue to shorten working hours rather than scaling back on employment. Moreover, Mr. Stevens stated that the interest rate will have to rise from the ‘emergency level’ as the outlook for growth and inflation improves, and went onto say that the RBA may begin to hike rates ahead of its counterparts as market participants continue to price-in higher borrowing costs.
However, Governor Stevens noted that the economy may contract over the next two-quarters as he sees a risk for household spending to falter, and concluded that the central bank will maintain its current policy for the time being in an effort to support a sustainable recovery. Nevertheless, as the economic calendar for the following week remains fairly light, the AUD/USD may continue to retrace the sell-off from the previous year as market sentiment improves, and may extend the rally from the March low as investors raise their appetite for risk.
Main AUD Events
Tuesday’s Monetary Policy Meeting minutes may provide the best update on plans to raise interest rates
NZD: Topped Out for 2009?
New Zealand Retail Sales May Suggest Surprising Growth
· Credit card data shows purchases rose for fifth time in six months
· New Zealand dollar remains very highly correlated to S&P 500, thus vulnerable to stock pullback
The New Zealand dollar rose to fresh year-to-date peaks against the USD through late-week trade, but the past several days may be remembered for the substantial reversal seen through Friday’s close. Forex traders pushed the NZDUSD to impressive heights on similar gains in the US S&P 500 and other financial market risk barometers. While it is extremely difficult to time market reversals during trending conditions, we believe a pullback is coming. The reversal on Friday’s trade gives us renewed confidence that the NZD may post a sustained turnaround on clearly one-sided market sentiment.
Limited economic event risk signals that short-term New Zealand Dollar trends will continue to depend on the trajectory of risky asset classes. If the US S&P 500 is able to recover Friday’s losses, expect the NZD to follow.
Main NZD Events
New Zealand Dollar traders will otherwise keep an eye out for a mid-week Producer Price Index report. The median analyst forecast predicts that PPI fell for the third-consecutive quarter through Q2, 2009. A strong exchange rate has sheltered the small island economy from higher global raw materials prices, and the Reserve Bank of New Zealand highlighted the NZ$ as a clear factor in their dovish inflation forecasts. Any especially large surprises could affect the RBNZ’s fairly moderate stance on price pressures. If, like the Reserve Bank of Australia, the RBNZ signals that the next interest rate move will be an increase, we could see short-term NZD rallies.
We remain committed to our calls for a sustained NZDUSD and NZDJPY pullback on clear sentiment extremes. The key difficulty remains the timing of such pullback. Calling for an NZDUSD turnaround 400 pips too early has clearly put a dent in this author’s credibility (and track record).
Disclosure and Disclaimer: The opinions expressed herein are not necessarily those of AVA FX. The author may hold positions in the above mentioned instruments.