By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
The divergence in currencies on Monday was short-lived as investors snapped up U.S. dollars ahead of Friday’s labor-market report. The greenback traded higher against all of the major currencies with USD/JPY rising more than 1% intraday. House prices continued to increase in June according to S&P CaseShiller but the big story was consumer confidence, which rose to its strongest level since September 2015. These positive reports along with Monday’s personal income and spending data helped provide momentum for the dollar’s rally. Key resistance levels are still being tested and it may take another few days before they are broken. We are still watching the 50-day SMA in EUR/USD and USD/JPY is right above 103. Aside from the demand for U.S. dollars, the yen is also pressured by recent comments from Japanese officials. Previously, BoJ Governor Kuroda said monetary policy hasn’t been exhausted and overnight, Suga said the government is watching the markets and currencies closely. Hamada added that rolling back BoJ easing would be the worst decision. While the latest string of Japanese data has been decent with the jobless rate improving and retail sales rising strongly in July, Japanese officials are clearly still frustrated with the weak growth in the economy. If USD/JPY breaks 103.50, the next stop will be 104. There could be a correction pre-NFP but the path of least resistance right now for USD/JPY is still higher. The focus on jobs makes Wednesday’s ADP report particularly important.
For the third day in a row, the euro traded lower against the U.S. dollar. Part of its weakness was caused by the stronger dollar but the latest Eurozone economic reports also gave investors cause for concern. Eurozone economic confidence deteriorated in August with business and industrial confidence slipping. Consumer prices in Germany also stagnated. It is no surprise that inflation in the Eurozone is low but economists were hoping for a modest increase. Instead, the year-over-year rate held steady at 0.4%, well below the central bank’s target. The ECB meets next week and this unexpected slowdown could lead to a tougher outlook from the central bank, which updates its forecasts on September 8. With that in mind, we are looking for further weakness in the euro, particularly with German unemployment and Eurozone CPI numbers scheduled for release Wednesday.
Of all the major currencies, sterling held up the best against the U.S. dollar with only minor losses. The strength of the currency is surprising considering that consumer credit and mortgage approvals continued to fall. The housing market is the primary sector being affected by Brexit. Prime Minister May said she doesn’t see a need to consult Parliament on Article 50. Sterling should be trading lower, particularly with U.K. yields falling and U.S. yields rising. Wednesday’s housing-market report is likely to be weak but the focus this week for the currency will be Thursday’s PMI manufacturing report. With that in mind, the primary reason for the sterling’s strength is short covering. Consumer confidence numbers were due Tuesday evening.
Next to the Japanese yen, Tuesday's worst-performing currencies were the comm dollars. Interestingly enough, AUD fell the most despite the unbelievably strong rise in building approvals. Economists were only looking for a 1.1% increase but approvals rose ten times more than expected. This was also the strongest increase since January 2014. Yet AUD dropped to its lowest level in 4 weeks. Some of which had to do with the sharp fall in Australian yields overnight while the stronger U.S. dollar also played a role in the pair’s weakness. In contrast, building permits in New Zealand dropped sharply in July. The ANZ’s activity outlook and business confidence index were scheduled for release Tuesday evening. Overnight, RBNZ Assistant Governor McDermott spoke and he had a slightly optimistic tone. Although he said consumer, businesses and the government aren’t really spending, relative to the rest of the world, NZ is doing well. The housing market is overvalued and he believes that inflation will naturally rise back to target and as a result, he doesn’t think they will get to zero rates. These comments helped AUD/NZD traders overlook positive AUD data and take the currency pair back to this month’s low.
Lastly, USD/CAD ripped higher after breaking out on Monday. Loonie traders did not care that Canadian data was mixed -- current account deficit rose less than expected and industrial product prices increased. Raw material prices dropped. They focused on the reversal in oil prices and the prospect of weaker GDP numbers on Wednesday. With retail sales and trade activity deteriorating significantly in the second quarter, Q2 GDP growth is expected to fall sharply.