Headline overload

US Markets

Another case of headline overload overnight.

US markets closed lower overnight due to some factors including, trade war phase 2, more political turmoil ahead of US midterm after reports surface ahead Attorney General Rod Rosenstein was resigning from his post and of course equity investors taking bets off the table ahead of any potential FOMC bullish tail risk. But given the short half-life that political turmoil has on the overall market sentiment, profit taking is more to do with trade war escalation fears and a possible hawkish Fed.

FOMC bullish tail risk

Yesterday we looked at the dovish tail risks but now a look at the opposite side of the coin.

With a rate hike baked into this FOMC meeting will be all about the future path of interest rates.

Don’t toss your dollar out the window just yet, by any standard all the US economic surprise index still favour the USD by a long shot. Of course, all data should be gleaned but its the surprises are what move asset currency markets and since most if not all Macroeconomics data are generally priced in over the long term, therefore adding up the sum of the data surprises can shed significant into monetary policy vies , and a  very basic  understanding of anticipated moves in currency markets. And by all current standards, the US surprise index is leading the charge and Fed will be looking at this metric.

Surprise = Realized Change – Expected Change in Economic

To that end, the markets still have a relatively pessimistic view on the US rates curve into 2019 and beyond as there has been too much focus and external issues and if trade wars etc. were really a concern for the Feds, they wouldn’t be raising interest rates this week nor guiding the market to another rate hike in December.

But a hawkish case can be made after several Fed members have been turning the dial up but none more so significant that Lael Brainard.

It’s challenging not to be dollar bullish from a pragmatic US interest rate storyline. But of course, price action needs to be respected especially with the EUR veering towards 1.1800 again. The strong US economy suggests USD yields have further room to run. And when former doves like Fed Governor Lael Brainard, who I dare say, is starting to roost with the Hawks and provides the clearest of signals hat this sitting Fed is more hawkish than the markets 2019 overly pessimistic lean.

Oil Markets

Oil continues to hold on to astonishing gains as the latest move was helped along by headlines from OPEC’s weekend meeting as the organisation agreed to no immediate supply boosts here and last weeks reports that Saudi Arabia was now comfortable with Brent at $80.

But with the 72nd session of the United Nations General Assembly kicking off, and President Trump set to hold court. Indeed, Iran is sure to be a fashionable topic so prepare for some headline risk, and I would expect some of Trumps OPEC barbs to surface. So it will be interesting to see how Oil markets absorb headlines with Brent trading near four years highs.

Headline risk notwithstanding, price action suggests that oil investors hopes are skyrocketing that US sanctions on Iranian crude oil exports will cause a significant shortfall in global supply. With that in mind, it’s possible we could see further advances in the weeks ahead. With OPEC showing little inclination to add amounts anytime before the December 3 summit, it’s very likely, in the absence of any about-face from OPEC, that Brent could trade to $85 + and WTI $75 + ahead of Nov 4 Iran sanction date as bullish expectations should continue to boil. But when taken in combination with the fact US commercial crude oil inventories are at their lowest since early 2015, it makes for a convincing bullish argument.

Gold Markets

It’s interesting to see Gold glued to the $1200 see-saw level this morning as frankly, I was expecting the yellow metal to be trading a tad weaker ahead of the FOMC. But with the markets in the very much oversold territory, some short bets are ceding just in case the Feds do unexpected give some notion of a pause for cause in the current 2019 Fed rate hike cycle. As a dovish inference for the Feds could send Gold prices above the critical $1210 level. There’s a lot of cross action inference on this week’s Fed forward guidance.

Currency Markets 

No idea why dollar bulls are so scared of their shadow these days, but It does tell me a significant number are long at not so comfortable levels.

Euro
Hawkish comments from Draghi has a significant impact on EUR volumes overnight as I continue to view the EURUSD the primary battlefield for USD positioning. Anytime the Uber dove Draghi underline the pick up on inflation, the market listens. Which triggered a rally in Bund yields, with a close above 0.50% but the EUR was rebuffed above 1.1800.
EU zone data remains uneven and at least currently in the USD cycle dollar bulls feel comfortable to sell EURO at 1.1800.

1.1720 remains the key for downside after it was such an obstacle to push through last week

JPY
Starting to see a nascent recovery in USD strength the back of this week’s Fed meeting, my views for a stronger JPY are a way to far in the horizon as the market is testing some significant near-term levels with a break into 113’s will open test of 114.25 on follow through. Interesting from my seta was yesterday absolute zero reaction in JPY to the glint of risk off, suggesting the dollar bulls are targeting USDJPY higher.

EM Asia

The Malaysian Ringgit

Brent above 80 has improved, but one look at global yields ratcheting higher in the wake of Draghi’s hawkish inflation comments and the true inflationary impact of surging oil prices are having on the US yields, will make local EM traders think twice about diving in headfirst.

Support comes in at 4.12 resistance 4.15

US Dollar Recovers Ground Ahead of Fed Meeting

The US dollar bounced back on Friday, but could not offset the losses suffered during the week. The greenback was lower against most major pairs at the end of five days. Traders adjusted their positions before the weekend giving some breathing room to the USD.

The U.S. Federal Reserve will host its two-day meeting on Tuesday and Wednesday. The Federal Open Market Committee (FOMC) statement will be published at 2:00 pm EDT followed by a press conference by Fed Chair Jerome Powell at 2:30 pm EDT.

A rate lift by the US central bank is highly anticipated and has been priced in to the dollar putting more focus on the words of the Fed chief.

Euro Appreciates as US Trade War Fears Soften

The EUR/USD surged 1.05 percent this week. The single currency is trading at 1.1743 after a late recovery attempt by the USD on Friday.



The Trump administration unveiled the second round of tariffs against Chinese goods on Monday but as more details came out an all out trade war can still be averted.

Despite the rhetoric market participants are optimistic about a resolution that will not have a negative impact on global growth.

German data and EU inflation will be released this week. German confidence has improved of late and forecasts show that trend will continue but European inflation early results are not expected to have gained traction. The EUR has recovered from political uncertainty earlier in the year, but investors will look at fundamentals for guidance.

Canadian Inflation Lifts Probabilities of an October Rate Hike

The USD/CAD fell 0.92 percent in the last five days. The currency pair is trading at 1.2921 after various phases of NAFTA jitters have helped and pressured the loonie. The Canadian currency gained on a weekly basis against a softening greenback.

US-China trade rhetoric hast lost some traction, and as JP Morgan CEO Jamie Dimon put it, it’s more like a skirmish than a war.


Canadian dollar weekly graph September 17, 2018

NAFTA optimism remains high, but officials from both sides have begun to trade sound bites as frustrations mount.

US White House Chief Economic Advisor Kevin Hasset said in a TV interview that the US could forge ahead with the Mexico only trade deal. The US has been trying to get Canada to join the quick agreement made with Mexico, but so far the negotiations have not been as smooth.

Canadian Foreign Minister wrapped up her Washington visit on Thursday with the Quebec elections on October 1 an important day if dairy concessions are given as part of the NAFTA renegotiation.

Canadian monthly GDP data will be released on Friday September 28, with a forecast of 0.1 percent. The stronger pace earlier in the year and with inflation above target will pressure the Bank of Canada (BoC) to lift rates in October. Probabilities of a 25 basis points hike are at 88.74 percent.

Oil Ends Week Higher with OPEC Meeting to Provide Guidance

Oil prices rose ahead of the Organization of the Petroleum Exporting Countries (OPEC) meeting in Algiers in a week that included supply concerns and pressure from US President Trump to keep prices low.


West Texas Intermediate graph

The production cut agreement by the OPEC and other major producers has been the most important factor in the stabilization of crude prices since the 2014 drop.

Supply disruptions have kept prices in current ranges even as the OPEC and partners such as Russia will be discussing ramping up production.

The biggest disruption to supply this year has come from the reapplication of US sanctions against Iranian exports. Global producers that are part of the supply curb have telegraphed their intentions but weather and geopolitical factors have been offset with global growth and energy demand forecast downgrades.

Weekly US inventories threw another drawdown data point on Wednesday and have kept the black stuff bid. President Trump has used twitter as a macro policy tool and this time his aim fell on the OPEC.

The organization has limited options and will look to Saudi Arabia for leadership as some members have pressured internally to increase production for their own national interests.

This time the US is mixing political and economic factors to force an increase in supply, even though the White House is the one who triggered the latest disruption.

Yellow Metal Loses Shine on Friday Looks Ahead to Fed Rate Hike

Gold was lower on Friday by 0.65 percent, but gains earlier in the week still managed to put it in the black with a 0.19 percent gain.

The safe haven appeal of the yellow metal was lower as US stock markets continued their rally stoked by improving economic data in America.



The Fed’s imminent rate hike is keeping gold close to the $1,200 price level and the Swiss franc is now the de facto refuge for investors.

With a 25 basis points fully priced in from the Fed metal investors will be focusing on the economic projections and any changes in the wording of the statement looking for clues on the rate hike path of the central bank.

Market events to watch this week:

Monday, September 24
4:00am EUR German Ifo Business Climate
Tuesday, September 25
10:00am USD CB Consumer Confidence
9:00pm NZD ANZ Business Confidence
Wednesday, September 26
10:30am USD Crude Oil Inventories
2:00pm USD FOMC Economic Projections
2:00pm USD FOMC Statement
2:00pmUSD Federal Funds Rate
2:30pm USD FOMC Press Conference
5:00pm NZD Official Cash Rate
6:00pm NZD RBNZ Press Conference
Thursday, September 27
8:30am USD Core Durable Goods Orders m/m
8:30amUSD Final GDP q/q
Friday, September 28
4:30am GBP Current Account
8:30am CAD GDP m/m

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

Copper melts

MANILA, Sept 18 (Reuters) – London copper drifted lower for a third session running on Tuesday as China vowed to respond to the latest U.S. tariffs on about $200 billion of Chinese goods, exacerbating the trade war between the world’s two biggest economies.

In imposing the new tariffs, U.S. President Donald Trump warned that if China takes retaliatory action against U.S. farmers or industries, “we will immediately pursue phase three, which is tariffs on approximately $267 billion of additional imports.”

China’s commerce ministry said the country has no choice but to retaliate against the fresh U.S. tariffs and hopes the United States would correct its behaviour.

“We know China can’t go tit for tat as they don’t have enough U.S. goods to tax,” said Stephen Innes, head of Asia Pacific trading at OANDA brokerage.

“So, if there is a more heavy-handed approach such as flat-out import restriction or overtly weakening the yuan, it could certainly bring the big market bears out of hibernation,” Innes said in a note to clients.

Commodities Weekly: Copper nears 15-month low as fresh tariffs announced

CNBC via Reuters

Trade Tensions Return as US Tariffs on China Lift Dollar

The dollar bounced back on Friday, after a couple of economic indicator misses this week, the greenback is higher against all major pairs. Major pairs and commodities are lower against the greenback ahead of the weekend. The American currency did not manage to overturn the losses posted during the rest of the week. On a weekly basis the USD is lower against all majors except the Japanese Yen.

A slowdown in the pace of inflation, miss in retail sales expectations and a softer tone on trade from the Trump administration were the three major factors for the softness of the currency.

Rate differentials also helping the USD. This week was mostly a non event for the Bank of England (BoE) and the European Central Bank (ECB). Although the Sept rate hike by the Fed is priced in, it also shows its the only economy with some momentum to even lift rates. Next up in the economic calendar are the Bank of Japan (BOJ) and the Swiss National Bank that are not expected to modify their monetary policies.

Euro Scored a Win on a Weekly Basis but Falls as Trade Tensions Rise

The escalation of trade tensions was a positive for the US dollar as investors sought a safe haven during times of uncertainty. As potential olive branches are put forward there is optimism that Canada will join the US-Mexico agreement and talks with China could lead to closing the gap between the two points of view on trade. US President Trump tweeted on Friday that the a meeting with China is no guarantee of anything and reports in the media suggest the $200 billion US tariffs are still on the table.

A September rate hike is still fully priced in, but the inflation and retail sales miss did slim down the probabilities of a follow up rate hike in December.

The American economic calendar is short on blockbuster releases with Washington development to guide markets as trade tensions have eased, but are far from resolved.



The euro rose almost 1 percent this week with risk appetite returning to markets and strong wage growth in Europe. The European Central Bank (ECB) did as expected and held rates signalling that it will end its QE program at the end of the year and continued to maintain interest rates low through the 2019 summer.

Investors were not given any new information and instead bought the currency on improved international trade environment. The olive branches are just now entering the picture, and ECB economists could not have predicted the timing as they also announced a downgrade of their economic projections, citing trade worries.

Upcoming European inflation along with service and manufacturing PMIs will bookend the economic calendar in the EU. The gap between interest rates will continue to grow as the U.S. Federal Reserve pushes on its tightening policies as growth fails to spark momentum in Europe.

Fed rate hikes are priced in into the USD, but signs of European slowdown or the US economy hitting a higher gear could be a gift for dollar bulls.

Canadian Dollar Awaits News on NAFTA as US Gets Tough on China

The Canadian dollar fell on Friday. After the Trump administration softened its stance on international trade, in particular by reopening trade talks with China, NAFTA optimism boosted the loonie. Traders did not feel confident in carrying over short dollar positions into the weekend and the greenback saw a recovery on Friday.


Canadian dollar weekly graph September 10, 2018

The loonie advanced 1 percent during the week and next week’s inflation and retail sales data on Friday are crucial for the fate of a Bank of Canada (BoC) interest rate hike. NAFTA headlines will roll in as the team of negotiations get back to work with the aim to add Canada to to US-Mexico agreement.

Expectations are mixed on NAFTA, as Canada seems ready to make concessions on dairy but the US and Mexico continue to press for a trilateral deal while also adding they are ready to forge ahead if its only a bilateral one.

China Tariffs Cap Rise of Oil as Growth Concerns Hit Commodities

Oil fell 0.35 percent on Friday compounding on losses seen on Thursday, but will head into the weekend with a 1.09 percent gain. Supply disruptions have lifted prices after the 2014, be it the Organization of the Petroleum Exporting Countries (OPEC) and major producers agreement to limit their output to weather and geopolitical disputes.

Hurricane Florence in the US was downgraded and with it the negative short term effect on potential disruptions. IEA reported today that OPEC is starting to ramp up production by 420,000 daily barrels more than making up for the impact that the sanctions on Iranian exports will have on supply.

Global demand for crude has not shown signs of recovery and if producers start pumping there is a risk that oversupply could once again bring instability to oil prices.

Geopolitical factors like the US-China trade tensions will continue to put downward pressure on crude prices as higher levels of protectionist measures tend to slow down global growth.

Yellow Metal Falls as Risk Aversion and Fed Rate Hikes Advance

Gold fell 0.46 on Friday after a bounce in the US dollar at the end of the week. Risk aversion has been the main dollar of US strength as trade war concerns could have a deep impact in global growth. Commodities have recovered this week after the Trump administration has softened its tough stance with China with bilateral talks to restart in a couple of weeks.



Friday’s move is also explained by investors limiting their exposures as the weekend approaches, given that geopolitical risk could rise at any moment. The move gave some breathing room to the greenback as it is on its way to erase the majority of its losses against the yellow metal.

A bullish confluence in oil markets

SINGAPORE (Reuters) – Oil prices slipped on Thursday, although U.S. crude remained above $70 a barrel on the back of falling crude inventories and Brent was still close to $80 because of looming sanctions against Iran.

Brent rose above $80 per barrel the previous session for the first time since May, spurred by expectations that U.S. sanctions against Iran’s oil exports, which will start in November, will tighten global markets.

U.S. crude inventories C-STK-T-EIA fell 5.3 million barrels in the week to Sept. 7 to 396.2 million barrels, the lowest since February 2015 and about 3 per cent below the five-year average for this time of year, the U.S. Energy Information Administration (EIA) said in its weekly report on Wednesday.

Stephen Innes, head of trading for Asia-Pacific at futures brokerage Oanda in Singapore, said crude inventory data for last week showed “a much deeper drop than analyst’s expectations … propelling Brent briefly above the fundamental and psychological $80 a barrel for the first time since May, and was equally as supportive for the WTI contract.”

U.S. crude oil production C-OUT-T-EIA fell by 100,000 barrels per day (bpd), to 10.9 million bpd.

Innes said the slight dips on Thursday came as rising refined product inventories, which the EIA also reported, “slightly dampened market overexuberance” as it indicated that U.S. fuel demand may be weakening.

Overall, however, Innes said “the confluence of bullish near-term signals (of) Iran sanctions and sinking U.S. crude inventories should keep oil prices supported for the remainder of the week.”

 

Reuters

OANDA Market Insights podcast (episode 27)

OANDA Senior Market Analyst Alfonso Esparza reviews the week’s business and market news with Jazz FM Business Breakfast presenter Jonny Hart.

This week’s biggest stories: US sanctions against Iran, Turkish lira collapse after steel sanctions and market reaction to UK GDP data

Big revisions offset July miss on payrolls

Another strong US jobs report expected today

The PBoC giveth the PBoC taketh

US Dollar Takes NFP Hit But Ends Up Higher on the Week

The US dollar fell on Friday after the U.S. non farm payrolls (NFP) came in below expectations with only a gain of 157,000 but otherwise the unemployment rate dropped to 3.9 percent and wage growth remained unchanged at 0.3 percent. The greenback is still higher against most majors on a weekly basis. The past five trading days featured central banks and influential economic indicators, but the guiding factor remains the trade tensions between China and the United States. On Friday China announced its preparing new tariffs on $60 billion US goods as retaliation on the ongoing trade spat. The week that kicks off on August 6 will be more subdued from the economic calendar with the central banks of Australia and New Zealand publishing their officials rates. The UK’s gross domestic product, Canadian jobs data and US inflation will wrap up the week on Friday, August 10.

  • RBA and RBNZ expected to keep rates unchanged
  • UK quarterly GDP forecasted to gain 0.4 percent
  • US inflation advancing at 0.2 percent

Dollar Rises Guided by Geopolitics

The EUR/USD lost 0.61 percent in the last five days. The single currency is trading at 1.1582 after the EUR rose 0.10 percent on Friday but is far from recouping the gains of the USD during the week. The euro rose on a tight rangebound session despite overcoming weak retail sales and was helped by the lower than expected jobs report. The currency pair was mostly guided by geopolitics and the U.S. Federal Reserve meeting on Wednesday. Trade tensions have escalated on the US-China front with the US central bank staying put on rates, but giving an optimistic view on the economy.



The US central bank is expected to continue with its plans to lift interest rates two more times in 2018. The jobs report brought less jobs than expected but still managed to add enough jobs to bring the unemployment rate down to 3.9 percent. There are concerns that the employment numbers will take a hit as trade war decisions trickle down but for now the outlook for American jobs is solid.

Inflation pressures remains low as despite a lower unemployment and high participation rate wages have not caught up to other costs. Labour shortages have not been widespread enough to trigger an above inflation rise in pay.

The positive employment data and the impressive growth of the economy in the second quarter validate the Fed’s decision to raise rates twice so far in 2018 and to continue on the path for two more rate hikes. The CME FedWatch tool shows a 93.6 percent of a chance of a hike in September 26.

The week of August 6 to August 10 will not bring the same economic calendar fireworks compared to the first week of the month. The highlights will be the Reserve Bank of New Zealand (RBNZ) and the Reserve Bank of Australia (RBA) with rate announcements that will likely end up with no change leaving investors to look for words from central bankers and monetary policy language for guidance.

The consumer price index on Friday will shed more light on inflation in America.

BoE Dovish Hike Sinks Pound

The GBP/USD fell 0.79 percent during the week. Cable is trading at 1.3004 wit the pound rising slightly on Friday. The Bank of England (BoE) hiked its benchmark rate on Super Thursday, but it was the cautionary words of BoE Governor Mark Carney that ultimately took the currency lower. The actions of the central bank were hawkish, by delivering the second rate hikes since the crisis, but Brexit looms over the monetary policy decision as hard Brexit scenarios have increased in probability.



The decision of the Bank of England (BoE) was unanimous, but given the fragile state of Prime Minister May’s leadership as she heads into the final 8 months of Brexit negotiations, it could end up being the only pro-active decision by the central bank in 2018 as it heads into reactive territory.

Loonie Higher on Strong Data and NAFTA Hope

The USD/CAD lost 0.58 percent during the week. The currency pair is trading at 1.2983 after strong Canadian trade data added more arguments for a Bank of Canada (BoC) rate hike. Canada’s deficit shrunk to $626 million in June. The monthly GDP numbers released on Tuesday by beating estimates with a 0.5 percent gain.


Canadian dollar weekly graph July 30, 2018

The Bank of Canada (BoC) lifted interest rates by 25 basis points on July 11 and a strong GDP report and a narrower trade deficit the probability of a follow up in 2018 has risen. Bank of Nova Scotia is forecasting 2 more rate hikes despite the uncertain outcome on NAFTA. The BoC will try to keep the gap between the Fed funds rate and the Canadian rate as much as the economy will allow. The U.S. Federal Reserve is expected to hike in September and again in December to deliver the promised four interest rate hikes in their path to normalization.

Mexican Peso Rose as US Jobs Missed Expectations

The USD/MXN depreciated on a weekly basis and is trading at 18.5574 on Friday afternoon. The currency pair had a volatile week trading in a tight range. The highest point came as trade fears triggered a flight to safety in which investors bought dollars. The talks on Thursday and Friday between US and Mexican negotiators are keeping NAFTA hope alive and with he soft employment numbers in the US the MXN appreciated.



NAFTA negotiations have advanced in recent weeks as the newly elected Mexican president has been optimistic a quick deal can be reached. Mexican Trade teams are in Washington to talk with the US Trade representative, but the US did not extend an invitation to Canada to join the meetings.

The US team is sticking to the sunset cause and the auto content but there is more willingness to negotiate in bilateral terms, although Mexico has made it clear that it won’t negotiate without Canada being present.

Market events to watch this week:

Tuesday, August 7
12:30am AUD RBA Rate Statement
11:00pm NZD Inflation Expectations q/q
11:05pm AUD RBA Gov Lowe Speaks
Wednesday, August 8
10:30am USD Crude Oil Inventories
5:00pm NZD Official Cash Rate
6:00pm NZD RBNZ Press Conference
Thursday, August 9
8:30am USD PPI m/m
9:30pm AUD RBA Monetary Policy Statement
Friday, August 10
4:30am GBP GDP m/m
4:30am GBP Manufacturing Production m/m
4:30am BP Prelim GDP q/q
8:30am CAD Employment Change
8:30am CAD Unemployment Rate
8:30am USD CPI m/m
8:30am USD Core CPI m/m

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

OANDA Market Insights podcast (episode 26)

OANDA Senior Market Analyst Craig Erlam and Head of Trading Asia Steve Innes review the week’s business and market news with Jazz FM Business Breakfast presenter Nick Howard.

This week’s big stories: rate hike from the Bank of England, Apple market cap hits $1 trillion, China moves to shore up the yuan, and US job figures (non farm payroll numbers) miss expectations.

Big revisions offset July miss on payrolls

Another strong US jobs report expected today

The PBoC giveth the PBoC taketh

Dollar Higher After Trump Administration Reopens Talks with China

The US dollar rose on Tuesday after American inflation data was in line with expectations and consumer confidence came out higher than forecasted. The U.S. Federal Reserve wraps up its two day Federal Open Market Committee (FOMC) meeting on Wednesday at 2:00 pm EDT. The market is not anticipating a major change from the language on the rate statement or the interest rate itself. The September Fed meeting has been priced in for another rate hike as the Fed continues its path toward monetary policy normalization. The private payrolls report from the ADP is expected to show a gain of more than 180,000 jobs and serve as the preamble to the biggest indicator release in the market the U.S. non farm payrolls (NFP) due on Friday.

  • ADP forecasted to add 186,000 jobs
  • Fed to hold interest rates unchanged
  • Central bank week continues with the BoE on Thursday

Dollar Rebounds Ahead of FOMC
The EUR/USD fell on Tuesday. The single currency is trading at 1.1689 after breaking above the 1.17 price level on positive European indicator releases during the European session. The USD started gaining traction with the release of inflation data and higher consumer confidence numbers but it was the reports that the US and China are trying to meet to discuss trade that boosted the currency. Private conversation are said to be ongoing with a goal of having ministerial meetings that have been on hold since the trade war rhetoric escalated.



The U.S. Federal Reserve is not expected to modify its monetary policy on Wednesday and without a press conference the focus will be on the language changes in the statement. The Fed has already hiked twice in 2018 and policy members have talked about two more interest rates lift if the economy continues on its current growth path. President Trump has already commented that he is not a fan of the Fed’s decision to keep driving interest rates higher. Chair Powell has so far avoided commenting outside of the central bank’s mandate and this week there won’t be a chance for the financial press to seek his opinion on the matter of the Fed’s independence.

Bank of Japan (BOJ) Underwhelms Sends Yen Lower

The USD/JPY rose on Tuesday after the Bank of Japan (BOJ) kept most of its monetary policy intact, but will allow a wider band on its bond yields as well as the use of forward guidance. BOJ Governor Haruhiko Kuroda said that rates will remain low for an extended period of time. The central bank remains committed to a lofty 2 percent inflation target and has not reached it despite a massive QE program that has been going on for 5 years. Mr Kuroda closed the door to speculation that the BOJ would exit QE.



Investors were underwhelmed by the BOJ’s decision with the currency pair climbing to 111.87 on its way to break the 112 price level. All eyes will be on the U.S. Federal Reserve and its statement on Wednesday. The Fed will follow the BOJ in this busy week with little changes expected, but in current market conditions small tweaks could have big consequences for currencies.

Strong GDP Boosts Canadian Dollar

The Canadian dollar appreciated versus the US on Tuesday after the stronger than expected monthly GDP report. The Canadian economy expanded at a 0.5 percent rate in May versus the anticipated 0.3 percent. The higher annual pace of growth came in at 2.6 percent and has increased the possibility of another rate hike this year, appreciating the loonie versus the greenback on the North American trading session. Oil prices fell below $70 as the US dollar recovered with the announcement of new trade talks between the US and China.



The US dollar staged a comeback after the announcement of lower trade tension between China and the United States. The currency pair touched a session low of 1.3010 at 8:30 am, but is now back at 1.3016 after sources indicated that US Treasury officials and China Vice Premier representatives intend to meet.

The NAFTA and EU-US trade conversations both had positive sound bites this week. Incoming Mexican President was eager for a quick NAFTA renegotiation and he was echoed by the Trump administration. Canada and Mexico made sure to be clear that a trilateral negotiation is needed as the US has been pushing for two bilateral sit downs.

Yesterday US Commerce Secretary Wilbur Ross said that NAFTA talks are close to a deal, specially with Mexico. The latest strategy by the US has been to move faster on talks with its southern neighbour with a new incoming government. Mexico and the US will hold ministerial talks on Thursday in Washington. Canadian officials tried to be part of the meeting but were rejected by the US.

Market events to watch this week:

Wednesday, August1
4:30am GBP Manufacturing PMI
8:15am USD ADP Non-Farm Employment Change
10:00am USD ISM Manufacturing PMI
10:30am USD Crude Oil Inventories
2:00pm USD FOMC Statement
2:00pmUSD Federal Funds Rate
Thursday, August2
4:30am GBP Construction PMI
7:00am GBP BOE Inflation Report
7:00am GBP MPC Official Bank Rate Votes
7:00am GBP Monetary Policy Summary
7:00am GBP Official Bank Rate
7:30am GBP BOE Gov Carney Speaks
Friday, August3
4:30am GBP Services PMI
8:30am USD Average Hourly Earnings m/m
8:30am USD Non-Farm Employment Change
8:30am USD Unemployment Rate
10:00am USD ISM Non-Manufacturing PMI

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

Busy week in markets gets off to a slow start

Investors encouraged by Trump/Juncker meeting

Equity markets are trading slightly in the red in what has been a slow start to an otherwise very busy week in financial markets.

Stock markets have been gradually rising in recent weeks, making their way back to the record high levels they achieved earlier in the year before the numerous trade conflicts involving the US heated up. The apparent progress made at the White House last week between Donald Trump and Jean-Claude Juncker has eased some concerns for now but the threats generally remain.

Earnings season has delivered a positive distraction for investors, with companies once again reporting stellar quarterly results aided by the obvious benefit of tax cuts. We’ll get results from another 144 S&P 500 companies this week as US corporates look to continue the positive momentum of earnings season so far and potentially propel the index to a new high.

DAX ticks lower, German CPI next

BoE seen raising rates while Fed and BoJ also meet

There’s also a number of central bank meetings this week, the most notable of the lot probably being the Bank of England with investors widely expecting a rate hike, taking the benchmark rate above 0.5% for the first time since early 2009. A rate hike is now 86% priced in which could trigger a lot of volatility if policy makers once again hold off, as they did back in May.

BoE Interest Rate Probability

Source – Thomson Reuters Eikon

The Federal Reserve and Bank of Japan will also hold meetings this week although these events may be less eventful, with neither seen adjusting policy this month. The Fed is also on a very clear tightening path and with the economy performing in line with expectations and the trade conflicts not yet biting, I don’t expect there to be any change in the central bank’s stance.

G7 FX moves look to central banks for direction

There has been speculation that the BoJ may look to slightly remove accommodation by increasing the yield it will allow the 10-year to reach, although I’m not sure that will come this week. Investors appear to be testing the BoJ’s resolve, with the yield having hit its highest level since February last year. Should the central bank reject the speculation, I would expect this to quickly reverse course.

This week also sees the release of the US jobs report which is widely regarded to be the most important economic report of the month and is typically a trigger for market volatility.

Economic Calendar

 

For a look at all of today’s economic events, check out our economic calendar.