Is USD Heading Into Melt Down?

We begin this week with a Bank Holiday in the UK and a light calendar. We also look at the prospects for USD.
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Last week, the markets focus on the Jackson Hole Economic Symposium. Several Central bankers delivered speeches there.

Of particular interest where comments by FED chair Powell. He may have disappointed some Dollar bulls hoping for a more hawkish tone.

He stated:

“The economy is strong. Inflation is near our 2 percent objective, and most people who want a job are finding one.

If the strong growth in income and jobs continues, further gradual increases in the target range for the federal funds rate will likely be appropriate.”

He also noted that there are no clear signs of inflation accelerating above 2%.

Powell stuck to the current policy trajectory. The U.S. central bank pushed ahead with its hiking cycle and signalled more hikes were coming.

This is despite President Trump’s objection to higher borrowing costs and a stronger dollar. The DXY has pulled back from its 2018 highs to sit just above the 95 handle.

Talks between China and the US ended on Thursday with no breakthrough in the trade war. The two countries now have $50 billion of tariffs imposed on each other’s goods.

This has raised concerns the conflict could slow global economic growth. The J.P.Morgan Global Manufacturing PMI came in at 52.7 vs 53 prior.

Most other data points are growing but the rate of growth has slowed.

Risk Sentiment in the broader markets was seen to be mostly positive towards the end of last week. The S&P 500 and NASDAQ rose to record highs on Friday.

The Australian Dollar was well supported after Political concerns regarding the Liberal party leadership abated. Scott Morrison was appointed as the new Prime minister.

Former PM Malcom Turnbull was ousted and the chaos caused the Australian dollar to temporarily dip below 0.7250.

The PBoC decided to resume the use of counter-cyclical factor in the CNY mid-point fixing. This is intended to reduce volatility and weighed on the USD.

USDCNY came off its best levels to trade at 6.80.

USD

Last week saw less hawkish comments from Powell and jawboning of the USD by President Trump. Global trade concerns also linger along with a record number of traders long USD.

All of this could become a catalyst for some growing USD weakness. Any sell off could be much harder due to the extended period of strength.

Watching out for possible USD weakness is one of our top tips for the coming weeks.

The first data point of the week is Consumer Confidence on Tuesday expected to come in softer at 126.5 vs 127.4 prior.

GDP 2nd estimate is expected to come in 4.0% after the surprise 4.1% prior reading. Any large deviation to the downside could provide a catalyst for unwinding of Dollar long positions.

This is especially true after such a strong print last data release.

We have both core PCE prelim and headline PCE prelim. These are expected to come in flat at 2.0% and 1.8% respectively.

Thursday sees the release of core and headline PCE price index. The expectations for core PCE M/M see a pick up from 0.1% to 0.2%. The Y/Y is expected to come in at 2%.

EUR

This week the Eurozone looks towards flash August CPI data to see if inflation can hang on above 2%.

The expectation is for a reading of 2.1% Y/Y vs 2.1% Y/Y prior for the headline figure.

Monday German IFO data is expected to mildly tick up. The market will be looking to gauge the ECB’s mood at the upcoming policy meeting mid-September.

Political risk still remains in Turkey and Italy. This could limit any Euro rallies as the market remains wary of the situation.

GBP

Brexit remains the main risk to the UK currency and as such will mostly overshadow any data releases.

The political uncertainty surrounding a deal or no-deal Brexit has dominated. This has made the market cautious of buying the GBP.

It is currently hovering between 1.27 and 1.29 against the USD. It would seem a lot of the Brexit negativity is already priced in.

This could result in consolidation with bouts of volatility as any new Brexit headlines arise.

AUD

After last week’s knee jerk reaction to Australian Politics, AUD has stabilised around the 73 handle.

New PM Morrison is seen as more of a steady hand. Although, recent Chinese data has shown a slowdown in the Chinese economy.

The RBA is still sitting on its hands regarding monetary policy. This has allowed household debt to balloon.

All of this has resulted in less liquidity and the entire country’s housing market is cooling off.

The risks for the AUD remain to the downside. This will be reaffirmed if we see any continued USD strength or weakness in commodities.

This week the market will be closely watching Capital Expenditure. Data for Q2 is expected to tick up to 0.6% vs 0.4% prior.

Any large deviation of the expected data could provide a trading opportunity for the AUD.

NZD

Recent sentiment on the NZD has been quite negative. This was caused by the RBNZ governor stating that rates are to be on hold for longer.

He also wouldn’t didn’t rule out a cut to the current interest rate. Any rallies on NZD would most likely be short term.

The markets are currently positioning mostly short the NZDUSD. We could see some unwinding of those positions if the NBNZ business outlook comes in positive.

The data recently slipped to a 10-year low of -44.9. Business outlook remains one of the main concerns for the RBNZ policy.

Any deterioration in the business outlook could see the NZD remained pressured. The market could price in a potential cut after the recent dovish outlook by the RBNZ.

New Zealand dairy prices have also been declining in recent months. This could present another headwind for the NZ economic outlook.

CAD

NAFTA concerns have been keeping a cap of the USDCAD of late. The recent data has been extremely positive.

This includes a 3.0% Y/Y CPI print with all inflation data coming in as prior or above expectations.

This week’s GDP release is expected at 3% Q/Q. This could push the expectations of a rate hike even higher over the coming weeks. There is currently a 27% chance priced into the CAD OIS curve.

Any NAFTA related headline could help or hinder the CAD. Any outcome for Mexico-US NAFTA talks could also set the tone for the CAD.

Oil remains well supported with WTI sitting at 68 vs the lows mid-August of 65.

If you have any questions about this week’s analysis please leave them below. We read each one and reply to as many as we can.

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