The dollar tumbled against all the other G10s yesterday after Fed Chair Jerome Powell said that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the US economic outlook, thereby bolstering the case for a rate cut at the Fed’s upcoming meeting. The Bank of Canada kept rates unchanged, noting that their current level appears appropriate, but appeared concerned with regards to the effects of global trade tensions. As for today, Powell will present his testimony before Senate, while the US CPIs and the ECB minutes are due to be released.
The dollar tumbled against all the other G10 currencies yesterday and responsible for that was Fed Chair Jerome Powell. The greenback tumbled the most against NOK, NZD and JPY in that order, while the currency against which it underperformed the least was CAD.
Yesterday, Powell presented his semiannual testimony before the House Financial Services Committee of the US Congress, but the dollar took the hit earlier, at the time Powell’s prepared text was made public. In our view, the point at which the market locked its gaze was the paragraph saying that since the previous meeting, “based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook”.
Following the Trump-Xi trade-ceasefire agreement, as well as Friday’s strong NFPs, investors may have been caught off guard by his remarks. Remember that the dollar was on a steady rise recently and heading into the testimony, as investors had been scaling back bets with regards to aggressive cuts by the Fed. However, Powell made them rethink and put some of those bets back on the table. According to the Fed funds futures, a 25bps cut at the Fed’s upcoming gathering remains fully priced in, while the probability for a 50bps decrease has rebounded to nearly 30% from just 2% yesterday. Investors, also added to the bps they anticipate being cut by December, but given that there were no strong hints with regards to what the Fed may do after July, a third cut remained factored in for the next year. It was just brought forth to March from May.
The dollar remained under selling interest at the time Powell presented his remarks, as well as during the Q&A session, when he added that the June employment report did not fundamentally change the Fed’s economic outlook and that the current levels of wage growth are not high enough to result in upward pressure on inflation. Apart from a sliding dollar, increased speculation with regards to lower US rates in the near future pushed equity indices up. Although most major EU bourses stayed on the defensive ahead of Powell’s testimony, Wall Street opened higher with all three major US indices hitting new record highs. Asian indices followed suit today, with Japan’s Nikkei 225 and China’s Shanghai Composite gaining 0.51% and 0.08% respectively.
Looking ahead, we are confident that the Fed will indeed cut rates when it meets next, but we only see the case for a 25bps decrease. Even St. Louis Fed President James Bullard, who was the only member voting for a cut at the prior gathering, does not believe that a “double cut” is needed. However, for us the big question remains whether more cuts are underway, or whether one will be enough for this year. We may get extra clues today form the Fed Chief, as he will be presenting his testimony before the Senate Banking Committee. Although the text will be the same, we may get additional information on the Fed’s future plans during the Q&A session.
We will also pay close attention to the US inflation data, which are scheduled to be released ahead of Powell’s second appearance. The headline CPI rate is expected to have slid to +1.6% yoy from +1.8%, but the core one is anticipated to have held steady at +2.0% yoy. A steady core rate could probably mean that the slide in the headline print may be due to volatile items, like energy, and may not be enough to bolster further the case for aggressive easing by the Fed. However, just after the Fed Chief’s dovish remarks, a negative surprise in underlying inflation may prompt investors increase the number of rate-decreases they anticipate by year end, bringing the cut they expect in March 2020 closer, perhaps to December this year.
In the beginning of this week, USD/CHF travelled a bit higher, tested and had a brief overshoot above the short-term downside resistance line taken from the high of May 22nd. But the bears managed to quickly push the rate back down and after yesterday’s remarks from Fed chair Powell, the dollar took a hit against all of its major counterparts, including the Swiss franc. This morning, the pair continued to drift lower and we believe it may continue in that direction, at least for a while more.
A move slightly lower could test an important support area, at 0.9840, which held the rate from falling between July 2nd and 4th. It may do the same again and stall the pair, or even act as a bouncing ground for a small correction to the upside. But as long as USD/CHF stays below the 0.9885 barrier, we may see another leg of selling. If this time, the 0.9840 hurdle fails to withstand the bear pressure, a break of it may open the door to a slightly lower area of support, at 0.9810, marked near the high of June 27th and by an intraday swing low of July 1st.
In order for us to abandon the bearish scenario, a break above the aforementioned short-term downside line is required. But to get more comfortable with higher areas, we would like to see a clear break above the key resistance zone between the 0.9950 and 0.9965 levels, marked near the high of July 9th and near the lows of June 17th and 18th. This way we will examine a possible move to the next potential resistance obstacle, at 1.0015, a break of which could lift the rate to the 1.0050 mark, which is the inside swing low of May 29th.
Apart from Powell’s testimony, we also had BoC monetary policy decision yesterday. The Bank kept interest rates unchanged at +1.75%, as it was widely anticipated, and noted that the degree of accommodation provided by the current rate remains appropriate, staying among the very few major central banks that have not turned their eyes to the cut button yet.
Yesterday, we noted that something like that could prove positive for the Canadian dollar, but we were wrong. The Loonie slid at the time of the announcement, as the rest of the statement appeared to be more cautious than many may have expected. Policymakers noted that ongoing trade tensions are having a material effect on the global economic outlook, with the US-China conflict, in particular, curbing manufacturing activity and business investment, as well as weighing on commodity prices. They also noted that growth in Q2 appears to be stronger than previously predicted, but they attributed that to some temporary factors, including the reversal of weather-related slowdowns in the first quarter and a surge in oil production.
Having said all that, the Loonie’s slide was short-lived against its US counterpart, with the currency recovering the lost ground and ending the day higher, albeit being the one which gained the least against the greenback. With the BoC looking content with the current level of interest rates, and Powell adding to the case of an imminent cut in the US, USD/CAD could continue drifting lower for a while more. Bearing in mind that ECB officials have also been open to additional stimulus, EUR/CAD may he headed in the same direction as well.
Speaking about the ECB, today we get the minutes of its latest policy gathering. At that meeting officials decided to push back their forward guidance, noting that they expect rates to stay untouched “at least through the first half of 2020.” At the press conference following the decision, President Draghi noted that several members raised the possibility of further rate cuts, while others talked about restarting QE, in case of adverse contingencies, while a couple of weeks thereafter, he himself said that additional stimulus will be required if a sustained return of inflation to the ECB's aim is threatened.
According to Eurozone’s money markets, investors are now nearly fully pricing in a 10bps rate cut in the deposit rate at the September gathering, while there is a 36% chance for such an action to take place at the upcoming meeting. Taking into account a recent report noting that ECB officials may not rush into additional easing in July and perhaps wait for September, when they will have the updated macroeconomic projections to work with, we believe that they could use the July meeting to lay the groundwork for a potential action in September. That said, we will scan the minutes to see whether this is the case, or whether officials were keen to act sooner, or maybe later.
From the end of June, EUR/CAD was in a steep downtrend, trading below a downside resistance line taken from the high of June 25th. But everything changed on Tuesday, when the pair broke that line and rushed to the upside to hit the 1.4760 barrier, which eventually held the rate down and then forced it to slide back to the 1.4700 mark. Our oscillators don’t seem to be showing any clear direction, hence why we will stay flat and wait for a clear break through one of our key levels, before examining a further directional move.
A drop below the 1.4700 hurdle, which yesterday acted as a good support zone, could invite more sellers into the game and the rate made slide south once again. We will then examine the next potential obstacle, at 1.4660, which may initially provide some support for EUR/CAD. The pair might rebound slightly higher, but if the rate stays below the 1.4700 zone, then that rebound could be seen as a temporary correction before another leg of selling. If EUR/CAD slides again and breaks below the 1.4660 area, it may end up testing the lowest point of this week, at 1.4635.
If the pair makes a run back up and pushes above the 1.4760 barrier, this could invite more bulls to step into the field and lift the rate to some higher areas. This is when we will examine a possible test of the 1.4802 hurdle, a break of which could allow the rate to accelerate further, aiming for the 1.4853 level, marked by the high of July 2nd.
During the European morning, the final German CPIs for June are coming out, but as it is the case most of the times, they are expected to confirm their preliminary estimates. Namely, the CPI rate is forecast to come in at +1.6% yoy, and the HICP one at +1.3% yoy.
Sweden’s CPIs for June are also due to be released. Both the CPI and the CPIF rates are anticipated to have declined below the Riksbank’s objective of 2%. Specifically, they are expected to have slid to +1.9% yoy and +1.8% yoy, from 2.2% and 2.1% respectively. However, if this is the case, both rates will still be above the Bank’s projections for this year, which are at +1.8% and +1.7%. As always, we will pay more attention to the core CPIF metric, which excludes the volatile items of energy, which has been moving in the desired direction for the last three months and stood at +1.7% in May. If the aforementioned headline rates meet their forecasts and the core CPIF one stays unchanged, or even ticks down, we doubt that policymakers will be tempted to alter their forward guidance when they meet next. Even after the ECB pushed back its own guidance and Draghi signaled that additional stimulus may be needed, the Riksbank maintained its view that the repo rate “will be increased again towards the end of the year or at the beginning of next year”, although noting it should proceed cautiously with monetary policy.
In the US, apart from Powell’s second appearance and the CPIs, we also have the initial jobless claims of the week ended on July 5th. Expectations are for a minor slide to 220k from 221k, which will drive the 4-wk moving average down to 221.75k from 222.25k.
As for tonight, during the Asian morning Friday, China’s trade data for June are scheduled to be released. The nation’s trade surplus is expected to have increased to USD 45.2 bn from around 41.7bn in May, with exports falling +2.0% yoy after rising +1.1%, and imports sliding +3.0% yoy after dropping 8.5%.
With regards to the speakers, besides Fed Chairman Jerome Powell, we have four more Fed speakers on the agenda, from whom we may get additional information with regards to the FOMC’s future plans. Those are: New York President John Williams, Atlanta President Raphael Bostic, Richmond President Thomas Barkin and Board Governor Randal Quarles.
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