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Forex Today - The USD is drifting as traders await Fed chair Jay Powell's testimony

Market Analysis /
Greg McKenna / 17 Jul 2018

Welcome to my Forex Today column where I'll give a brief wrap on the key drivers of Forex markets and throw in a chart of the day. 

As ever, feedback welcome....oh and for AUDUSD specifically you can find that in My Australia Today piece each morning on the blog. 

QUICK SUMMARY

The USD had a good week last week but is on the back foot a little this morning after the Euro gained 0.2% to 1.1708. The Yen reversed early weakness and USDJPY is at 112.29 down 0.1% and thePoundd is well off the high of the day with GBPUSD at 1.3235 this morning largely unchanged despie Brexit messiness.

On the commodity bloc the Aussie is largely unchanged at 0.7414 after rallying up to ~0.7441 at one point when the USD was weak. It’s still the case that the short term moves are driven by the USD and Euro though the AUDUSD does look extended against copper which dipped 0.3% to $2.76 a pound. The Kiwi is down a quarter of a per cent after a miss on Q2 CPI with a print of 0.4% against 0.5% expectations. It's at 0.6758 while the CAD gained 0.2% with USDCAD down at 1.3133.

BIGGER PICTURE

The solid retail sales revisions in the US (May from 0.8% to +1.3%) and the 0.5% print for June helped the USD recover from the early weakness last night.

I’m frankly still baffled by the why and how of the lack of appreciation for the real and stark economic and policy differences between the US economy and the Fed with other nations and jurisdictions. That traders seem to want to focus on what ails the US unless there is clear evidence of ailment somewhere else is a clear narrative that we can take away from the price action in markets this year.

As I’ve written before some of that is, I believe, antipathy toward President Trump and a certain pre-schadenfreude as traders and investors expect he’ll eventually blow up the US economy. But, as the data shows that is not what is happening. US economy is still doing well and expected to print solidly in Q2 and Q3 at the very least. Germany, and other places are already slowing.    

Against this backdrop Fed chair Powell’s walk up Capitol Hill this evening will be extremely important for the USD and US rates.  

Already last night rates caught the strength of retail trade, the better than expected NY Fed Empire Manufacturing Index (+22.6 v 21 exp) and the lift in the Atlanta Fed’s GDP now to a 4.5% expectation for Q2. But forex traders, like Minneapolis Fed boss Neel Kashkari, seem to be worried about the recession the flattening of the yield curve is suggesting for a few years hence. Just recall what JP Morgan boss Jamie Dimon said…no potholes yet.  Powell claims to be data driven so tonight’s address is likely to be pretty upbeat, he’ll not risks of course, but upbeat and on track for more rate hikes is likely to be the message. That should be USD supportive.

The degree to which it is though is hard to fathom. Like last night’s data will Powell simply drag the USD back from the precipice or will he drive it genuinely back toward the highs against the Euro and other pairs. Likely we are stuck in a range for the moment. But my trend indicators suggest Euro, GBP, AUD, NZD, and Yen (among others) are still in a downtrend.

Though as I highlighted yesterday the fact the market is now long USD and short most other things - and only a little bit long Euro - is and impediment to further USD gains right now. The question is whether we now need a USD long wash out to recommence its rally or the pause in the USD's strength will continue for a while yet before it can again reassert itself. 

Click on me, I'll expand
Click on me, I'll expand

Perhaps, as Bundesbank president Jens Weidmann told the German cabinet recently, the fact gorwth is already slowing might make a difference eventually. But as I also highlighted yesterday, the data has been better than expected recently which is another handbrake on the USD. 

Japy Powell could change that if he reinforces the Fed's base case of US economic strength and rate rises not its risk case of trade tensions and uncertainty.  

And folks don't forget Brexit. Markets appear hopelessly complacent to me. The messiness of the Chequers deal which already seems to be unravelling could leave UK-EU negotiations with nowhere to go. Robert Peston wrote on Facebook overnight that:

Her (PM May) Chequers Brexit deal seems to be history only days after the ink on its associated white paper has dried: it is difficult to see the EU agreeing to levy the UK's tariffs, as the ERG amendment demands; and absent that implausible agreement from the EU, there is no longer a credible customs plan that would keep open the border between Northern Ireland and the Republic (or at least not one that the EU would recognise).

This implies the UK no longer has a credible plan for its future trading relationship with the EU.

Which feels like crisis territory. And it's only Monday.

The market doesn't agree with me. GBPUSD is holding up. But the risks are rising. Mark Carney's speech tonight is probably going to be GBP supportive. But it will be interesting nonetheless.  

Forex chart of the day – USDCNH.  For any other asset I would be screaming top. But this is the Yuan, offshore granted but the yuan nonetheless. So the big question is whether or not this current consolidation – loss of momentum – in USDCNH over the past week or so presages a big dip lower toward 6.60, maybe even 6.54. Or whether this is the pause that refreshes on the 6.9 – perhaps 7.0.

The currency isn’t the best method to stimulate the Chinese economy, but it is still an effective method should the PBOC, SAFE, and other authorities decide that a weaker yuan would aid the economy. As with everything in China though the ability to do this without causing destabilisation of current economic transition processes and capital flight will be key.

Click on me, I'll expand
Click on me, I'll expand

DATA:

On the day we get the RBA board minutes hers in Australia. Singapore’s trade data for June is out as are Chinese house prices and industrial capacity utilisation. Tonight we get a window into where the UK economy is at with the release of employment, wages, and a speech from BoE governor Carney. Later in the evening it’s US capacity utilisation and industrial production as well as the NAHB housing index. But the big event is day one of  Jay Powell’s semi-annual address to congress.

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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