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Dollar Rally Forces EURUSD and USDJPY Breaks
British Pound Surprised by BoE Hawks, But Doesn’t Turn
Euro Traders Ready for Another Round of Economic Data

Dollar Rally Forces EURUSD and USDJPY Breaks

Between two days of key event risk, it seemed that the US Dollar was due a period of moderation. However, this past session was anything but. The normally boilerplate FOMC minutes offered up a surprisingly hawkish lean and extended the currency’s impressive run this week. This extension has raised the stakes for the dollar’s trends. Aside from the Dow Jones FXCM Dollar Index (ticker = USDollar) advancing to six-month highs, we find that many of the majors are attempting to tip the scales into key breakouts. Key among these standout moves are EURUSD, GBPUSD and USDJPY. Each carries a different level of fundamental headwind and thereby carries a different gauge of the dollar’s strength. EURUSD sets the currency against a currency that projects an economic performance and monetary policy bearing that stands into direct contrast to the US. The Cable is a more significant fundamental balance with UK growth and BoE rate forecasts outpacing their counterpart. Then there is USDJPY – a cross that shares a distinct relationship to equities through carry and investor appetite.

For the dollar to maintain this exceptional run, its fundamental backing will have to build steadily. The current trend has been founded on a material upgrade to interest rate expectations. Tuesday’s July CPI figure may have kept the ‘mid-2015’ time frame for the first Fed hike in contention, but falling in-line with consensus did little to embolden rate hawks or convert the complacent and doves. The Fed minutes were far more effective in that capacity. According to the transcript of the July 29-30 meeting, “many Fed officials” believed the pace of job gains may bring forward the first Fed hike. On inflation, “most” saw downside pressures on price growth diminishing. While not stamping a specific date on the first 25bp hike, this presents a tangible hawkishness. Ahead, we are set for another round of rate fodder in US manufacturing activity data and the start of the Jackson Hole Symposium. One element in this slow but measureable change in monetary policy from one of the first adopters is its impact on risk trends. Will the low volatility environment hold out as the easy money is slowly reined in?

British Pound Surprised by BoE Hawks, But Doesn’t Turn

While the Fed’s minutes will no doubt stand out in peoples’ memory longer because of the dollar’s response, the Bank of England’s review was just as remarkable. Breaking from the trend of unanimity for the MPC, we learned that the vote to hold rates was actually 7-2. Members Weale and McCafferty voted for a 25 basis point rate hike at the last meeting. While this is still far from consensus, voices calling for action now means the ultimate hike is much closer than it has been in years. Ahead, retail sales and a 10-year Gilt sale present second tier event risk.

Euro Traders Ready for Another Round of Economic Data

Last week, the Euro’s fortunes dimmed significantly when 2Q GDP figures showed the ‘core’ economies had stalled or contracted. Though European equity indexes have held steady through the disappointment, the implications are significant. A drop in economic activity will temper investor returns and could lead governments to put their deficit reduction goals on hold. That in turn could reverse the record low sovereign borrowing costs and reverse capital inflows. Ahead, we have PMI figures to tell us whether August activity has improved at all.

USDJPY Position on a Different Level than Other Yen Crosses

This past session, GBPJPY recovered from a near breakdown and EURJPY edged above trendline resistance. In comparison, USDJPY put in for a genuine break higher. This was in large part due to the bullish performance of the dollar, but the general performance for these crosses is remarkable. The BoJ has offered little change in tone to suggest they are willing to upgrade their anti-yen policies, so the focus in this performance is fully on risk trends. Yet, the motivations behind sentiment and carry trade are shaky. Can risk appetite really hold firm while economic activity cools? Watch for discussions about health of the global economy and financial market at Jackson Hole.

Australian Dollar Drops after Chinese PMI Misses

Australian data released this morning was modestly encouraging. The June Conference Board Leading Index grew 0.4 percent to offer support through the traditional growth channels. Meanwhile, the capital markets were bolstering the appeal of carry currencies like the Aussie dollar with equity markets on the rise. And yet, the Australian currency took a nasty spill. The source of this move was the August HSBC Chinese Manufacturing PMI. Though still reflecting growth (above 50), the substantial miss of expectations with a 50.3 print clearly unnerved traders.

Emerging Markets: Stimulus Tide Turn Could Spell Trouble

Developed world equity markets didn’t’ seem too troubled by the implications of an earlier end to easy US monetary policy, but the Emerging Markets seem to have taken it to heart. The MSCI EM ETF slipped for the first time in three days (0.2 percent) just after printing a new 18-month high. In the FX market, the EM currencies were heavily coated in red with majors like the Turkish Lira down 1.0 percent, South African Rand off 0.9 percent and Mexican Peso lower by 0.7 percent.

Gold’s Decline Notably Slower than Dollar’s Advance

There is a meaningful divergence in the relative performance of gold and the US Dollar. As the currency is the common pricing instrument for the commodity, their moves are often mirrors not just in direction but magnitude as well. Yet, where gold is down for four consecutive days through Wednesday, it’s losses are far more constrained than the greenback’s gains. Perhaps that safe haven demand is gaining some traction.

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