Forex Major Currencies Outlook (July 11 – July 15)

USD

ISM Non-manufacturing PMI in June, unlike its manufacturing counterpart, surprised to the upside and came in at 55.3 vs 54.3 as expected. The employment sub index slipped into contraction with new orders also declining but staying well into expansion territory. Prices paid index returned to 80 and although it is still very elevated it indicates easing of price pressures. Both production and backlog of orders rose while inventories dropped.

The minutes of the June FOMC meeting showed that participants were wary of deterioration in inflation picture and that restrictive monetary policy is needed. Interest rate hike of 50-75bp will be the most appropriate at the July meeting. The participants saw downside risks to growth and danger that higher inflation could stay entrenched if public looses faith in their resolve to bring it down. USD has rallied after the minutes but then it reversed and continued on a downward trajectory as relief rally took over.

Nonfarm Payrolls came in at 372k vs 268k as expected. The unemployment rate was steady at 3.6% while participation rate slipped to 62.2% from 62.3% in May. Wages were at 0.3% m/m same as in May and 5.1% y/y vs 5.2% y/y the previous month. There are no signs of easing in the labour market which should keep Fed firmly at a pace for a 75bp rate hike in July. The yield on a 10y Treasury started the week at 2.89% and shortly crossed the 3% level during the week before firmly crossing it after NFP. FedWatchTool sees the probability of a 75bp rate hike at 97.7% post NFP and 2.3% chance of a full 100bp rate hike.

This week we will have inflation data for June expected to show another increase and consumption data for the same period.

Important news for USD:

Wednesday:

• CPI

Friday:

• Retail Sales

EUR

Final Eurozone services reading for the month of June was slightly revised up to 53 from 52.8 as preliminary reported and it nudged composite up to 52 from 51.9 as preliminary reported. S&P Global report notes that “The sharp deterioration in the rate of growth of eurozone business activity raises the risk of the region slipping into economic decline in the third quarter. The June PMI reading is indicative of quarterly GDP growth moderating to just 0.2%, with forward-looking indicators such as the survey’s new orders and business expectations gauges pointing to falling output in coming months.” Additionally, they not that there are signs of inflationary forces peaking in April. EURUSD dropped heavily on London open on Tuesday and broke lows for the year to reach levels not seen since 2003. The pair fell below 1.03 and below 1.02 the day after as fears of recession in the Eurozone as well as natural gas shortages grip markets attention.

GBP

The UK final services reading for the month of June saw an improvement to 54.3 from 53.4 as preliminary reported and in May. Composite was lifted on the back of it to 537. from 53.1 as preliminary reported and in the previous month. S&P Global notes that inflation pressures may cause issues for services spending going forward and add that new orders were weakest since beginning of 2021. Input prices are still rising rapidly which will in turn raise cost-of-living.

There were disturbances in the political scene of the UK with current Chancellor of the Exchequer Rishi Sunak and former Chancellor and current Health Minister Sajad Javid resigning. Prime Minister Johnson will not leave his post adding that he will “keep going”. However, the pressures against him were too great and he has resigned as well. New ministers have been appointed. Nadhim Zahawi is appointed as Chancellor of the Exchequer while Steve Barclay is the new Health Minister.

AUD

RBA has delivered a 50bp rate hike as expected and lifted the cash rate to 1.35%. This is the first time that they have raised rate by 50bp in two consecutive meetings and if data supports it they could go for another 50bp rate hike in August. They are determined to bring back down inflation and take further steps to normalize monetary policy. The pace of future rate hikes will depend on incoming data and outlook for inflation and labor market. Inflation is seen peaking later in the year and then returning to the target range of 2-3% in 2023. Medium-term inflation expectations remain well anchored. One source of uncertainty is the behavior of household spending. Although savings rates remain high and households accumulated wealth during the pandemic it is still unclear how higher prices and higher rates will impact the consumer.

Caixin services for the month of June returned to expansion with 54.5 vs 47.3 after abysmal May reading of 41.4. The May reading showed us pain that economy felt due to lockdowns in China while June reading shows us a rebound caused by loosening of restrictions. Composite also returned to expansion with a reading of 53.

This week we will have employment data from Australia as well as trade balance, GDP, production and consumption data from China.

Important news for AUD:

Wednesday:

• Trade Balance (China)

Thursday:

• Employment Change
• Unemployment Rate

Friday:

• GDP (China)
• Industrial Production (China)
• Retail Sales (China)

NZD

The latest GDT auction printed -4.1% following other global commodity prices down. This is the seventh negative auction in the last eight and it was lead by butter prices which plunged 9%.

This week we will have RBNZ meeting at which the bank is expected to continue with 50bp rate hikes.

Important news for NZD:

Wednesday:

• RBNZ Interest Rate Decision

CAD

BOC quarterly business outlook survey showed that almost 80% of businesses expect inflation to be above 3% on average for the period of two years. One quarter of businesses expect it to be above 2% for three years or more. Almost half of the businesses see supply issues persisting until the end of 2023 while expectations for average wage increases in the next 12 months are at 5.8%. Given the danger of inflation expectations getting unanchored we see BOC proceeding with 75bp rate hike next week.

Employment change for the month of June showed a decline of 43.2k vs 23.5k as expected. It was a big miss on the reading as majority of jobs that were lost were part-time jobs. The unemployment rate fell to a new record low of 4.9% from previous record low in May of 5.1%. Unfortunately, this was achieved with a sharp drop in the participation rate (64.9% from 65.3% the previous month). Ultimately, average wages jumped to 5.2% from 3.9% in May. It was a mixed report, however we do not see it will deter BOC from a 75bp rate hike next week.

This week we will have BOC meeting. Incoming data are suggesting very strong economy with rapidly growing inflation, therefore we see a 75bp rate hike.

Important news for CAD:

Wednesday:

• BOC Interest Rate Decision

JPY

Average cash earnings in May came in at 1% y/y vs 1.7% y/y in April and on a real terms, taking into account inflation, they fell -1.8% y/y. BOJ stated that rise in wages is necessary to keep inflation sustainable and with them moving in the wrong direction there will be no need for any changes in monetary policy in the near future. Sources are starting to pop up that BOJ will raise its inflation forecast at their next BOJ meeting, however there will be no tightening of monetary conditions, ultra low rate policy will persist in order to prop up the economy. Former Prime Minister Shinzo Abe was holding a speech in Nara as part of election campaign when he was shot in the back two times with a shotgun. Unfortunately he was not able to push through this fight and passed away.

CHF

SNB total sight deposits for the week ending July 1 came in at CHF748.5bn vs CHF748.4bn the previous week. Virtually unchanged as SNB takes a back seat and lets market dictate the way for Swissy. Inflation in Switzerland showed another unexpected jump as it printed 3.4% y/y vs 3.2% y/y as expected and it rose 0.5% m/m. Inflation is now at a 30-year high with transport, housing and energy prices contributing the most. Core inflation rose 1.7% y/y vs 1.5% y/y in May. SNB indicated their willingness to reign in inflation so this is a nudge for a rate hike in September.

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_{Please note that this analysis should not be used as investing advice as it is only an overview of the economic events influencing the markets. Please remember that our accounts have Market Execution. Please note how Execution works during high impact news and other times of low liquidity.}