Forex Major Currencies Outlook (July 12 – July 16)

USD 

ISM Services PMI for the month of June came in at 60.1 vs 63.5 as expected and down from 64 in May. This is a big miss led by a drop in the production index of over 6 points. The employment index, same as with last week’s manufacturing report, slid below the 50 level to 49.3. As long as there are unemployment benefits coupled with the need for parents to stay at home in order to take care of their children, we will see issues with employment. A brighter picture should be from September on when unemployment benefits expire and schools reopen. New orders dropped slightly while new export orders showed significant decline, barely hanging in expansion territory at 50.7. Overall, the reading at 60.1 is very encouraging and it is still among the highest recorded. 

FOMC Minutes from the latest June meeting showed various participants expecting conditions necessary for reduction of the pace of asset purchases to be met somewhat earlier than they had anticipated at previous meetings in light of economic data, indicating that reduction in QE could come by the end of the year. Many participants felt that economy was still 'far' from achieving maximum employment goal while majority of them concluded that risks to inflation projections are tilted to the upside. 

This week we will have inflation and consumption data. 

Important news for USD: 

Tuesday:

• CPI

Friday:

• Retail Sales 

EUR 

Final services PMI reading for June came in at 58.3 vs 58 as preliminarily reported. There was a positive revision to French reading and a negative revision to German reading. The composite is held high at the 59.5 level with German reading hanging above the 60 level. We can see strength from Q2 moving into Q3 as PMI readings will stay elevated in the coming quarter. Markit notes that: “Business is booming in the eurozone's service sector, with output growing at a rate unsurpassed over the past 15 years. A wave of optimism that the worst of the pandemic is behind us has meanwhile propelled the firms' expectations of growth to the highest for 21 years, boding well for the upturn to gain further strength in coming months. Firms are increasingly struggling to meet surging demand, however, in part due to labour supply shortages, meaning greater pricing power and underscoring how the recent rise in inflationary pressures is by no means confined to the manufacturing sector.” 

German ZEW survey for July showed current conditions returning to positive for the first time in 2 years with the 21.9 reading reflecting optimism surrounding reopening. Concerns are located in the expectations category which fell to 63.3 from 79.8 in June for Germany and to 61.2 from 81.3 the previous month for the Eurozone. European Commission put out new projections for GDP and inflation. GDP was upgraded to 4.8% in 2021 and 4.5% in 2022 while inflation is now seen at 1.9% in 2021 and 1.4% in 2022. They see upside risks to inflation and characterize overall risks to the economy as balanced. 

Results of ECB’s 18-month long strategy review show the bank abandoning its “close to but below 2%” inflation target and adopting new symmetric 2% inflation target over medium-term. HICP remains the appropriate price measure. The ECB has explicitly recommended including OOH (owner-occupied housing) in HICP calculation over time. New strategy will be applied from the July meeting which is to be held on July 22. ECB president Lagarde stated that a new "more narrative based" statement will replace introductory statement at ECB press conference. 

GBP 

Both services and composite PMI improved from their preliminary 61.7 reading to 62.4 and 62.2 respectively. UK economy is still going on strong with all three PMI readings printing above 60 for the third consecutive month once again confirming a strong growth in Q2. Markit noted that backlogs of orders increased at the fastest pace in the history of the survey which spans since 1996. Worker shortages combined with supply delays were the main constraints on growth. Input prices remain highly elevated across all service sectors indicating mounting price pressures (inflation). GDP in May increased by 0.8% m/m vs 1.5% m/m as expected. That is a big miss and it pushed GBPUSD pair down, however it is a fourth consecutive monthly increase and it puts Q2 GDP on the right path. Additional positive is that consumer services activity showed a continued strong rebound due to the ongoing reopening. 

Prime Minister Johnson announced that lockdown restrictions will be lifted on July 19, the so-called “Freedom Day”. He added that pandemic is far from over and that cases are rising, however the question he asked was along the lines of “if not now, when?”. People will not be mandated to wear face masks and will no longer be instructed to work from home. 

This week we will have inflation and employment data. 

Important news for GBP: 

Wednesday:

• CPI.

Thursday:

• Claimant Count Change
• Unemployment Rate 

AUD 

RBA has left cash rate unchanged at 0.10% as was widely expected with 3-year bond yields still capped at 0.10%. April 2024 bond has been retained as the targeted bond. The bank members stated that bond purchases will continue after current program is completed in September. They have also acknowledged that economic recovery is stronger than previously expected and that labour market continued to improve at the faster pace. The response to improved outlook will be done by adjusting weekly amount of bonds purchased from AUD5bn to AUD4bn and further assessment of economic situation will be done in November. The tone of the statement was dovish and it was amplified by the statement from governor Lowe that RBA will not hike rates before 2024. Further on, Lowe added that QE will likely be needed in the future business cycles. AUD managed to rise due to the reduction in bond purchases, which can be interpreted as positive sign for the economy, but will find itself under pressure from other currencies in the future, most notably NZD for which there are already calls for rate hike in November. 

Caixin services heavily missed expectations by coming in at 50.3 vs 55.7 as expected. This has pulled composite reading to 50.6 from 53.1 in May. Services printed their lowest reading in 14 months. The reading still holds above the 50 level, however drops in new orders were significant as South China was hit hard with new virus outbreak. Inflation data for June showed CPI ease to 1.1% y/y from 1.3% y/y in May due to a drop in food prices (-1.7% y/y), especially pork prices (-38.5% y/y), with PPI rising 8.8% y/y vs 9% y/y the previous month. This is the first time in 2021 that PPI is not rising at a faster pace than previous month. Chinese government stated that it will cut Reserve Requirement Ratio (RRR) for SMEs and then made a broad-based rate cut of 50bp. The decision will come into effect on July 15. 

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

Important news for AUD: 

Tuesday:

• Trade Balance (China)

Thursday:

• Employment Change
• Unemployment Rate
• GDP (China)
• Retail Sales (China)
• Industrial Production (China) 

NZD 

Quarterly Survey of Business Optimism showed a business confidence at 7% in Q2 vs -13% in the previous quarter. This huge improvement led a majority of local banks to cite it as the main reason for their call for RBNZ rate hike in November of this year. Market pricing for the rate hike is above 80%. NZDUSD was pushed higher on the rate hike optimism. With RBA leaving policy unchanged and RBA governor Lowe stating that rate hikes will not come before 2024 AUDNZD short seems like a better trade. 

This week we will have RBNZ meeting and inflation data for Q2. No changes to rate are expected but we should see RBNZ to formally announce date when they will stop with QE. 

Important news for NZD: 

Wednesday:

• RBNZ Interest Rate Decision

Friday:

• CPI 

CAD 

Employment report for June showed some very encouraging data. Employment change came in at 230.7k vs 195k as expected. The unemployment rate fell to 7.8% from 8.2% in May. Participation rate was the number one star as it rose to 65.2% from 64.6% the previous month. The level is highest since March of 2020, beginning of pandemic in Canada. Parts of Canada are still under lockdown but easing of restriction is expected to come soon which should lead to additional strong employment reports. One big concern with the report is that full-time employment fell -33.2k and all of the gains were recorded in part-time employment (263.9k). Overall, we can expect a more upbeat tone regarding the labour market coming from the BOC. 

This week we will have BOC meeting. No changes to rate are expected but we should see asset purchases being reduced by additional CAD1bn per week. 

Important news for CAD: 

Wednesday:

• BOC Interest Rate Decision 

JPY 

Final services PMI number for June improved to 48 from 47.2 as preliminarily reported. Composite was thus pushed to 48.9, a tick up from 48.8 in May. Services reading remains in contraction territory for the 17th consecutive month. Although state of emergency has been lifted in many prefectures we can expect reading to stay below the 50 level due to negative signs from new business and employment indexes. Household consumption in May came in at 11.6% y/y while labour earnings rose 1.9% y/y, thus making it the biggest increase in over 3 years. Both readings were impacted by the base effects from the last year. 

Prime Minister Yoshihide Suga declared a state of emergency for Tokyo area. The new state of emergency will run through August 22. The Olympic Games are set to start on July 23 and will have even more limited live audience than previously calculated with. Additional state of emergency will further impair the economy, especially services sector where, as we stated, negative signs are mounting. 

This week we will have BOJ meeting. No changes to rate are expected but we should see BOJ lower their growth projections. 

Important news for JPY: 

Friday:

• BOJ Interest Rate Decision 

CHF 

SNB total sight deposits for the week ending June 2 came in at CHF712.1bn vs CHF712.5bn the previous week. A small decline in the deposits indicating SNB’s absence, for the moment, from the markets. Seasonally adjusted unemployment rate ticked higher to 3.1% in June.

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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.}