Forex Major Currencies Outlook (July 4 – July 8)

USD 

Durable goods for the month of May came in at 0.7% m/m vs 0.1% m/m as expected. Core capital goods rose by 0.5% m/m. Despite inflationary pressures rising we see that business investment is not slowing down. Conference Board consumer confidence for June plunged to 98.7 from downward revised 103.2 in May. The biggest drop was in the expectations category as people seem to brace themselves for the recession. 

Headline PCE number in May came in unchanged at 6.3% y/y, with monthly reading increasing 0.6% m/m vs 0.2% m/m in April. Core PCE recorded second consecutive month of declines and came in at 4.7% y/y vs 4.9% y/y the previous month. On the monthly basis it rose 0.3% m/m compared to expectations of 0.4% m/m. Personal income came in at 0.5% for the third straight month while personal consumption increased 0.2%. However, real personal consumption continued to be in the negative territory. Additionally, contribution of personal consumption to Q1 GDP was downward revised adding the worries about the strength of consumer. Atlanta Fed now sees Q2 GDP at -1%. 

ISM Manufacturing PMI for the month of June dropped to 53 from 56.1 in May. New orders slipped below the expansion level and are at 49.2 while new export orders still hold above 50. Backlog of orders also declined by substantial amount. Employment index continued to decline and is now deeper into contraction with 47.3. The report added fuel to the recession story and Atlanta Fed Q2 GDP projection slipped deeper into the recession at -2.1%. The 10y Treasury started the week with yield of around 3.15% and continued to decline through most of the week finishing it with yield below 3%. FedWatchTool now sees the probability of a 75bp rate hike in July at 74.8% with 25.2% of a 50bp rate hike. 

This week we will have ISM Non-Manufacturing PMI, FOMC Minutes and Nonfarm Payrolls data. Headline number is expected to be around 300k with the unemployment rate staying at 3.6%. 

Important news for USD: 

Wednesday:

• ISM Non-Manufacturing PMI
• FOMC Minutes

Friday:

• Nonfarm Payrolls
• Unemployment Rate 

EUR

ECB policymaker Martins Kazaks stated in an interview with Bloomberg TV that 25bp rate hike in July and 50bp rate hike in September represent the base case scenario. At the meeting in Sintra, Portugal ECB President Lagarde confirmed the July 25bp rate hike and added that they are data dependent. She continued saying that inflation is “undesirably high” and if the incoming inflation data do not improve ECB will move faster. They will use the flexibility of PEPP reinvestments to fight the fragmentation in the bond market. They will also accelerate the completion of the design of a new instrument intended to combat fragmentation risks.

Preliminary German CPI data for the month of June showed the first decline since January as headline number came in at 7.6% y/y vs 7.9% y/y in May. It was only a 0.1% m/m increase. We need to take into account that government measures, namely their energy relief package that was implemented on June 1. This will be a temporary relief and it will not derail ECB from their rate hike path as Spain’s preliminary reading printed above 10% for the first time since 1985. French reading showed inflation rising to 5.8% y/y from 5.2% y/y in May with a second consecutive month of 0.7% m/m increases. Ultimately, preliminary Eurozone CPI showed headline at 8.6% y/y vs 8.4% y/y as expected and up from 8.1% y/y in May and terrifying 0.8% m/m. The slight comfort can be found in core reading which eased to 3.7% y/y from 3.8% y/y the month before.

ECB source stated that anti-fragmentation policy will divide countries in three tiers: 1. Donors; 2. Recipients and 3. Neutral. In the Donor group we have: Germany, Netherlands and France while in Recipients group we have Italy, Spain, Portugal and Greece. All of the other EU countries are in the Neutral group.

GBP

Final Q1 GDP reading came in unchanged at 0.8% q/q. Personal consumption was unchanged at 0.6% q/q while business investment and government spending took a dive. The UK government is considering temporary cut to VAT from 20% to 17.5% in order to assist its citizens to cope with rising costs of living.

AUD

Official PMI data from China for the month of June saw all three readings return to expansion (above the 50 level). Manufacturing was at 50.2 vs 49.6 in May, although, expectations were for a bigger rise, to 50.5. Non-Manufacturing came in at 54.7, up from 47.8 in May and composite was at 54.1 up from 48.4 the previous month. Easing of lockdowns naturally brought increased economic activity and it is reflected in the data. The devil hides in the details and sub-indices show cracks in economic recovery. The employment and selling prices indices showed declines. Declines in selling prices will negatively impact profit margins of companies which in turn can lead to further drops in employment. Caixin manufacturing PMI came in at 51.7 vs 48.1 the previous month reaching the highest level since May of 2021 on the back of increased production.

This week we will have RBA meeting where a 50bp rate hike is expected. From China we will get Caixin services and composite PMI as well as latest CPI data.

Important news for AUD:

Tuesday:

• RBA Interest Rate Decision
• Caixin Services PMI (China)
• Caixin Composite PMI (China)

Saturday:

• CPI (China)

NZD

Business confidence in June continued to decline and came in at -62.6 vs -55.6 the previous month. Activity outlook also plunged to -9.1 from -4.7 in May. A deadly combination of supply side issues and inflation pressures is wrecking chaos on the economy. Inflation expectations are still above 6% and show no signs of a meaningful weakening. Consumer confidence also dropped as the situation with high inflation remains bleak.

CAD

Finance Minister Freeland stated that there is no guarantee that recession will be avoided but that country still has a path toward “soft landing”. She expressed her confidence in BOC’s ability to control the inflation.

This week we will have employment data.

Important news about CAD:

Friday:

• Employment Change
• Unemployment Rate

JPY

BOJ published Summary of Opinions from their June meeting in which they reiterated that it is appropriate to continue with monetary easing in order to support the economy. The continuation of monetary easing is necessary to achieve sustained wage growth and if it exceeds 2% it will in turn lead to sustainable inflation of 2%. Japan still has negative output gap and in order for it to be closed as well as improve inflation expectations the bank should strengthen its monetary stance.

Preliminary industrial production for the month of May plunged -7.2% m/m vs -0.3% m/m as expected. A drop of this magnitude has not been seen in two years. This has prompted the government to cut their outlook for industrial production stating that output is weakening and that is led by drops in motor vehicle production. Chinese lockdowns accentuated supply chain issues as Japanese car makers could not get auto parts in time.

Inflation report for the Tokyo area in the month of June showed headline number at 2.3% y/y vs 2.2% y/y as expected, Ex fresh food category came in at 2.1% y/y as expected and up from 1.9% y/y in May while ex fresh food, energy rose to 1% y/y from 0.9% y/y the previous month. BOJ Tankan survey showed that firms expect prices to rise 2.4% in 2023, 2% three years from now and 1.9% five years from now. Indices measuring large manufacturers and non-manufacturers output prices reached high levels not seen since the 1980.

CHF

SNB total sight deposits for the week ending June 24 came in at CHF748.5bn vs CHF751.8bn the previous week. The bank omitted reference to “highly valued” CHF so they are not intervening and are only monitoring market movements.

This week we will have inflation data.

Important news for CHF:

Monday:

• CPI

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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.}