US Dollar in Command

The dollar edged higher in early European trading Monday, but remained near a one-week low as rising Covid-19 cases and slumping U.S. consumer confidence could pressure the Federal Reserve to delay tapering its bond-buying program.

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded less than 0.1% higher at 92.550, but this is still around 0.5% lower than the levels seen at the end of last week.

Here are the key market moving factors for the week:

 The US

• Profit-taking on long dollar positions was seen ahead of the weekend. The yield on the December 2022 Eurodollar futures slipped to finish unchanged on the week that saw CPI and PPI reports. The preliminary University of Michigan’s consumer confidence measure tumbled to its lowest level since 2011 as the delta variant flares, leading to new social restrictions and delays in the return to work in the US for many.
• The market appears to have fully discounted a Fed hike at the end of next year. Although at the June FOMC meeting, two officials thought that two hikes by the end of 2022 would be appropriate, the market, investors seem reluctant to give countenance now.

The UK

• The market’s more hawkish takeaway from the recent Bank of England meeting has seen the risk of rate hike around the middle of next year has risen. The implied yield of the June 2022 short-sterling futures contract has risen from almost 25 bp at the end of the first half to 42 basis points in the middle of last week.
• The implied yield on the December 2022 contract has risen from about 38 bp to nearly 58 bp. The UK also reports employment data. The furlough program is to terminate at the end of September, and only after then will a clearer view of the UK labor market be possible.

EUROPE

• European stock markets are expected to open lower Monday, as a string of weak Chinese economic data releases points to a Covid-induced slowdown at one of the globe’s key growth engines.
• At 2:05 AM ET (0605 GMT), the DAX futures contract in Germany traded 0.4% lower, CAC 40 futures in France dropped 0.5% and the FTSE 100 futures contract in the U.K. fell 0.5%.

AUSTRALIA

• The AUD/USD would be vulnerable to a risk-off environment and additional downward pressure may come from the 10-year government yield spread between Australia and the US. Yields overall have retreated lower in recent sessions and the spread between Australia and the US continues in a trend lower, undermining support for the Australian Dollar.

NEW ZEALAND

• Two central banks meet, the Reserve Bank of New Zealand and Norges Bank, the Norwegian central bank. Both are at the forefront of major central banks shifting monetary policy from supporting growth to achieving their mandates. Recall that a couple years ago, the New Zealand parliament gave the RBNZ a maximum employment mandate alongside price stability. There seems little holding it back from hiking. Unemployment in Q2 fell to 4.0%, where it was in Q4 19, and price pressures are accelerating to move above 3%.
• The swaps market appears to have a 25 bp rate hike discounted for next week and another 25 bp hike before the end of the year. The New Zealand dollar is in the middle of its $0.6900-$0.7100 trading range that has persisted since the middle of June, but well off the $0.7300 high seen in late May and the year’s highest set toward the end of February near $0.7465. If the RBNZ does not deliver, the currency is vulnerable to a knee-jerk drop. However, the Kiwi is likely to bounce back if it is seen as a hawkish hold.

JAPAN

• Japan kicks off the new week with its first estimate of Q2 GDP. If it escaped a contraction, it did so barely. The world’s third-largest economy contracted by 1% in Q1 after expanding in H2 20. Large parts of the economy are in areas with formal or informal states of emergency, which largely impose a curfew and limit alcoholic drinks.
• Talks emerged last week as it became clear that more people contracted the virus than won medals in the Olympics that the existing emergency protocols might be extended until the end of next month.
• Japan reports July trade figures, and seasonally it typically deteriorates from June (15 of the past 20 years). The trade surplus was JPY383 bln in June. Due to the base effect, exports in June were almost 49% above year-ago levels. Still, net exports shaved 0.2% of Q1 growth and are expected to have reduced Q2 growth by the same amount.
• Japan also reports the July CPI figure. Without much fanfare, the June series was revised sharply lower. Initially, June CPI was estimated to have risen by 0.2% year-over-year. It has been subsequently revised to -0.5%. Similarly, the core rate, which excludes fresh food, was subject to the same revision from 0.2% to -0.5%. The earlier release of the Tokyo CPI estimate warns that the most that may be reasonably hoped is a move out of deflation.

CHINA

• China’s daily crude throughput last month fell to the lowest since May 2020 as independent refiners slashed production, according to data from the National Bureau of Statistics on Monday. That was the first year-on-year decline since March last year when the coronavirus hit hard.
• European markets are set to suffer from the weak sentiment in Asia Monday after data released in China earlier in the day showed industrial production rose 6.4% year-on-year in July, and retail sales grew 8.5% year-on-year in the same month, both lower than expected.
• This slowdown is the result of the second largest economy in the world tightening mobility restrictions to combat the spread of the highly-transmissible delta variant of the Covid-19 virus.

Market Overview:

 Gold

• Gold prices held gains after rallying 2.9% over the last 3 trading sessions
• Disappointing Chinese retail sales and industrial production figures dented risk sentiment
• Prices are eyeing $1,785 for immediate resistance, breaching which may open the door for further gains

Oil

• Crude oil prices fell for a third day after China reported disappointing retail sales and industrial production figures
• The University of Michigan consumer sentiment index plummeted to a decade low of 70.3, weighing on demand outlook
• WTI is testing trendline support, with sentiment tilting to the downside

Below are the major market moving events for the week:

Monday

8:30: US – Empire State Manufacturing Index: anticipated to have slumped to 29.00 from 43.00.

21:30: Australia – RBA Meeting Minutes

Tuesday

2:00: UK – Claimant Count Change: previous print came in at -114.8K.

8:30: US – Core Retail Sales: forecast to drop to 0.2% from 1.3%.

8:30: US – Retail Sales: likely fell to -0.2% from 0.6%.

13:30: US – Fed Chair Powel Speaks

22:00: New Zealand – RBNZ Interest Rate Decision: a hike to 0.50% from 0.25% is predicted.

Wednesday

2:00: UK – CPI: expected to edge down to 2.3% from 2.5% YoY.

5:00: Eurozone – CPI: liable to have remained flat in July, at 2.2% YoY.

8:30: US – Building Permits: predicted to rise to 1.610M from 1.594M.

8:30: Canada – Core CPI: likely to have ticked down to 0.1% from 0.3%.

10:30: US – Crude Oil Inventories: previous reading showed a drawdown of -0.447M.

14:00: US – FOMC Meeting Minutes

21:30: Australia – Employment Change: seen to plunge to -45.0K from 21.1K.

Thursday

8:30: US – Initial Jobless Claims: expected to shift lower, to 360K from an upwardly revised 375K.

8:30: US – Philadelphia Fed Manufacturing Index: to rise to 25.0 from 21.9.

Friday

2:00: UK – Retail Sales: forecast to remain flat at 0.5%.

8:30: Canada – Core Retail Sales: anticipated to surge to 4.4$ from -2.1%.

21:20: Australia – Retail Sales: previously printed at 0.1%.

Based on the above factors and the events lined up for the week, the analyst at RvR Ventures suggests you to Trade responsibly; invest only as much as you can lose. All the profits and losses due to the above data are your own personal responsibility. Kindly practice money management & risk mitigation while trading.

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