The greenback topped the G10 board on Friday after the dovish comments of Federal Open Market Committee John Williams were walked back late Thursday night, which kicked off the dollar’s day with a momentum it never let go of. Despite the almost crystal clear indications from policymakers that they will lower interest rates by 25 basis points at next Wednesday’s Federal Open Market Committee meeting, speculation over the exact nature of the meeting’s policy decisions and forward guidance continues to move the dollar. This week’s data flow will be viewed in light of a split between market pricing of the Fed’s policy path, which implies as many as four cuts over the next year, and the tone of current economic data, which remains reasonably firm. Tuesday and Wednesday will feature survey data from the Richmond Fed, and Markit respectively. Headline hard data in the form of Durable Goods will be released on Thursday, before the first release of Gross Domestic Product growth in the second quarter is released on Friday.
Despite a brief midweek rally from the two-year lows seen last Wednesday after some good data releases, the pound continued to struggle on Friday and overnight, and was among the worst-performing G10 currencies as a whole last week. This morning’s main sterling relevant news is Phillip Hammond, who announced over the weekend he would resign as Chancellor if Boris Johnson became Prime Minister, and did not rule out voting down the Government. Boris Johnson will almost certainly become Prime Minister tomorrow, raising the prospect for further sterling volatility if he offers more clarity over his strategy for renegotiations with the EU. Data flow will be the thing this week, with the first release of note being tomorrow’s Industrial Order Expectations from the Confederation of British Industry.
The single currency handed in all of its Thursday gains again against USD on Friday after it broadly weakened despite hopeful signs coming from the May Current Account data. The goods surplus increased with force from €23.1 billion in April to €26.8 billion in May, while the secondary income deficit (foreign aid and remittances) further narrowed. Potentially even more important were the figures of the financial account, which showed foreigners scooped up mostly Eurozone equity as €52 billion flowed into euro assets, while euro investors appear to be exchanging less of their euros to buy foreign assets. All in all, this suggests financial flow data provides upside risks for the euro, with favourable price-earnings ratios in equities compared to US equities a potential euro tailwind. It should be noted that the divergence in Eurozone-US equity P/E ratios has been present for some time already, but disappointing US earnings can quickly become the catalyst for a rebalancing of global equity portfolios, which suggest there is plenty of room for the euro to strengthen on the back of this. The countdown to Mario Draghi’s departure will start this Thursday with his third-before-he-leaves European Central Bank monetary policy-setting meeting. This meeting is very much alive, as the chances of a rate cut are currently priced in around 50%, which means we will see the single currency on the move regardless whether the ECB delivers or disappoints on market expectations.
A big miss in this Friday’s Retail Sales reversed the positive sentiment that has recently built up around the loonie, toppling it from an eight-month high against USD. Friday’s release marked the first decline in Canadian retail sales in four months, and the headline figure showed a more extensive decline once motor sales and gas sales are removed, falling 1% in May. Sales volumes also contracted by half a percentage point in May, the most since November 2018 while sales fell in 4 of 11 subsectors representing 39% of total retail sales. Despite the large miss in data, the loonie’s reaction was surprising given the volatility in the Retail Sales data and the move was arguably exacerbated by the bout of US dollar strength Friday morning after the New York Fed walked back Governor Williams’ dovish comments. One data point will prove ineffective in moving BoC expectations despite the Retail Sales data highlighting a level of fatigue in the consumption sector. The question now for Canadian dollar traders is what the impetus will be for CAD to break a key psychological level that has held firm over the last few weeks, especially with little scheduled on the data calendar for the rest of the month.