Currency View by OFX

Last week’s news

• US Fed Chair Jerome Powell managed to keep a dovish stance in his testimony before Congress on July 14th and 15th. He agreed that inflation has been higher and more constant than expected, as headline inflation came in at a high of 5.4% year-over-year and core inflation spiking to 4.5% (from 3.8% in the prior month). However, Jay Powell added inflation readings should partially reverse soon and that it will be a mistake to raise rates when all forecasters believe that inflation will go down. He also emphasised that the labour market still has a long way to go, despite the current improvement.
• Crude oil prices had the biggest weekly loss since mid-March. Traditional financial media blamed a resurgence of COVID-19 for threatening the outlook of global fuel demand. West Texas crude oil touched a 33 month-high, which coincided with the lowest level from 10 years ago in October 2011 after retracing from a 2012 high of 110 dollars a barrel. The loonie as a result was dragged lower last week, being the second-worst G10 performer with a fall of 1.32% against the US dollar. The worst performer was the Norwegian krone, which fell 2.08% versus the greenback.
• The Bank of Canada held its rate at 0.25% as expected, and as part of the quantitative easing, the BoC tapered from 3 billion a week to 2 billion, signalling optimism on the speed of the recovery. However, the Governing Council believes the Canadian economy still requires extraordinary monetary policy support. According to their projection for late 2022, once the 2% inflation target is sustainably achieved and there is no slack in the economy represented by considerable excess capacity in the Canadian economy, rates will rise.
• The Australian dollar declined to new year lows on Friday. A pick-up in consumer confidence data from Westpac, positive Chinese export numbers and the unemployment rate hitting 4.9% (beating the expected 5.1%) could not bring support. Any upticks on the AUD were short-lived, and it continued to decline throughout the week, especially during the EU/UK sessions as the USD and other safe havens continued to gain momentum. Confirmation of a dovish stance by the RBA and an increase in the number of infections linked to the new COVID-19 Delta variant, combined with weaker equity markets and lower commodity prices, have been weighing down on the AUD.
• NZD was the week’s best G10 performer supported by a hawkish RBNZ who despite holding their cash rate at 25bps advised they will be ending QE this month. Swap markets and local banks started pricing a 25bps RBNZ rate hike for November, pushing the short end of the yield curve (led by 2-year yields jumping by 13 bps) higher. On top of this, Friday inflation numbers surged to 3.3%, breaching RBNZ target. The swap market and local banks are now pricing a hike as soon as August.

Looking ahead

• Expectations are very low for this Thursday, when the European Central Bank reveals how their new monetary strategy will make a difference for market participants. In FX markets, low expectations can still translate into big currency swings, because any type of surprise may translate into an increase in FX trading volume. From a technical analysis standpoint, the EUR/AUD has broken through an important Fibonacci level at 1.5962 and is looking to test 1.61.
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• The South African Reserve Bank will likely make a more eventful policy announcement than the ECB this week. Traders will be looking for currency vulnerabilities as South Africa’s unfolding turmoil is generating political risk in emerging markets. Citigroup Inc. and Deutsche Bank AG were among the banks recommending that investors short the South African Rand last week as deadly riots threatened to derail any economic recovery.
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Key market events this week

• Tuesday
  • HK jobless rate
  • Eurozone current account balance
• Wednesday
  
  • Australia retail sales data
  • Japan trade data
• Thursday
  • ECB rate decision and Eurozone consumer confidence data
  • HK CPI
  • US initial jobless claims, leading index, existing home sales data
• Friday
  • Eurozone, UK, US Markit PMI