FX Majors Weekly Outlook (15-19 August)

UPCOMING
EVENTS
:

Monday: NAHB
Housing Market Index.

Tuesday: US
Building Permits/Housing Starts.

Wednesday:
RBNZ Policy Announcement, US Retail Sales, FOMC Minutes.

Thursday:
Fed’s George and Kashkari.

Following
the strong labour market report, the US CPI last week missed expectations
across the board. The biggest contributor to the decline was energy prices. The
supply side of energy didn’t change much, so it’s the demand side that is
weighing on prices. This just means that the Fed (which can adjust only the
demand side) needs to keep on tightening and depress demand if it wants to
achieve its goal. Naturally, this leads to a worse growth outlook, which is as
of now the only way to fix the current inflation problem. In fact, although the
energy part fell, the other stickier components like services increased or
remained high.

The reaction
to the CPI report was a rally in risk assets as a less aggressive Fed coupled
with unchanged or lower inflation expectations depresses real yields, and that
ultimately leads to higher propensity towards risk assets. We saw the US Dollar
being offered across the board, the stock market rallying, US yields falling,
commodities rising and cryptocurrencies following the risk party. This is not
something the Fed wants to see after just one good CPI report. If financial
conditions ease too much, the Fed may even be forced to surprise with out of
consensus hikes just to reimpose its will and determination. For now, the
market prices a higher probability of a 50 bps hike at the September meeting.

This
reaction in my opinion is wrong-footed, I think the safe assets are still the
better choice and wouldn’t chase risk here as the global growth outlook will
keep on weakening. Especially the USD weakening against the other major
currencies like EUR, GBP, AUD and so on looks misplaced and the market in fact
reversed some of the rallies out of the CPI report. The EUR/USD (chart below),
which is basically the DXY (Dollar Index) upside down, points technically to
further downside. The price got rejected from the top of the channel and a
previous swing level. A break of the counter trendline would add even more
conviction to further downside for the pair with an ultimate break of the
0.9956 low very likely.

Looking at
this week upcoming data, on Monday and Tuesday we will see get the latest
reports for the US Housing Market which are expected to show further declines
amid tighter monetary conditions and slowing growth. The NAHB index on Monday
is expected to decline to 54 from the prior 55 reading and the US Building
Permits to decline 3.30% compared to the prior decline of 0.60%.

On
Wednesday, the RBNZ is expected to hike rates by 50 bps bringing the OCR to
3.00%. They’re expected to maintain their hawkish stance and resolute in their
commitment in bringing inflation back to their target in the 1-3% range. Note
that the recent New Zealand CPI for Q2 report came out hot at 7.3% vs. 7.1%
expected and 6.9% prior. Next, US Retail Sales are expected to be lower on the
headline figure since it’s a nominal dollar report and prices eased in
July. Later in the day we will also get
the latest FOMC Minutes which is not expected to show anything market moving as
it’s a three-week-old stuff and doesn’t incorporate the latest labour market
and inflation reports.

On Thursday
we will hear from Fed’s George and Kashkari but they’re unlikely to deviate
from the current estimates of 50 or 75 bps hike at the next meeting and
year-end Fed Funds at 3.50%/4.00%, waiting for the other set of reports in
September.

This article
was written by Giuseppe Dellamotta.



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