September Kicks Off With A Bang

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What a time it was last week for the forex market. Investors went from hoping that the US.’ eagerness to secure a trade deal with Mexico would mean a more conciliatory tone toward other countries to fearing that the president is doubling down on a trade war.

The US failed to reach an agreement with Canada and continued to criticize Chinese and EU trade practices. As we head into this new month, the optimism is beginning to fade as major currency pairs come off their highs or in some cases hit fresh lows. The Australian dollar was hit particularly hard, falling more than 1% to its weakest level in 20 months. The best-performing currency was the Swiss franc because investors are reluctant to invest in the euro and other risky assets. Although there wasn’t any consistency in the greenback’s performance last week, there’s no doubt that the bulls remain in control.

September is a big month in the FX market and it kicks off with a bang as investors look forward to monetary policy announcements from Australia and Canada and Friday’s US. August nonfarm payrolls report. This is historically the worst month for US stocks and with Italy in trouble, trade talks uncertain and Brexit negotiations ongoing, the market could lose its appetite for risk, especially after US stocks hit record highs last month.

September Kicks Off With A Bang

USD

US Dollar:

Data Review

  • Advance Goods Trade Balance -$72.2b vs. $-69.0b Expected
  • Wholesale Inventories 0.7% vs. 0.2% Expected
  • Consumer Confidence 133.4 vs. 126.6 Expected
  • GDP Annualized 4.2% vs. 4.0% Expected
  • Core PCE (QoQ) 2,0% vs. 2.0% Expected
  • Pending Home Sales -0.7% vs. 0.3% Expected
  • Personal Income 0.3% vs. 0.3% Expected
  • Personal Spending 0.4% vs. 0.4% Expected
  • PCE Deflator 0.1% vs. 0.1% Expected
  • PCE Core 0.2% vs. 0.2% Expected
  • Chicago PMI 63.6 vs. 64.0 Expected
  • U. of Mich. Sentiment 96.2 vs. 95.5 Expected
  • U. of Mich. Current Situation 110.3 vs. 107.8 Prior
  • U. of Mich. Expectations 87.1 vs. 87.3 Prior

Data Preview

  • ISM Manufacturing – Potential downside surprise as stronger Empire State is offset by weaker Philly Fed and Chicago PMI
  • Trade Balance – Likely to be weaker given stronger dollar
  • ADP Employment Change – ADP is hard to predict but can be very market moving
  • ISM Non-Manufacturing Index, Factory and Durable Goods Orders – Will have to see how ISM manufacturing fares but continued improvement in US economy signals stronger data
  • Change in NFPs – Nonfarm payrolls are likely to be stronger after last month’s disappointing release

Key Levels

  • Support 110.00
  • Resistance 112.00

Taking a more detailed look at the US dollar, it had a very good run in the first half of 2018 for two primary reasons – rate hikes and trade war. But as September begins, changes could be in store for the Fed’s tightening cycle and US trade talks. Discussions with Canada will continue and perhaps ahead of the November mid-term elections, we could hear President Trump whose announcements are always well timed to politically express renewed willingness to talk with China and the EU. For now, however, we don’t think the dollar’s decline is over and expect the greenback to trade firmly in the week ahead. This week’s ISM and non-farm payrolls report won’t affect the Fed’s plans to tighten later this month but they will play an important role in shaping the market’s expectations for the Fed’s guidance. While economic activity could slow, especially on the manufacturing level, job growth is expected to be strong after last month’s disappointing release. The performance of the dollar may be driven less by the progression of the US and more by trade tensions and developments abroad. USD/JPY, in particular, maintains a bullish bias and even if it extends its slide, losses should be limited at 110.

AUD, NZD, CAD

Data Review

Australia

  • AUD Building Approvals -5.2% vs. -2.0% Expected
  • CH Non-Manufacturing PMI 54.2 vs. 53.7 Expected
  • CH Manufacturing PMI 51.3 vs. 51.0 Expected
  • CH Composite PMI 53.8 vs. 53.6 Prior

New Zealand

  • Building Permits -10.3% vs. -7.6% Prior
  • ANZ Business Confidence -50.3 vs. -44.9 Prior
  • ANZ Consumer Confidence -0.7% vs. -1.3% Prior

Canada

  • Current Account Balance $-15.88b vs. -$15.30b Expected
  • Quarterly GDP Annualized 2.9% vs. 3.1% Expected
  • GDP (MoM) 0.0% vs. 0.1% Expected

Data Preview

Australia

  • AU PMI Manufacturing – Chinese activity slowed but last month’s report was very weak
  • AU Retail Sales – Potential for downside surprise given sharp pullback in PMI services
  • AU Current Account Balance – Potential for upside surprise given stronger AU trade balance
  • RBA Cash Rate Target – Potential for cautionary comments after mortgage rate hikes
  • AU GDP – Potential for upside surprise given stronger trade balance and retail sales
  • AU Trade Balance – Will have to see how manufacturing PMI fares but weaker AU means trade could improve

New Zealand

  • Terms of Trade Index – Potential for downside surprise given weaker NZ trade balance

Canada

  • Bank of Canada Rate Decision – Central Bank likely to set the stage for October tightening
  • Employment Report – CAD employment released before IVEY PMI so tough to predict this month

Key Levels

  • Support AUD .7100 NZD .6600 CAD 1.2800
  • Resistance AUD .7300 NZD .6700 CAD 1.3200

The big focus this week will be on the commodity currencies. Australia and Canada have monetary policy announcements. AUD/USD dropped to its lowest level since January 2017 and further weakness is likely. By now, everyone knows that Westpac made an unexpected out-of-cycle hike in variable mortgage rates due to shrinking profit margins. Suncorp and Adelaide bank have followed and many are wondering if the other big 3 will lift their rates as well. Having already borne the brunt of bad PR, it would not be as unpalatable for Commonwealth Bank, NAB or ANZ to do the same, but Westpac’s situation is also far worse than its closest rival CommBank. In their latest quarterly update, Westpac said net interest margin fell 11bp whereas earlier this month, CommBank said its margins declined by only 2bp. Nonetheless, the floodgates are open and the other 3 major banks may jump on the opportunity to secure their margins. There are 3 reasons why Westpac’s mortgage hike has been so negative for the Australian dollar – it tightens the purse strings for consumers and hurts the housing market and eliminates any possibility of a rate hike by the Reserve Bank in the next 6 to 8 months. When we heard from the Reserve Bank on Tuesday, it kept rates steady at 1.5%. The RBA has been firmly neutral for the better part of this year and recent data (as shown in the table below) gives them no reason to change their bias — but the mortgage rate hikes do. If Governor Lowe starts talking about the possibility of rate cuts, the Australian dollar could tumble below 70 cents. Aside from the RBA rate announcement, manufacturing PMI, retail sales, Q2 GDP and the trade balance also hit, ensuring a busy week for AUD/USD. The New Zealand dollar, on the other hand, doesn’t have much going on except for terms of trade so it is likely to follow the Australian dollar lower. Consumer and business confidence took a big hit in the month of August reinforcing the negative trend of New Zealand’s economy. The next stop for NZD/USD should be 65 cents.

September Kicks Off With A Bang

Australian Dollar Data Points

Despite high hopes, Canada failed to secure a trade deal with the US last week and as result, USD/CAD is trading back above 1.30. At the end of this week’s talks, Canadian foreign minister Freeland said, “Canada will only sign a deal that’s a good deal for Canada, we are very, very clear about that.” President Trump notified Congress on Friday that he planned to sign a deal with Mexico in 90 days and would include Canada if they are willing. The bad news is that the White House’s Friday deadline has been missed and given Prime Minister Trudeau’s optimism at the start of the week, it is clear that there are difficult issues that both countries don’t want to budge on. The good news is that the talks haven’t completely broken down – negotiations will resume on Wednesday but with no hard deadline to work towards, it could take weeks before an agreement to be reached. In the meantime, the focus will shift back to the economy. There’s a monetary policy announcement on the calendar along with labor market, trade and manufacturing data scheduled for release. The market is pricing in an 81% chance of an interest rate hike in October and if that’s their plan, they would need to let everyone know that they are serious about tightening this week. Although the latest GDP reports fell short of expectations, growth, in general, is healthy, labour market conditions have improved and inflation is on the rise. For all of these reasons, we think the Canadian dollar could outp-erformance other currencies particularly AUD, NZD and EUR this week.

September Kicks Off With A Bang

Canadian Dollar Data Points

Euro:

Data Review

  • GE IFO Business Climate 103.8 vs. 101.8 Expected
  • GE IFO Expectations 98.4 vs. 98.4 Expected
  • GE IFO Current Assessment 106.4 vs. 105.3 Expected
  • GE GfK Consumer Confidence 10.5 vs. 10.6 Expected
  • GE Unemployment Change -8k vs. -8k Expected
  • GE Unemployment Claims 5.2% vs.5.2% Expected
  • EZ Economic Confidence 111.6 vs. 111.9 Expected
  • EZ Consumer Confidence -1.9 vs. -1.9 Expected
  • GE CPI 0.1% vs. 0.1% Expected
  • GE Retail Sales -0.4% vs. -0.2% Expected
  • EZ Unemployment Rate 8.2% vs. 8.2% Expected

Data Preview

  • GE and EZ Manufacturing PMI Revisions – Revisions are hard to predict but changes will be market moving
  • EZ PPI – Tough call as lower inflation in Germany is offset by stronger price growth in France
  • EZ Retail Sales – Potential for downside surprise given weaker French and German retail sales
  • GE Trade Balance, Current Account Balance, EZ Industrial Production and GDP – Potential for downside surprise given drop in manufacturing PMI index.

Key Levels

  • Support 1.1500
  • Resistance 1.1700

After hitting a 3 week high of 1.1733 last week, EUR/USD u-turned and now appears to be on its way to 1.1550. There were 2 primary factors driving the euro lower – President Trump’s attack on the EU and Italy’s financial troubles. As US – Canadian trade talks were underway the US President described the EU as “almost as bad as China, just smaller.” This comment makes it clear that he is not easing up on Europe and the tariffs will remain in place. Fitch maintained its credit rating on Italy but lowered their outlook. While this was not the worse-case scenario for Italy and the euro, it still leaves the door to downgrades by Fitch or the two other rating agencies who will be updating their review in October. Technically, EUR/USD looks very bearish, especially on a weekly basis.

British Pound:

Data Review

  • BRC Shop Prices 0.1% vs. -0.3% Prior
  • Net Consumer Credit 0.8b vs. 1.5b Expected
  • Mortgage Approvals 64.8k vs. 65.0k Expected
  • GfK Consumer Confidence -7 vs. -10 Expected

Data Preview

  • PMI Manufacturing – Potential for downside surprise given lower CBI Industrial Trends report
  • PMI Services and Composite PMI – Will have to see how manufacturing PMI fares but confidence is stronger

Key Levels

  • Support 1.2850
  • Resistance 1.3050

Sterling, on the other hand, soared against the euro and US dollar this past week as the EU’s Chief Brexit negotiator Michel Barnier and UK Brexit Secretary Dominic Raab confirm that progress is being made in Brexit talks. According to the European Union’s Chief Brexit negotiator Barnier, the EU is ready to offer the UK a deal that it hasn’t had with any other country and while he tried to tone down the optimism the following day by saying that a no-deal is still possible, all signs suggest that the EU is eager to work with the UK to reach an agreement by November. Originally an October deadline was set for a Brexit deal in advance of the EU Summit in October, but instead European leaders will use the opportunity to have a vibrant discussion about Brexit. Reaching a deal in mid-November means they would need to call an emergency summit that month. UK PMIs are in focus this week along with ongoing Brexit talks. GBP/USD came off its highs and there could be an extension to 1.2850 but we don’t see much in the way of losses beyond that level.

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