FX Week Ahead Preview: Is it “End Of Days” For The Greenback

Sunday, July 16, 2017
By Paul Martin

Rajan Dhall from fxdaily.co.uk
Jul 16, 2017

Coming off the back of another bad week for the USD, we look to a barren period for the data schedule in the US, so markets will have to determine whether to extend this weakness based on the evidence so far.

Friday’s hit on US rates was more a function of the softer retail sales data than the inflation read, where the core year on year was unchanged at 1.7% as forecast. However, with seasonal factors supportive of a pick up in consumer spending in June, there was little improvement on the weak May readings in retail, and USD sellers were back in with force. The greenback ended the week on its lows across the board, but this was tempered to a degree against the JPY and CHF.

Even though the JPY is still seen to be a little undervalued at current levels vs the USD, the consistent BoJ policy to keep the key 10yr JGB rate near/at zero is underpinning the spot rate to a degree, but this also depends on whether the global risk tone can be maintained. Despite the backdrop of tensions over North Korea, as well as the ever present risk of president Trump sparking a trade war (with anyone), equities continue to grind higher with their Teflon (Kevlar) coated armour, so the carry trades will naturally follow. On this note, watch out for the China GDP numbers Sunday night and any material drop from the annualised growth rate of 6.9% from Q1 – Q2 forecast at 6.8% and risk sentiment would easily stomach that.

apan are off on Monday – for Ocean Day – but on Wednesday the BoJ meeting is again set to maintain their accommodative stance, just as they publicly communicate on a near weekly basis over the news wires – so nothing new here.

The BoJ outlook should show some improvement however, in line with the modest upgrade to their growth forecasts, but JPY divestment and outflow is expected to continue so cross JPY should attract more of the trading next week. Initially, USD/JPY may test 112.00 again as Asia react to Friday’s numbers, but strong demand is noted at this level, if not a little lower into the mid 111.00’s.

There are however, other areas where USD bears are likely to feel just as comfortable, but not without some noteworthy event risk ahead. EUR/USD has been the primary route up until last week, where we saw limits reached into 1.1500. We failed to touch this level after a number of attempts, but dips remain shallow as the positioning for QE tapering later this year remains aggressive. More insider/source stories this week anticipated the ECB meeting in September to be the catalyst, but we have to negotiate Thursday’s meeting first. President Draghi and his colleagues are keen to fend off any excessive market reactions, but we have already seen German 10yr hitting 60bps this week, and while this has not been fully reflected in EUR/USD price action, EUR/CHF has offered less resistance on the upside. Pre 1.1100 may offer some resistance, but 1.1125-35 is the next top of note – last seen in May last year. If the market refocuses on EUR/USD again, we sense a tough grind higher, but a move into the 1.1500-1.1600 range nevertheless. This still looks an overstretch in the time frame achieved, but we doubt traders will be deterred from bidding into 1.1300 again, unless EU CPI on Monday slips.

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