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Summertime and the Living is Easy

by Stephen Casey | August 16, 2016

Good morning. The US dollar is trading at multi-week lows on Tuesday, losing ground against almost every major currency after dovish comments from the Fed’s Williams sparked another sell-off. The US dollar lost more than 1% against commodity-back currencies and hit a seven-week low against the yen as those traders not on vacation adjust to the Fed’s new outlook, pushing back the next rate hike further into 2017. Equities were similarly lower overnight, just a few hours after US indices marked another record close. North American futures are slightly lower as we distribute our analysis this morning, but as stocks remain the only asset providing real return, any dip could be short lived as central bankers continue to prop them up and focus more on easier policy in efforts to stimulate stagnant growth.

In a paper released overnight, San Francisco Fed President John Williams argued that global central banks may have to raise inflation targets and focus more on growth, reiterating comments from other prominent policymakers that looser fiscal policy may be the answer in the shorter term. Mr. Williams’ comments come at a time when speculation of aggressive easing surround the Bank of Japan, the European Central Bank and the Bank of England, which cut rates and increased quantitative easing at its most recent meeting amid the Brexit fallout. The minutes from the most recent Reserve Bank of Australia meeting hit the wires on Tuesday and painted a similarly cautious picture. The Aussie is soaring higher at the greenback’s expense but policymakers down under express similar caution on their economy, having cut rates to record lows just last month. Australia’s central bank specifically cited slow growth, unemployment and depressed wages as reasons for their easy action. The euro is putting to test important technical resistance this morning and sterling has finally bounced a bit – supported by local inflation readings on top of the greenback’s woes. There was a slight dip for the euro early in the session, but it was fleeting on the smaller than expected recovery in the August ZEW reading.

Monday presented another very quiet start for North America. The US and Canadian dollars were largely unchanged against the other major currencies without any key data points released. This morning, traders got an important look at US consumer prices for the month of July. It was reported that consumer prices were flat for the month of July and rose only slightly over the previous period in 2015. Housing starts rose 2.1% in the month of July and soon to follow will be industrial and manufacturing production figures, to be released shortly. After very disappointing second quarter growth, this morning’s figures are worth watching as investors look toward Q3. The greenback may be able to finally catch a bid should production in those sectors begin to pick up as some economists anticipate third quarter growth to be somewhere around 3-3.5% annually. As earlier reported, today’s comments from the Fed’s Williams really hurt the US dollar as vacation markets push those “long dollar” positions to their stop-loss brink. Over the next few weeks, we should find out just how much pain lies in the market. Tomorrow’s FOMC Minutes and more speeches from members Lockhart, Dudley and Bullard remain this week’s highlights.

The Canadian dollar started the week trading at its highest level against the US dollar since mid-July. Last week’s OPEC rumors sparked a rally for oil prices and the loonie, which has jumped more than 2.5% in less than one week. Interesting to note though is that the four-week correlation between the Canadian dollar and crude fell to an 18-month low just last week. As reported by Bloomberg News, Canada’s economy continues to fall behind that of the US, highlighted by the July jobs reports which continues to favor the US. Could the recent oil-driven dip in USD/CAD be short-lived? Time will tell as Wall Street does not forecast the same kind of third quarter turnaround for Canada as it does the US, coupled with Canada’s largest-ever trade deficit of C$3.6 billion. On Friday, Statistics Canada will release July inflation figures, +1.5% is expected.


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