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Dog Days Are (NOT) Over

by Stephen Casey | August 9, 2016

Good morning. The dog days of summer have arrived and save for a few currencies; tumbleweeds are the only things moving quickly through foreign exchange markets. This is a very quiet data week for North America and as a result, both the American and Canadian dollars have settled into a very tight range for the time being. Overnight, some Chinese price data paced an otherwise quiet Asian session while second tier data releases were scattered throughout Europe. Policymakers around the world are more or less finished until the month of September so for those of left at work this week, we’ve turned to equities and commodities as our guide.

Chinese producer prices touched the lowest mark in two years last month, which should take some pressure of the central bank as policymakers weigh their options on an easier policy. Consumer prices rose 1.8% in July from the same period in 2015, well below the central bank’s 3% target, but this result was expected widely from the market and further eases pressure for policymakers as this matches the low hit back in January. The Australian dollar continued to edge higher on Tuesday, following oil and other commodities which gained late in Monday’s North American session. The risk-on momentum carried into Asia after the S&P touched another record high on Monday, boosted by Friday’s very strong US jobs report. In Australia, the NAB business confidence index dropped slightly to 4 in July as businesses remain concerned with trading conditions and the impact on future earnings. The New Zealand dollar was unchanged even as the odds of a 50 bp cut has touched a 15% likelihood in the market, up from 0% one week ago. More Chinese data in the form of money supply, retail sales, and industrial production remain highlights for this week.

Sterling remains the big story during European trading, slumping again as markets punish the currency in the wake of last week’s Bank of England policy action. One of the central bank’s most hawkish members, Ian McCafferty, was noted as saying more cuts could be on the horizon in the UK, opening up the door for zero and even negative rates. Mr. McCafferty was once the lone supporter of higher interest rates for the BoE so today’s comments are quite notable. Cable extended the low after a wider than expected trade deficit was reported, ballooning to 5.1 billion Sterling from 4.2 billion sterling during the month of June. This is the widest deficit in one year, sparked by an increase in imports, which jumped 4% to a record high of 48.9 billion sterling. The euro continues to trade steadily, stuck between the rock and the hard place that is the US dollar and British pound. The euro-zone data calendar was scant with inflation and GDP figures slated for the latter part of the week.

Another quiet day is expected as North American trade kicks off this morning. With US data back loaded this week, we should expect the equity and fixed income markets to guide price foreign exchange price action. On Monday, the big dollar was very steady even as oil and other commodity prices rebounded throughout the session. The loonie has had a tough time mounting any comeback after its own very disappointing jobs numbers on Friday. Oil is rising for the second straight day, more than $3-per-barrel higher off of last week’s lows. Despite the recent jump in risk and commodities, the loonie has found a tough time following suit as the fundamentals of Canada’s economy may be keeping the currency back. As Karl Schamotta noted in Friday’s analysis, concerns over overheating housing sectors in Vancouver and Toronto, coupled with a $3.63 billion deficit may continue to keep the Canadian dollar down against a host of major currencies. Friday’s US PPI and retail sales numbers remain the data highlight of the week for North America, with scoreboard watching likely controlling price action until then.

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