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In The Waiting Line

by Stephen Casey | July 26, 2016

Good morning. Financial markets were mixed on Tuesday as earnings reports and the looming Federal Reserve meeting holds investors hostage. The summer doldrums have taken over so the swings have lessened but a lot of uncertainty remains which is not allowing for much conviction the FX or broad markets. The big dollar continues to find buyers, gaining ground against most major currencies one day before the Fed meets but such gains were marginal. The euro is holding steady for the moment but the yen continues to surge higher, touching a two-week high as stimulus expectations are reduced. A very quiet data calendar overnight has pushed the FX slate to the back pages and equities and commodities guide sentiment.

The Bank of Japan will have its policy meeting this week as well, announcing its latest policy decision on Thursday evening at 11pm EST. The market seems prepared for an expansion of asset purchases and another rate cut below zero. On Tuesday, the yen continued to surge higher following a Nikkei report which suggested more direct government stimulus of as much as 6 trillion yen over the next few years. Participants seem to be disappointed in this report as some have suggested the number could exceed 20 trillion yen, so this is a disappointment if true. Asian shares were mixed as Japanese stocks dipped but Chinese shares were a touch higher. Sterling unexpectedly rose off the lows overnight even as Bank of England policy maker Martin Weale turned an about-face on policy, announcing he now favors immediate stimulus for the UK economy. The pound continues to grind lower with each new high lower than the previous, and Mr. Weale’s comments should continue to favor sellers as he noted a “dramatic deterioration” in short-term economic indicators. The euro remains pinned to important technical levels and is now trading within the tightest range in more than two years. As market participation dwindles in the summer months, it is interesting to see this kind of stability for the single currency sandwiched between the Brexit outcome and tomorrow’s FOMC meetings. The data calendar picks up tomorrow with German import prices and Euro area M3 money supply and loan growth reports for the month of June.

Here in the US, markets are quiet and preparing for tomorrow’s FOMC meeting. The Fed is expected to keep rates firm within the 0.25-0.50% band but may offer some important changes to the accompanying statement. The big dollar has been advancing over the last few sessions, making notable gains against the euro and the commodity currency bloc. On the data calendar this morning, we get a look at the American housing sector with S&P/Case-Shiller Home Price Index and New Home Sales for the month of June. While both are unlikely to move markets, a significant uptick in home prices and sales could spark a rally in treasuries and continue to buoy the dollar. Markit’s composite and services PMIs are released at 9:45am with 51 expected for both readings. The Fed will be making their announcement tomorrow afternoon at 2pm – there will not be a press conference.

The Canadian dollar is at its lowest level against the greenback in almost three months as oil prices continue to plummet. Technically, crude prices continue to break lower and are now trading at the worst levels since early May – on the same day BP Plc reported a 45 percent dip in earnings. One of the world’s seven largest oil and gas companies, BP’s profit dropped to $720 million from $1.3 billion one year ago and the company expressed concerns over oil prices in the medium term. The correlation between the Loonie and crude has ratcheted up again over the last week and if the US sees another strong jobs report next Friday, rate forecasts could move USD/CAD even higher over the next few weeks and months. At this stage, the futures market prices in the next Fed rate hike in June 2017 – we will see where that stands around August 5th.

 

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