Up until the last few months, the U.S. economy seemed to be an island of safety as the U.S. economy seemed to be immune to all the global economic weakness propelled on by tax cuts and deregulation. Whether related to tariffs or the global integrated economy weakening, economic weakness has finally hit our shores over the last two months with Friday’s U.S. jobs data confirming a deceleration in the pace of hiring over the past three months.
As the U.S. economy has shown signs of weakness, markets are not waiting for the Fed to acknowledge the weakness. Markets are always forward; U.S. short, medium and long term interest rates have collapsed in almost an unprecedented fashion since the beginning of December as they price in the weakness with many now calling for at least two, if not three, rate cuts over the next six to nine months.
Where does that leave the U.S. dollar going from here? The U.S. economy and the U.S. dollar have been seen as safe havens with the DXY index on a general uptrend (supported by Fed rate increases) over the past year. Most recently, the DXY stalled out in April and May and June is exhibiting weakness following the sharp decline in interest rates. With the Fed apparently moving into easing mode and other countries having already cut their rates or put them on hold, it would appear that the interest rate advantage the DXY has enjoyed is dissipating. While the DXY will not fall out of bed, we anticipate a steady to slightly weaker U.S. dollar going forward.
MAJOR CENTRAL BANK ACTIVITY THIS WEEK
Expectations for rates to remain unchanged at 24.0%
Expectations for rates to remain unchanged at -0.75%
Expectations for rates to be cut by 25 bps to 7.50%
KEY MARKET MOVING ECONOMIC RELEASES
United States and Canada
Expectations for a decrease from 0.2% to 0.1%
Expectations for a decrease from 0.3% to 0.1%
U.S. Retail Sales
Expectations for an increase from -0.2% to 0.7%
U.S. Industrial Prod.
Expectations for an increase from -0.5% to 0.2%
UK Industrial Prod.
Expectations for April to decrease from 0.7% to -1.0%
U.K. Jobs Report
Expectations for a good jobs report; UR remains at 3.8%
EZ Industrial Prod.
Expectations for April to decrease from -0.3% to -0.4%
Expectations for YoY CPI to remain at from 1.4%
Asia/Japan, and New Zealand
Expectations for an increase from 2.5% to 2.7%
Expectations for a decrease from 0.9% to 0.6%
China Industrial Prod.
Expectations to remain unchanged at 5.4% YoY
Expectations for a decrease from 1.2% to 0.7%
Aussie Jobs Report
Expectations for the UR to decrease from 5.2% to 5.1%
The euro has been gradually strengthening over the past two weeks as U.S. interest rates have collapsed and the market is pricing in Fed rate cuts. European politics (Italy) will be a constant source of anxiety for the euro, but market positioning, psychology, and the market dynamic of the Fed cutting interest rates while the ECB remains on hold should provide further near term upward momentum.
Sterling has benefited from the weaker U.S. dollar but is lagging behind other key currencies. Continued ongoing concerns about Brexit and the internal tribal fighting within the Tory party along with a still sharply divided electorate and Parliament will continue to hamper the GBP from keeping pace with the euro.
The JPY has badly lagged behind other major currencies over the past week despite the sharply lower U.S. interest rates. Cross rate action is primarily responsible for the JPY remaining steady as the unwinding of EUR/JPY, EUR/CAD, etc. have taken hold for now. Expect a steady to stronger JPY in the short term.
CAD has been one of the top performing currencies over the past week. Lower U.S. interest rates and improving Canadian economic data (trade and jobs report) have helped to propel it higher. Since January 7th to June 7th, the CAD is unchanged but near term momentum seems to indicate further strength in the short term.
The CNH continues to consolidate near recent lows. Market concerns about the U.S. – China trade talks going on ad infinitum with both sides digging in continue to raise concerns about the Chinese economy weakening further. Market concerns about the possibility of further CNH weakness to offset the slowing economy remain a near term factor. Expect more sideways trading this week.
The AUD has benefited from U.S. dollar weakness this past week but continues to lag behind other G7 currencies. The RBA recently cut interest rates and is leaving the option open for further rate cuts, which is undermining sentiment for this currency. Expect a steady to slightly stronger AUD this week.
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