FX Daily: Looking out for further signs of a US slowdown

The dollar had a modest rally across the board yesterday but it was unclear why. It may have had something to do with month-end flows. However, the bigger story for FX markets is whether this broad, cross-market correction seen around 10/12 July has run its course. Tomorrow's event risks will have a big say in that. Here, our team looks for a 15bp Bank of Japan rate hike, which could trigger more independent yen strength and extend the corrective environment. However, a rate hike is far from a given and the vast majority of the local community in Japan think it is too early for another hike. If that's the case, USD/JPY could rally to say the 157 area and see investors jump back into the high yield/activity currencies which have taken such a beating in July. The second event risk tomorrow is the FOMC meeting, which we think will be risk-bullish and dollar-negative as the Fed prepares the market for a September rate cut. 

Today, the focus is on two US releases – both at 16CET. The job opening JOLTS data are expected to correct back to the eight million level after the unexpected spike to 8.14 million last month. Remember that the JOLTS data have been representing the excess demand for labour and a lower figure would confirm the Fed's view that the labour market is coming back into better balance. Also in focus is July consumer confidence data, which is expected to dip lower. Over recent weeks there has been growing momentum – aided by second-quarter earnings reports – that the US consumer is finally rolling over. A softer confidence figure today will add to the view that the Fed will want to "sustain the expansion" with a September rate cut.

DXY did well yesterday but could hand back those gains today were US data to emerge on the soft side or if the rest of Europe emulates France's seemingly strong second-quarter GDP data.

Chris Turner

Elsewhere, Australia releases CPI numbers for the second quarter overnight (0330 CET), which may tilt the balance in favour of a Reserve Bank of Australia (RBA) rate hike next week (6 August). Our economics team expect headline monthly inflation to have slowed only modestly to a consensus 3.8% YoY in June, causing an acceleration in the second quarter print from 3.6% to 3.8% YoY. Barring major downside surprises in the core measures, we suspect that a consensus read will make an RBA rate hike increasingly likely. Markets are – in our view – too dovish with pricing (+7bp for next week, +2bp by year-end), and the upside potential for AUD in the next seven days is substantial.

Francesco Pesole

This morning we have already seen a better-than-expected second-quarter GDP figure from France and later today we will see similar updates from Germany, Italy, Spain and then the eurozone. Any upside surprise to the consensus of 0.2% QoQ second quarter GDP reading for the eurozone could provide a modest lift for the euro – breaking the narrative of downside risks to growth and reining in market pricing which is now looking for more than two further ECB rate cuts this year.

Today will also see the national releases of the July CPI data ahead of the eurozone release tomorrow. Currently, the consensus expects the core CPI figure to dip back to the 2.8% YoY area, which looks unlikely to move the needle on ECB pricing.

EUR/USD had a soft Monday, but could find some support on the GDP releases today and move higher tomorrow evening should the Fed turn more overtly dovish as we expect. 1.0800 could prove the floor for EUR/USD this week.

Chris Turner

USD/JPY is consolidating after a sharp 6% drop from 11 July, when soft US CPI data and strategic Japanese FX intervention took its toll. Speculative yen shorts in Chicago futures markets, in the week to 23 July, had scaled back their positions by 40% over the prior two weeks. This community probably cut positions a little further later last week when USD/JPY traded on a 152 handle. It seems fair to assess that the speculative market is a lot better balanced than it was at the start of July – but is still running decent yen short positions.

Tomorrow's BoJ/Fed combination will of course have a big say on whether this USD/JPY correction goes much further. ING's house view of a 15bp BoJ hike and a dovish Fed argues that the correction extends, potentially close to 150. However, the low volatility environment and already a large correction across risk assets this month warns that if the BoJ surprises us (not locals) with unchanged policy, USD/JPY could have a decent bounce to 157 and that a cross rate, like AUD/JPY, could have a sizable rally. 

We'll know a lot more this time tomorrow.

Chris Turner 

This morning we have already seen second-quarter GDP data for Hungary, which was lower than expected at 1.5% YoY, while the market was expecting 2.2%. Later this morning we will see the same data from the Czech Republic. We expect 0.6% YoY, which is consistent with some acceleration from the first quarter. It will also be the last number from the economy before Thursday's Czech National Bank (CNB) meeting, but it will not be included in the new central bank forecast.

The CEE market opened yesterday with a sell-off across the board with Polish zloty leading the losses. Rates aggressively followed the rally in core markets and alongside a stronger US dollar, undermined FX in the region and the emerging market space. Still, EUR/CZK showed some resistance to going higher and the Czech koruna remains our favourite currency for this week given our hawkish expectations from the CNB meeting. EUR/HUF is back close to 394, which we think is now fair value and we remain negative on the Hungarian forint given yesterday's rally in the rates space, outperforming CEE peers. On the other hand, EUR/PLN has jumped close to 4.300, which we think is too much and we could see some downside correction back closer to 4.280 today.

Frantisek Taborsky