Market Briefing - Currency Markets Turn Choppy Ahead of Blockbuster Week
The trade-weighted dollar is oscillating between gains and losses ahead of a week that is expected to bring a peak in the US monetary tightening cycle and confirm a slowdown in the American economy. Global bond yields are ticking higher, futures are poised for a slightly softer open, and both global oil benchmarks are down.
Hopes for a broader stimulus effort in China are supporting commodity-linked currencies. According to several unconfirmed reports, the State Council is moving to set up a fund to support many of the country’s biggest real estate developers. Global raw materials - particularly iron ore, cement, and copper - have slumped this year as a broad-based crackdown on the Chinese property sector (arguably the world’s biggest bubble) has led to a steep downturn in prices and building activity.
Traders are signing pre-nuptial agreements with their positions ahead of Wednesday’s Fed meeting. Market participants overwhelmingly expect the central bank to raise its benchmark rate by three-quarters of a percentage point, but many also expect policymakers to acknowledge fading price pressures and growing slowdown risks, telegraphing a smaller series of hikes in the autumn. If Jerome Powell and his colleagues remain rhetorically hawkish instead, the “peak tightening“ thesis that animated foreign exchange movements through much of the last week could fall apart.
Today’s data calendar is relatively barren, but tomorrow’s Conference Board consumer confidence survey and Wednesday’s durable goods orders are expected to show signs of weakness.
Recession fears could become more entrenched on Thursday when second-quarter gross domestic product data is released. Consensus forecasts are still set for a 0.4 percent growth rate, but the “whisper number” is tilted to the downside. Friday’s personal consumption data - including the Fed’s favoured inflation measure - and the latest quarterly employment cost index are expected to illustrate continued strength in consumer spending and an ongoing moderation in wage pressures.
The euro is treading water, holding last week’s gains as traders position for a series of superheated inflation prints. Individual countries are set to report July consumer price indices on Thursday, with an 8.8-percent euro area-wide number forecast for Friday. Although momentum continues to favour a move through parity against the dollar, above-consensus data could support expectations for a more aggressively front-loaded tightening cycle from the European Central Bank, and we think the common currency could exhibit surprising stability through the summer months.
UK Conservative leadership challengers Truss and Sunak are due to face off in their first head-to-head debate. The exchange rate implications should be limited - the candidates hold well-understood positions on economic issues, and neither represents an extreme break from Tory orthodoxy. The pound is firmly rangebound, with central bank speakers in purdah and no obvious volatility catalysts on the calendar between now and next week’s Bank of England meeting.
Wheat prices are moving higher after missiles hit the port city of Odesa, Ukraine. Russia claimed to have hit military targets, but commodity traders are wary of a collapse in the export deal agreed on Friday between Moscow, Kyiv and Ankara. Extraordinarily-high wheat costs are putting households across the developing world under severe pressure, and could lead to a wave of political unrest that destabilizes emerging market currencies.
KARL SCHAMOTTA, CHIEF MARKET STRATEGIST
USD Conference Board Consumer Confidence, Early July
USD Advance Goods Trade Balance, June
USD Durable Goods Orders, June
USD Department of Energy Weekly Inventories
USD Federal Reserve Rate Decision
USD Gross Domestic Product, Q2
CAD Survey of Employment, Payrolls, and Hours, May
USD Weekly Jobless Claims
EUR Gross Domestic Product, Q2
EUR Consumer Prices, July
MXN Gross Domestic Product, Q2
CAD Gross Domestic Product, May
USD Personal Consumption Expenditures, June
USD Employment Cost Index, Q2
USD University of Michigan Consumer Sentiment, July (Final)