EUR: EUR/USD still range-bound between 1.35 and 1.37
The EUR/USD recovered back above 1.36 last week, mainly due to the weakness of the US dollar. Given these circumstances, several European Central Bank members reaffirmed that QE remains probable if inflation expectations continue to subside, and growth continues to disappoint. However, these comments failed to weaken the EUR/USD, even though industrial output was shown to have declined sharply month-on-month in Germany (-1.8%), France (-1.7%) and Italy (-1.2%) .
This week, watch out in particular for the German ZEW index (measuring economic sentiment), although it is unlikely to have a significant influence on the EUR/USD. Instead, the pair will likely remain range-bound between 1.35 and 1.37 in the run-up to Janet Yellen’s testimony. Until the Federal Reserve’s rhetoric turns more hawkish, it is improbable that the EUR/USD will weaken much below 1.35. However, we do expect the pair to test 1.3480 in the short-term.
JPY: Buy USD/JPY below 101
The Japanese yen came under upward pressure last week following the downturn in the equity markets and consequent decline in US long rates. The USD/JPY fell back towards 101.3, and could end up weakening further to 100.8 if equity indices extend their downward correction. This week, watch out for the Bank of Japan’s monetary policy meeting; not expected to change, with monetary easing unlikely in the short-term. While the sales tax hike probably had a significant impact on economic activity, as underlined by the 19.5% month-on-month drop in machine tool orders in May, the outlook for the Japanese industrial sector is expected to improve according to the Tankan survey published at the beginning of this month. Unless there is significant easing in US long rates – at least below 2.50% – it is unlikely the USD/JPY will weaken too severely. Therefore, we recommend buying the USD/JPY below 101 to play a rebound towards 102, then 102.8, once the US quarterly earnings reporting season draws to an end.
GBP: EUR/GBP heading towards 0.788
As expected, the Bank of England kept any changes in its monetary policy on hold. It will be interesting to read the minutes of the last Monetary Policy Committee meeting (due to be published on 23 July) to see whether comments regarding growth and employment remain as upbeat as before. With regard to economic indicators, watch out for the publication of the Labour Market Statistics and consumer prices for June. These figures are expected to be up, heightening expectations of an interest rate hike – in turn further bolstering sterling. However, a change in the central bank’s tone is unlikely before the publication of the Inflation Report on 13 August. With these factors in mind, our short strategy for the EUR/GBP remains towards 0.788 and our long strategy for the GBP/USD towards 1.723. We were forced to take our profits on the GBP/SEK at 11.65 after the Swedish krona’s rebound at the end of the week.
AUD: AUD/USD on course towards 0.92
The Australian Labour Force survey offered mixed indicators, especially in the wake of the US Employment Situation Report, but the increase in unemployment nonetheless weighed on the AUD/USD. Similarly, the weak Chinese trade surplus got the better of the pair’s earlier bullish disposition to see it pull back below 0.94. All these factors are likely to reassure the reserve Bank of Australia and its Governor Glen Stevens, following his dovish tone the previous week. This week, pay attention to the minutes of the last central bank meeting – although the Governor’s attitude of restraint is unlikely to change. We remain negative on the AUD/USD towards 0.92, particularly if equity markets display greater volatility in the short-term.
NZD: AUD/NZD heading towards 1.05
The New Zealand dollar continued to appreciate in the face of a jittery US dollar and the Australian dollar. The Kiwi continues to draw strength from the prospect of further interest rate hikes in coming months, even though the Purchasing Managers’ Index has been on the decline for several months.
The Reserve Bank of New Zealand (RBNZ) is focusing on inflation, with figures for Q2 2014 due out this week. Consumer prices are expected to be up by 1.8% year-on-year after an increase of 1.5% in Q1 2014; figures which will support the central bank’s decision to tighten monetary policy. This ought to pave the way for a further appreciation of the NZD/USD to at least 0.89 – unless the RBNZ sounds a warning well beforehand that it stands ready to intervene in the foreign exchange market if needed and/or if equity markets correct sharply over the coming weeks. Regardless, the New Zealand dollar should continue to outperform the Australian dollar, with the AUD/NZD pulling back towards 1.05.
SEK: EUR/SEK on course towards 9.40
The Swedish krona recovered last week after June’s weaker-than-expected increase in the unemployment rate (to 4.1%), alongside weaker-than-expected inflation. Even so, the latest business indicators were very disappointing, with an extremely poor increase in household consumption in May and a deterioration in the trade balance in June. Finally, the deterioration in European industrial output in May will weigh heavily on the Swedish economy, as 50% of the country’s exports are to the eurozone. In the absence of any further statistics this week, the krona’s behaviour will be decided entirely by external factors. We consider the current 9.22 level for the EUR/SEK a good level to play a rebound towards 9.40, and remain positive on the USD/SEK.