The FOMC and NFP got nothing on trade-related updates last week! What could move the Greenback this week?
CPI reports (Aug 10, 12:30 pm GMT)
Uncle Sam has a lot of reports scheduled throughout the week, but one that traders might pay attention to are the inflation numbers.
Consumer prices came in weaker than markets had expected in June, printing at 0.1% and an annualized rate of 2.9%.
Thankfully, the Fed is also aiming for a 2.0% annual inflation rate, so the report is right around the central bank’s estimates. It also helped that dollar bears were held off by optimistic remarks from Fed Governor Powell in the same trading session.
This week we’ll see if Powell and his team have more reasons to worry about inflation than they already are. Markets see a 0.2% monthly headline inflation rate with core CPI remaining at 0.2%.
Recall that Powell recently warned against exploiting the unresponsiveness of inflation to low unemployment, saying that pushing resource utilization past sustainable levels could lead to markets questioning their commitment to low inflation.
Now that China has threatened to increase tariffs on $60 billion worth of U.S. goods, all eyes will be on the Trump administration’s response.
Don’t forget that the U.S. is also in talks with Mexico over its auto imports and is scheduled to conduct bilateral talks with Japan later this week.
News of compromises or progress in negotiations could lift overall risk sentiment. Meanwhile, further action against China’s products or comments on the sharp yuan devaluation could inflame the U.S.-China trade war jitters and push the dollar higher.
Last Week’s Price Review
The Greenback is mixed for the week (as of 5:00 pm GMT), but still a net winner, thanks to intense selling pressure on Friday, which erased a large chunk of the Greenback’s gains. It wasn’t the NFP report that weakened the Greenback, though.
Before we begin, let’s first remove USD/JPY from the overlay of USD pairs since that’s clearly an outlier.
See? Much better! Anyhow, the Greenback had a rather poor start on Monday. There were no catalysts, but as hinted at by market analysts, and as noted in Monday’s U.S. session recap, it’s likely that market players were unloading some of their positions ahead of the week’s top-tier events, which include the FOMC statement and NFP report.
After that early bout of weakness, the Greenback found support and became more mixed before getting jolted broadly higher during Tuesday’s U.S. session, thanks to a Bloomberg report that claimed that “Representatives of U.S. Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He are having private conversations as they look for ways to reengage in negotiations.”
There was little follow-through buying, though, and the Greenback’s price action started to become mixed and messy again.
Fortunately for the Greenback, the Wall Street Journal released a report later, claiming that there had been little progress in trade talks between the U.S. and China.
More importantly, the report claimed that “Some [of Trump’s advisers] are pushing the president to apply tariffs as high as 25% on $200 billion of Chinese imports, up from an original proposal for 10%.”
A Bloomberg report would also claim later that “The Trump administration will propose raising to 25 percent its planned tariffs on $200 billion in Chinese imports, ratcheting up pressure on Beijing to return to the negotiating table.”
Those reports likely sent safe-haven flows towards the Greenback since the Greenback began to steadily take ground from everything except the safe-haven yen.
The Greenback eventually encountered sellers again during Wednesday’s London session. And as noted in Wednesday’s London session recap, there were no direct catalysts, but profit-taking ahead of the NFP report was a likely reason.
Buyers tried to push most USD pairs higher again when the ADP report printed a stronger-than-expected reading. However, selling pressure was ever present, likely because of skittishness in the run-up to the FOMC statement.
Speaking of the FOMC statement, that was a dud since the Fed’s official press statement didn’t really offer any surprises.
Well, the Fed did change its assessment on U.S. economic growth. As for specifics, the Fed had this to say during the June FOMC statement (emphasis mine):
“Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate.”
And this is what the Fed had to say during the August FOMC statement (emphasis mine):
“Information received since the Federal Open Market Committee met in June indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate.”
Other than that, there wasn’t really anything else. Even so, the FOMC statement likely opened the doors for USD bulls to come in since the Greenback began finding buyers again, likely because of safe-haven flows since the U.S. government was expected to confirm earlier rumors that the U.S. will slap a 25% tariff on $200 billion worth of Chinese goods.
And as it turns out, those rumors were the real deal since U.S. Trade Representative Robert Lighthizer would later confirm those rumors.
It was smooth sailing for the Greenback on most pairs after that, well, except against the yen and the Loonie since the yen was on the offensive at the time, thanks to falling bond yields and risk aversion, while the Loonie was riding the rise in oil prices and NAFTA-related optimism.
The Greenback’s rise would become more uniform when Thursday’s U.S. session rolled around, though, likely because of preemptive positioning ahead of the NFP report since there weren’t really any major catalyst.
Selling pressure would eventually kick the Greenback on Friday, though, likely because of profit-taking. However, selling pressure intensified before the NFP report.
And as noted in Friday’s London session recap, that was apparently because of the People’s Bank of China (PBoC) since China’s central bank announced late into the session that the foreign exchange risk reserve requirement ratio of forward sales will be raised from 0% to 20%, effective August 6, 2018.
And here’s my quick explanation from the London session recap (it’s not plagiarism when you copy from yourself):
“In simple terms, the PBoC would require Chinese financial institutions to put some cash in reserve when buying U.S. dollars through currency forwards.”
“Such a move therefore makes it more difficult to buy U.S. dollars, especially when the yuan is on a weakening phase.”
“The move also obviously makes it harder to stop the yuan from appreciating and lessens demand for the Greenback, which is why the Greenback slumped hard on the report.”
As for the July NFP report, well, that showed that the U.S. economy only generated 157K jobs, missing expectations for a 190K increase. Wage growth and the jobless rate met expectations, though.
Interestingly enough, the NFP report was effectively a dud since it had a mixed effect on the Greenback, probably because USD bears already let loose earlier thanks to the PBoC’s announcement. Some USD pairs even rose later, likely because USD bears who shorted due to the PBoC were using the NFP report to cover their shorts.
Fresh bears did come out of the woods later on when ISM’s non-manufacturing PMI report failed to impress, giving the Greenback a final bearish kick.