Dollar up on global bond selloff, Yen slammed

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10 July 2017

thomasdodds

World markets continue to come to terms with a global regime shift in financial conditions.

E
ver easier monetary policy has been a fact of life in the advanced economies since the great financial crisis of 2008-9. However, over the past few months, most central banks have given unequivocal signs that this is about to change. The immediate impact is being seen for now mostly in world bond yields, which sold off last week in a orderly but steady move.

The biggest beneficiaries of this move were the US and the Canadian Dollar, while the worst performing G10 currency was the Japanese yen, as Japanese yields, explicitly anchored by the Bank of Japan as part of its monetary easing, failed to follow their counterparts elsewhere in the upwards move.

Currency markets focus has shifted squarely from political risks to trying to gauge the pace and extent of policy tightening by the different central bank. This week, expect most market action to be driven by central bank meetings in Canada, South Korea, Malaysia and Indonesia, and critical communications from central bank officials, such as Bank of England’s Broadbent and Haldane on Tuesday, and Federal Reserve Chair Yellen testifies on monetary policy before Congress on Wednesday and Thursday. The main macroeconomic release of the week is US inflation out on Friday afternoon London time.

Major currencies in detail

GBP

Signs of a modest economic slowdown in the UK continue to pile up. Last week, the key PMI leading indicators of business activity came out weaker than expected. At 53.8, the composite index is still solidly above the 50 level that indicates expansion, and consistent with annual growth in the 1.5-2.0% range, but the trend bears watching, and another decline in this month’s numbers would trigger a review of our forecasts for Sterling. A surprise fall in manufacturing output and a wider trade deficit did not help matters, and the Pound had a rough go of it last week.

This week, in addition to the monetary policy communications by Haldane and Broadbent, the employment report should provide further clues as to whether the gap between inflation and wages continues to widen.

EUR

This week will be an exceptionally quiet one in the Eurozone. No key macroeconomic releases or central bank communications are expected. The Euro should trade driven by two key factors: whether the sell off in Eurozone bonds continues, and the tone of Yellen testimony to the US Congress across the Atlantic.

USD

The US payroll report for June once again did not have the impact in currency markets that it used to, in a further sign that markets are taking economic growth for granted and are now fully focused on inflation indicators and central bank communications. The report was mixed to positive, with a solid positive surprise in job creation but no upward tick in annual wage growth.

This week looks quite critical for the Dollar. In addition to Yellen’s key testimony to Congress on Wednesday and Thursday, we will get June inflation numbers on Friday. Retail sales and industrial production round up what promises to be quite a volatile week for the US Dollar.