This week’s calendar is a jammed with market moving economic data but these releases will not alter the current trends in the market. For example, USD/JPY is very weak – it has been falling for seven out of the last eight trading days and is trading at its lowest level in 7 months. This decline reflects the anxiety in the markets and the expectation for a response from the central bank. It is also reinforced by the persistent decline in Treasury yields and sell-off in stocks. Investors believe that with the deterioration in US-China trade relations and the turn in the markets, the Federal Reserve will have no choice but to lower interest rates next month. In fact, according to Fed Fund futures, traders are pricing in two full rate cuts before the end of the year. That won’t change even if consumer prices or retail sales surprise to the upside because the thought is that inflation and consumption will be curtailed by recent developments. And they are absolutely right – if markets continue to sell off and trade tensions worsen, corporate profitability and consumer wealth will be negatively affected. So if the dollar rallies against the Japanese yen or the Swiss Franc on the back of better data, its better to look for opportunities to fade rather than follow the move. Now is not the time to buy USD/JPY and USD/CHF because it should only be a matter of time before 105 in USD/JPY is broken.
Investors should also avoid the Australian and Canadian dollars. Although AUD/USD hit a 10-year low last week we believe that the market is underpricing the chance of a rate cut this year. According to interest rate futures, there’s only a 60% chance of a quarter point rate cut by December and we think it will be hard for the RBA to avoid easing by October. The RBA is aware of the risks in the market right now and they said they would cut rates if the labor market or inflationary conditions worsen. It is difficult to see the central bank’s arguments for keeping rates steady. Service and manufacturing activity slowed significantly in the month of July and there’s a very good chance that this week’s labor market numbers will fall short of expectations. So we believe that the RBA has no choice but to ease. They’ve already admitted that if all central banks go to zero, they will need to consider it too. However before everyone gets to zero, additional easing by the Fed, ECB and RBNZ could push the RBA to take rates below 1%, especially if the global economy is contracting and markets are crashing. Therefore more losses are likely for A$, particularly against the US dollar and Japanese yen.
Rate cuts could also be coming for Canada after last week’s employment report. The market was looking for job growth to return in July but employment fell by -24.2K, the largest drop since August 2018. Full time and part time work declined, pushing the unemployment rate up to 5.7% from 5.5%. USD/CAD shot higher immediately after but turned sharply lower as selling of US dollars resumed. USD/CAD finally stabilized and we think it is headed higher. With that said, the better opportunity may be to sell Canadian dollars against the Japanese yen and Swiss franc.
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