Week Ahead in FX: FOMC to Guide USD as Commodities Drop

• China Flash Manufacturing PMI Hurts Already Low Commoties
• FOMC in Focus as Fed deals with Forecast Publishing Blunder
• Loonie Touches 10 Year Low versus USD

Monday, July 27
4:00am EUR German Ifo Business Climate
8:30am USD Core Durable Goods Orders m/m
Tuesday, July 28
4:30am GBP Prelim GDP q/q
10:00am USD CB Consumer Confidence
Wednesday, July 29
2:00pm USD FOMC Statement
2:00pmUSD Federal Funds Rate
8:30pm AUD RBA Gov Stevens Speaks
9:30pm AUD Building Approvals m/m
Thursday, July 30
8:30am USD Advance GDP q/q
8:30am USD Unemployment Claims
9:00pm NZD ANZ Business Confidence
9:30pm AUD PPI q/q
Friday, July 31
8:30am CAD GDP m/m
9:00pm CNY Manufacturing PMI

China PMI Disappoints and Drags Commodities Lower

Today marked a new chapter for polling company Markit’s Chinese purchasing managers index (PMI) as it is now sponsored by Chinese business news company Caixin. The PMI data out of China disappointed with a 48.2 reading, lower than the 49.8 forecasted. A reading below 50 is seen as contraction. It is one of the lowest indicators of the manufacturing industry since the revision to the May survey in 2014. Weaker exports and stock market uncertainty have eroded the confidence of purchasing managers. Asian stock markets were quick to react dropping after the PMI report was published.

Commodities were the hardest sector to be hit by the news of a further slowdown in China. Oversupply and lower demand are keeping Oil prices under pressure. Metals have seen lower demand and little inflation lower the demand as a hedge. The Greek debt deal agreement defused the drama that had reignited the appetite for Gold as a safe haven. Corn and Wheat lost over 6 percent during the week with Oil, Copper and Gold in the 4 percent range. Natural gas seemed to the be one of the least affected commodities during the rout as it only lost 1.89 percent during the week.

Next week’s FOMC statement could keep pressure on commodities as the USD could get a boost from a hawkish stance. Oversupply and lower demand are common themes in the commodities market and there will be little next week to change that outlook. The USD strength or weakness is the main factor that could change the overall valuations until global growth is back on track.

FOMC Statement in Focus as Fed deals with Forecast Publishing Blunder

The U.S. economy will publish a several major economic indicators next week. After having a quiet week on the release front in a week that was defined by the Reserve Bank of New Zealand (RBNZ) and the Chinese flash manufacturing PMI the market will have plenty of fundamental data to guide the USD. The highlight comes with the release of the Federal Open Market Committee (FOMC) statement. The Fed’s benchmark interest rate is expected to stay untouched, but the statement will be analyzed for clues about an impending rate hike later this year.

The Federal Reserve disclosed on Friday that it had erroneously posted confidential data on June 29. The data included the economic projections by the Fed’s Board staff. The central bank is stressing that this is the work of staff members and not members of the FOMC. The projections show an average of 0.35 percent rate in the fourth quarter, which implies only one rate hike before the end of the year. The staff’s forecasts are below those that were published by the FOMC which implied two rate hikes and a 0.65 percent rate. The staff projections are normally published with a five year lag period.

The USD index will end the week lower as the traders viewed the U.S. currency levels as good for profit taking activity. The Greek debt drama seems to have subsided, although negotiations will continue for months to unlock the different tranches of aid. The U.S. jobless claims data which were better than expected with 255,000 new applications brought the figure to a four decade low. Employment continues to be the strongest pillar of the U.S. recovery. Questions remain about the real reason people are not filling jobless claims. Is a true recovery happening? If that is the case, where are the other signals and when will the American consumer start spending?

American core durable goods orders will be released on Monday, July 27. New purchases are expected to rise by 0.4 percent after a 0.5 percent figure last month that was revised down to 0.0 percent. This has been the second time that a positive orders is turned negative by a downward revision. On Tuesday, July 28 the Conference Board will release its consumer confidence survey of American households. The forecast is for a lower reading in July at 100.1 after a higher 101.4 in June. U.S. consumer confidence has improved but lacks consistency as macro economic headwinds cause ripples in the economy leading to uncertainty. A stronger consumer confidence is needed if the U.S. economic recovery is to show signs of sustainability.

After the disastrous first quarter gross domestic product (GDP) more is expected of the U.S. economy. The forecast for the second quarter GDP to be released on Thursday, July 30 calls for a 2.6 percent growth in the first of three releases of good and services production. The advance report which will happen on Thursday is often the one that shapes the expectations as it does not tend to deviate from the other 2 releases as it gets closer to the final release data point. The Fed will issue its statement a day ahead of this release. A combination of a strong signal of a rate hike combined with strong growth could propel the USD higher. Vice versa a dovish Fed and a missed 2Q GDP could further depreciated the USD.

USD events to watch this week:
Monday, July 27
8:30am USD Core Durable Goods Orders m/m
Tuesday, July 28
10:00am USD CB Consumer Confidence
Wednesday, July 29
2:00pm USD FOMC Statement
2:00pmUSD Federal Funds Rate
Thursday, July 30
8:30am USD Advance GDP q/q
8:30am USD Unemployment Claims

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

USD/CAD Breaks Above 1.30 as Lower Commodity Prices Crush Loonie

The USD touched 10 year highs versus the CAD after commodity prices were hit by the disappointing Chinese PMI survey results. A supply glut in crude and lower demand have pushed prices below $50 and put the Canadian economy in a quagmire. The Bank of Canada was forced to cut its benchmark interest rate by 25 basis points on July 17 and there is growing expectation that the U.S. Federal Reserve will finally raise interest rates before the end of 2015. The three factors continue to push the USD/CAD higher leading into next week where the Fed will publish its FOMC announcement.

The loonie has lost almost 23 percent since touching parity in 2013. The drop in oil prices has forced the Bank of Canada into an alternative strategy to give exporters an edge via currency depreciation. It is a long shot given the lost manufacturing base in the past 10 years as the industry moved off shore. Services are leading the gains in exports, but they face higher global competition. The Canadian economy is trying to shake off a mild recession and it has the risk of being left behind of the U.S. economy can hit a sustainable pace of growth.

The USD/CAD has broken the psychological level of 1.30 and will get limited support from oil prices next week. A hawkish FOMC with further global commodity demand weakness could push the CAD lower as there will be very limited economic indicator releases next week that could make the case for a strong loonie.

CAD events to watch this week:

Friday, July 31
8:30am CAD GDP m/m

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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