Following a week where the USD was a loser against all the major currencies, we are now looking forward to a week with major reports. Before going to the anticipated numbers in those reports, we wish to briefly comment on the revelations of the new COT report, released late Friday.
Referring to last week's COT report, we note the aggregate USD long versus short all other major currencies was quite large, almost 432K contracts of CME futures and delta adjusted options. The new report revealed the USD long had been reduced to 398K. The biggest short covering occurred in the euro and the Australian dollar. Short positions in the pound and the yen increased. With the specs so unbalanced long the USD, last week's market action, which featured some short covering, should have been expected.
Will there be follow through next week? Central bankers are going to meet and there are meaningful economic reports to be released. A pick-up in volatility should be expected.
On Monday, RBA Governor Stevens starts the comments from the central bankers. It is expected the RBA will reduce the bank rate by 25 basis points in the August 6th meeting. The (M/M) AU Building approval is also released on Monday and is expected to show a modest increase. For the Aussies, however, it appears the Chinese economic data is more important than the local data.
The weekly trade in the AUDUSD (FXA, UUP, UDN) shows a solid advance, briefly topping the .93 handle, before settling back to .9250. A$ short covering accounted for some of the strength. We are doubtful there will be substantial buying ahead of an anticipated dovish RBA report in early August, but should there be, we will be looking at the sell side in the .9350/.94 area.
It was a good week for the euro versus the USD (EURUSD, FXE). While the European fundamental news was not outstanding, at least new problems were not anticipated. The euro traded higher from the opening on Sunday and closed near the top of the weekly range.
On Thursday, we get the notes from the EU central bank, which will be followed by a Draghi press conference. Prior to the Draghi chat, we have an Italian 10 auction in Italy on Tuesday. The results are meaningful since Italy is the third largest debt issuer in the world. Difficulty selling these bonds can threaten the EU stability. The last 10 year trade was 4.55%. Italian 10 year paper was last quoted at 4.40%, perhaps an indicator of the present calm in the eurozone.
On Wednesday, the European CPI will be released. It is expected to be steady at 1.2% up for the Core, and 1.6% the entire CPI. No inflation threat here. At the same time we get the EU Unemployment rate, expected to be 12.2% up from 12.1%. This will be followed on Thursday with the M/M PMI from Italy, France, and all Europe. These numbers are expected to be about the same as last month's numbers, around 50. My guess is good numbers, by themselves, would be friendly to the euro.
The first week of every month produces an abundance of US data. We begin with US home sales, which can be a bit of a wild card. The market has discounted a broad housing recovery, but the views on main street do not concur. New sales are anticipated to be down 1%. The Housing Price Index, estimated to be up 12.5%, will be followed on Tuesday with US Consumer Confidence, down slightly to 81.
The US ADP Employment Change leads the number releases on Wednesday. This number has been revised somewhat in an attempt to project and front run the NFP Report. The estimate is 180K new jobs, down from 188K last month. At the same time, we also get the US GDP Annualized (Q/Q). This number is down to 1% from 1.9% in the previous report.
The Wednesday news continues with a statement from the Fed pertaining to interest rates. It is anticipated the rate will be unchanged, .25%, and Bernanke will not be tapering this year. Should he reduce the target unemployment rate to 6%, this could be bearish for the USD, since the bond buying would continue longer. On the following day, we turn our attention to US Initial Jobless claims, 344k, about the same as last week's 343k. This is followed by the US PMI ISM Manufacturing PMI. The guess on this is 52, up from last month's 50.9 number.
Finally on Friday, we get the NFP report, which is often a surprise, and the US Unemployment Rate. Guesses for the NFP are 185K, down from 195K last month. Unemployment is expected to drop to 7.5% It will be important to monitor the amount of new full-time to part-time jobs created.
Another issue that is creating some uncertainty in the US is speculation about who will the new Fed Chairman, or in this case Chairwoman, will be. According to media rumors, it is a contest between Janet Yellen and Larry Summers. Yellen would supposedly continue the Bernanke policies, while Summers' future policies are a mystery. Summers, though brilliant, can also be quite abrasive. When he was President of Harvard, he made enemies and there were critics of his management of the school endowment fund.
A new Fed Chairman can be unnerving to markets. The US equities have been big winners under Bernanke, though they now act like they are headed for some consolidation. My guess is President Obama will nominate Yellen.
The USD lost to the yen this week, selling off from over 100 to 97. As we noted in the last COT report, the specs' short position increased to 123.4K, a sizable position. There are some reports coming out Sunday evening, but more importantly will be the comments of BOJ Governor Kuroda.
There was an announcement that PM Abe is re-examining the consumption tax currently at 5% and scheduled to climb to 10% by October 2015. It sounds like he is seeking advise -- is there another way to raise tax money? A reduction or delay in the tax would get the yen bears' attention. Taxes are needed to reduce the huge deficit.
We are coming to what should be a lively week. Make sure you manage your money so you are able to trade another day.
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