By Dean Popplewell
The world has been spoiled by the beautiful game for the past four weeks and with yesterday's final, can the markets now get down to some business? All the various asset classes have suffered during the tourney; all robbed of sustainable volume and volatility over the past few weeks and the beginning of the summer doldrums has not even truly begun yet.
Central Banks Dominate
This week is dominated by a plethora of central bank activity; enough to grab all investor attention. Later today, European Central Bank (ECB) President Mario Draghi will speak to the European Parliament and many expect him to release more details about the bank’s targeted longer-term refinancing operation, or the TLTRO.
The Reserve Bank of Australia (RBA) minutes will be released tomorrow and should keep investors on their toes especially with Governor Glenn Stevens jawboning his currency down of late.
Stateside, Federal Reserve Chair Janet Yellen will be front and center on Tuesday and Wednesday to testify before Congress. She is expected to maintain her dovish tone while looking through the inflation noise. The Bank of Canada (BoC), meanwhile, is on the hot seat following a dismal Canadian employment report last Friday. The BoC is expected to keep rates on hold and remain dovish despite stronger Canuck consumer-price index data of late.
Investors will also be eyeing a Bank of Japan policy review on Tuesday though no policy changes are expected.
On the handover from Europe, sellers are leading the latest price action, although pressure and interest is again limited due to Bastille Day in France, Europe's second-largest economy. The U.K. gilt bond bear will be looking to events later in the week where the U.K. June unemployment data on Wednesday is forecast to see the unemployment rate for the three months up until May fall further to +6.5%. On Tuesday, British inflation data for June is expected to tick a tad higher (+1.6% versus +1.5%) from its four-and-a-half year low print the previous month. Bank of England (BoE) Governor Mark Carney and a few fellow cohorts will also get to answer questions from the U.K. Treasury Select Committee about the Financial Stability Report on Tuesday. Until all is revealed, investors and dealers will be relying on the range trade from a fixed-income perspective.
Is the EUR the Funding Currency of Choice?
The pound (£1.7117), from a broken record perspective, is likely to remain well supported in the short term as the U.K. economic outlook remains positive (in comparison) and the BoE is edging closer to hiking interest rates. Despite the U.K.'s large current account deficit remaining a concern, the country's economic growth is strong, and coupled with the perception of higher rates (to attract further foreign investment); it will be able to support GBP going forth against most low-yield back currencies. The EUR (€1.3621) is expected to remain under pressure from the ECB's monetary policy. Yield differentials should continue to put further downward pressure on the EUR's money market rates and encourage much stronger use of the EUR as a funding currency -- follow the EUR cross for direction.
EURO Spreads Tighten
The 18-member single currency has held its own so far this morning. The EUR (€1.3636) has managed to nudge up to a fresh intraday high versus its Group of 10 peers. Aiding the currency are the main European bourses trading in the black, while the eurozone peripheral spreads tighten a tad (Portuguese bond to German bund is outperforming, especially with the shares from Banco Espirito Santo opening higher). Both 10-year Spanish-German and Italian-Spanish notes have managed to come in a bit after last week’s potential blowout scare. Even this morning's eurozone industrial production data has beaten expectations -- down only -1.1% for May versus -1.2%. National manufacturing weakness was already recognized and had been mostly priced in. The EUR bear continues to be caught in this tight trap with many looking for further guidance from the ECB for some positional vindication. Currently, the EUR's topside looks the most vulnerable, with the July 10 high (€1.3651) the market’s next point of reference. On the downside, the single unit has to contend with the 80s; the €1.3585 with some momentum to justify these shorts outright. Following the major EUR crosses, it's less tedious and certainly more informative. Watch gold and the EUR/JPY squeeze, any of these positional changes give the investor a better insight, especially when the EUR follows.
CFTC’s Commitment of Traders Spurs Changes
The latest U.S. Commodity Futures Trading Commission’s (CFTC) Commitment of Traders report released last Friday reveals that the net USD positions have been trimmed again, by -$0.4B to +$2.1B. This was probably done on the back of the last nonfarm payrolls report where payrolls increased by +288k versus the +215k forecast. Other notable currency positions shifts: Kiwi (NZD) net longs increased after the July 8 Fitch Ratings upgrade. This will certainly be a squeeze; the report noted a big uptick in CAD, turning longs for the first time since February 2013. What poor timing, especially after last Friday's horrid jobs report that saw the loonie fall from grace very quickly and remain trading well north of $1.0700. The EUR saw net short rising slightly, while net GBP longs were trimmed on some profit booking (still the largest interest).