Besides this week’s Congressional testimony from Fed Chairman Ben Bernanke, key German and UK data as well as the latest RBA meeting minutes will be among the key catalysts for the currency market.
The most important event risk this week in the financial markets will be Fed Chairman Ben Bernanke's semi-annual testimony on the US economy and monetary policy. Following last week's dovish comments and today's weaker-than-expected US retail sales report, some traders may feel compelled to reduce their US dollar (USD) positions ahead of the testimony.
According to the House Financial Services Committee, the prepared portion of Bernanke's testimony will be released at 8:30 am ET on Wednesday instead of the usual 10 am. Apparently "This change will allow members of the Financial Services Committee the opportunity to review the testimony and the report before the hearing begins."
In other words, it will give members of Congress more time to pick apart Bernanke's plans and prepare their discerning questions.
The US dollar may have ended Monday higher against the Japanese yen (JPY), Canadian dollar (CAD), and Swiss franc (CHF), but its losses against the Australian dollar (AUD) and New Zealand dollar (NZD) and its inability to rally against euro (EUR) and British pound (GBP) is a sign of hesitation in the FX market.
This morning's softer retail sales report gives the Fed Chairman reason to maintain a more cautious approach, although the Federal Reserve still seems on track to taper asset purchases this year.
See related: A US Data Scare That Won’t Matter
We expect Bernanke to spend most of his time in Washington reassuring Congress that the Fed’s plans will not send the economy into a downward spiral. To do so, he will stress that monetary policy will remain extremely accommodative and a rate hike is a long ways away. In the meantime, however, the prospect for dovish comments could prompt more traders to reduce their long dollar positions ahead of Bernanke's speech.
This Week’s Key European Event Risk
While the EURUSD tested 1.30 intraday, it rebounded off earlier lows to end Monday’s North American session unchanged. No major Eurozone data was released, but Fitch downgraded its rating of the European Financial Stability Facility (EFSF) to AA+ from AAA. The decision had very little impact on the euro because it was a catch-up move to downgrades made by Moody's and S&P last year.
The German ZEW survey of investor confidence is scheduled for release on Tuesday, and based on the recent volatility in the financial markets, disappointments in Eurozone data, and dovish policies from the European Central Bank (ECB), we wouldn't be surprised if investors grew less confident about the outlook for the German economy.
The ZEW survey is the most important Eurozone data release this week and could be fairly market moving for the euro.
The Standout Sector of the UK Economy
Like the euro, the British pound (GBP) ended Monday unchanged against the US dollar. According to Rightmove, UK house prices in July grew at the slowest pace since January, but on annualized basis, prices increased at the fastest rate ever. The outlook for UK housing remains promising, and that sector is one of the stronger areas of the UK economy.
UK consumer prices are scheduled for release on Tuesday and inflationary pressures are expected to drop for the first time since January. Soft inflationary pressures allow the Bank of England (BoE) to keep monetary policy easy.
RBA Minutes Pose a Threat to the Aussie
Monday night will be a busy time down under with New Zealand consumer prices scheduled for release along with the minutes from the most recent Reserve Bank of Australia (RBA) monetary policy meeting. While New Zealand CPI could tick higher because of rising food prices, we do not expect the RBA minutes to support the Australian dollar (AUD).
When the central bank last met, dovish comments from RBA Governor Glenn Stevens sent the Aussie tumbling to fresh lows. At the time, Stevens said, "We have to negotiate the downward phase of the investment boom over the next few years, which appears likely to pose significant changes….”
A weaker currency hasn't brightened the central bank’s view, and instead, Stevens said that a lower Aussie is needed for Australian businesses to compete while the country transitions away from a commodity-driven economy.
As a result, we feel that the RBA minutes pose a threat to the AUD even though the Australian and New Zealand dollars were spared from further losses on Monday despite mixed Chinese economic reports. China's economy grew by 1.7% in the second quarter, which was stronger than Q1 growth, but weaker than expected.
Chinese GDP growth on an annualized basis also slowed to 7.5% from 7.7%. With this in mind, the Chinese government predicts that growth will slow to 7% this year, which means they expect the economy to continue to lose momentum in the second half of 2013.
3 Factors Driving the Yen This Week
The Japanese yen (JPY) traded lower against all major currencies on Monday. Japanese markets were closed for a holiday overnight, but that did not stop global investors from driving the yen lower.
There are no major Japanese reports on the economic calendar this week, but as we have seen in today's price action, the market doesn't need Japanese data or even the participation of Japanese traders to move the yen.
Uneven Chinese growth only gives the Bank of Japan (BoJ) added incentive to maintain its easy monetary policy and keep the liquidity flowing. As a result, the outlook for the yen hinges largely on the performance of the Nikkei, US bond yields, and Japanese appetite for foreign bonds.
With only Tokyo condominium sales due for release over the next 24 hours, look for the yen to take its cue from the market's overall risk appetite.
By Kathy Lien of BK Asset Management