High spending, high inflation and an economy that seems to be stagnating, yet the Dollar continues to rise against other major currencies. How is this possible and how long can it continue for?
Economic Growth and Global Sentiment
While the global economy is recovering as people learn to live alongside Covid, the delta variant is continuing to spread and hamper economic growth. Regardless, the sentiment continues to shift towards risk-on. The US is in a no-mans-land of sorts when it comes to economic growth at the moment. GDP is increasing quickly but is somewhat overshadowed by the similarly high inflation rate. The unemployment rate is falling but job numbers continue to be underwhelming. Despite this, the Dollar's unique advantage of being able to perform in both sentiments enables it to continue to outperforming other currencies.
Threat of National Debt and a Debt Ceiling Crisis
The debt ceiling is a limit on the amount of national debt that can be incurred by the Treasury that limits how much money the government can spend thus limiting how how they may pay on the debt they already borrowed. This debt ceiling has been reached many times in history but every time congress has made exceptions. However as Biden continues to spend and parties become more divided, what will happen when the government inevitably reaches the debt ceiling next is uncertain. Should the debt ceiling not be raised the government will be forced to default on their debts, the economy would near collapse and selling bonds in the future would become significantly more challenging.
Interest Rate Betting
Four months ago the Fed stated its intent to raise interest rates twice in the next two years, its probable that as time goes on an inflation continues to increase investors are betting on this happening sooner than later. This is backed up by the falling price of Gold. Gold is seen as a hedge against inflation, so this could be investors speculating at a decrease in inflation caused by an increase in interest rates.
Let's look at the news event's we've got lining up this week...
The USD Retail Sales Report is set for Tuesday which shows the total value of sales at a retail level. Consumer spending accounts for a majority of economic activity, and therefore when citizens spend, it is a sign that people have jobs, people are making money, and people are able to spend money for whatever it is they want.
Analysts expect to see a 0.2% decline in the USD Retail Sales compared to the previous month at 0.6%. The Core reading is expected at a minor 0.2% increase after the previous reading at 1.3%. This report will likely paint a mixed picture of consumer spending, so I suggest looking at the data once released before making any trading decisions.
This week, all eyes are on the RBNZ as the central bank is widely expected to hike rates from 0.25% to 0.50%. These hawkish expectations are supported by stronger than expected quarterly inflation and employment figures, as New Zealand has been weathering the pandemic far better than any of its peers. Keep in mind that the RBNZ has already committed to scaling back its easing program in July, suggesting that policymakers are keen on keeping price pressures in check.
This release should shed more light on whether policymakers are shifting to a more optimistic stance or not. In their latest statement, the Fed refrained from giving a timeline for tapering asset purchases, citing that they need to see "substantial further progress has been made toward its maximum employment and price stability goals” before making adjustments".
The Employment Change report is a measure of the change in the number of employed people in Australia. Job creation is an important leading indicator of consumer spending, which accounts for a majority of overall economic activity. The number of unemployed people is an important signal of overall economic health because consumer spending is highly correlated with labour-market conditions.
Job creation is expected to decline by 46k in July after the previous month where we saw job creation of 29.1k. This might be enough to move the unemployment rate up to 5.0%.
Volatility was relatively low and choppy in the FX space among the major currency pairs, but we did see the CHF make a directional move early on in the week. The winners this week was a draw between the CAD and NZD, benefitting from the rebound in oil prices on Tuesday and the latter finding buyers ahead of the likely rate hike from the RBNZ next week.
We have a heavy week of central bank highlights, including the RBA's insistence to continue tapering, expectations of a rate hike in New Zealand, and comments from the Fed on when we may see tapering in the US.
Let's look at the news event's we've got lining up this week...
The quarterly AUD Consumer Price Index (CPI) report is releasing on Wednesday, which measures the change in the average price basket of goods and services by consumers, which can be anything from food, transportation and medical care. Changes in the CPI are used to assess price changes associated with living in the country. It is one of the most used statistics to identify periods of inflation or deflation.
Analysts expect a pickup in price pressures to advance from 0.5% to 0.6% and the trimmed mean CPI to jump from 0.3% to 0.5%. However, with what's going on currently and the ongoing set of lockdowns caused by the Delta variant, this may not life Aussie traders' spirits.
No interest rate changes are expected from the Central bank, and the Fed Chair Powell will likely downplay the pickup in inflation.
Pressure is still continuing to grow on policymakers to start tapering assets since the economy has been recovering. Any indication that the Fed is closer to scaling back their stimulus could be bullish for the USD.
Strong growth figures are expected for the previous quarter, and the economy is likely to grow by 8.5% in Q2. Since most companies and businesses have reopened again over the past couple months, this has spurred consumer activity and investments.
A better than expected headline could reinforce Fed tightening hopes while a worse than expected headline could encourage doubts on seeing tapering moves in the near future.
The Core Personal Consumption Expenditures (PCE) Price Index is releasing on Friday and it reflects changes in the prices of goods and services purchased by consumers in the US.
Another pickup in inflation is expected, and we're looking to see the reading pick up from 0.5% to 0.6% in June. This is the Fed's preferred measure of inflation, and hence should be a very big deal!
With markets beginning to a volatile start on Covid fears, by the end of the week markets seemed to calm down to a steady recovery. The CAD performed the best rising in recovery in risk, but also on rising oil prices. The Euro had the most notable event of the week due to the monetary policy statement from the ECB.
7/22/2021
The past couple months haven't been too good for the crypto market, in fact, the market saw a $90 billion loss since May. If you have kept up with the activity on Elon Musk's account, you might have seen how the majority of his tweets about dogecoin or bitcoin have greatly influenced the price of most cryptos in either direction. His influence on Twitter and social media broadly affect the behavior of bitcoin and other altcoins, and in a recent interview, he mentioned that he "might pump [bitcoin] but I don't dump".
Out outlook
Lately, we've seen a lot more businesses and institutions getting involved or talking about getting involved in crypto or bitcoin specifically. The price of bitcoin has also hit some hard support that has held price above this level in the long run. I think bitcoin could see some upside going into this weekend now that we've seen some good news and two days of green so far. And crypto does tend to perform better on weekends after a period of buying during the week. We just need to see how the coin fares the rest of today and tomorrow.
Trade Setups
BTCUSD
Bitcoin shows some hard rejection from the lows on the 4H timeframe and comes up to test resistance around the falling trend line starting in late June. Something to look out for is a decrease in volume and/or a hard retracement from this trend line; this could mean yet another lower low will form, and that would be very concerning considering that we will probably test the very bottom of the consolidation zone. However, if we see a break above this falling trend line, we could see price continue to the top of this zone where there are several tops on this timeframe.
Look out traders! On Friday the 23rd of July, the Euro will be printing their monthly PMI data so here's what to expect...
The Purchasing Managers' Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors. It consists of a diffusion index, which essentially summarises market conditions viewed by purchasing managers if they are expanding, staying the same or contracting. The PMI aims to provide information about current and future business conditions to company decision-makers, analysts, and investors.
The headline PMI is a number from 0 to 100. A PMI above 50 represents an expansion when compared with the previous month. A reading below 50 represents a contraction, and a reading at 50 indicates no change compared to the previous month. The further away from 50, the greater the level of change.
As a whole, the Euro has expanded significantly in their PMI readings. The Eurozone is doing very well combatting the pandemic and the crisis it's caused on their economy. However, we're now beginning to see a significant recovery.
We're expecting to see another round of potential declines in Manufacturing PMI's all round, however we're also expecting to see another round of potential inclines in Service PMI's all round too. This could potentially mean we won't see a very one-sided direction following the results as half is expected to be good news, and the other half is expected to be bad news.
If the results come out as expected, I'm expecting high volatility in both directions. As mentioned, this is mainly because we're expecting a decline in Manufacturing PMI but an incline in Service PMI's. So it's good news mixed with bad news. There likely will be spikes, but I'm expecting this is both directions. I would suggest looking out for the released actual numbers before deciding to trade this event.
Let's look at the news event's we've got lining up this week...
The RBA did not make any changes to interest rates in the latest policy decision. Policymakers extended its bond-buying program for a couple of months which reducing the amount from A$5B to A$4B per week. The transcript of their meeting should provide more insight on why they decided to make these adjustments and whether or not they’re considering tightening anytime soon.
No policy changes are expected from the ECB, however many are hoping that the Chairperson Lagarde will update their forward guidance on rates. Particularly, expectations are for the ECB to commit to keep negative rates in place for longer, as their economy is struggling to deal with the pandemic.
Lagarde may also clarify the end of the PEPP (pandemic emergency purchase programme) next year could be followed by regular asset purchases, which would basically be another round of quantitative easing.
We're expecting to see another round of declines for manufacturing PMI's in the eurozone while the services sector could be showing improvements.
France could print a dip in its July flash manufacturing PMI from 59.0 to 58.1 and an increase from 57.8 to 58.7 for its services PMI.
Germany could see its manufacturing PMI dip from 65.1 to 64.7 and its services PMI climb from 57.5 to 59.4.
This should be enough to bring the region’s flash manufacturing PMI down from 63.4 to 62.6 and the flash services PMI up from 58.3 to 59.4 this month.
This week we saw uncertainty in the markets as most currencies saw mixed choppy price action, except the NZD which caught a strong bid on Wednesday after the RBNZ announced an end to their quarantine easing program, earlier than expected.
