Dollar, get ahold of yourself!

3. Aug. 2017

So greenback short players finally reached for the level of 92.50, staging breakthrough of 1.19 on EURUSD. In our view these moves are a signs of dollar bottoming out as investors adjust their portfolio with fine-entered greenback longs as the updates on US economy is slowly but surely beginning to improve. The US consumer pleased us with increased expenditures, the consumer sentiments index from the University of Michigan remained steady at healthy levels, indicating American people are confidently looking to the future. More importantly, a comment was made by Loretta Mester, president of the Federal Reserve Bank of Cleveland, who optimistically looked at the recent slowdown in inflation, noting the temporary nature of the factors in effect. She said, the economy may need more employment to impetus prices, with unemployment somewhere at 4.75%, downgrading from past estimate of 5%.

Such a view from the Fed official brings back NFP to the game. If the report demonstrates strengthening of the labor market (ie, job growth roughly in line with the forecast, reduced unemployment), one can expect that the chances of a December rate increase will grow. But the report should be unambiguously positive, so that the Fed has a reason to spin off the story about the transitory weakness of inflation. Taking into account that unemployment in June moved from pre-crisis lows, rising by 0.1% to 4.4%, unemployment benefits were not surprising, and ADP report yesterday came out worse than expected, it is difficult to expect from NFP a pleasant surprise. And if the report disappoints, then the calm that the dollar enjoyed at the beginning of this week is likely to change to the next wave of selloff with the next target around 90.00. The dynamics of gold also speaks in favor of the bullish correction of the dollar. Having ceased to torture the defenders of the two-month high at around $ 1270, the market has retreated and is waiting for statistics on the labor market in the US, hoping that the report will allow the Fed to adjust its views, and hence the future yield of the "yellow asset".

Now for today's meeting of the Bank of England. Turbulence in the UK financial markets has diminished significantly - pound volatility has fallen, credit spreads as a measure of risk have also declined, the stock market is growing thanks to the exporters. Progress on Brexit goes in parallel with the dynamics of the market, not affecting it in any way. Markit's report on production and the service sector came out today, activity in both sectors in June expanded faster than expected. For the Bank of England, the main problem remained growing inflation, but it seems to disappear by itself with the stabilization of the pound. In the last month, it has slowed and now officials need not rush to raise rates as the Brexit has not really started yet, the country will have a lot of changes it has to withstand, and the transition should be smoothed with the soft credit policies. It is obvious that with the current stimulation, the British economy will strengthen its positions, which is logical to cause the strengthening of the pound, the stabilization of inflation. But do not underestimate the uncertainty associated with Brexit. It will still remind you of itself and as a risk factor it will be a stone on the neck of the sterling trying to not sink. Today, one should not expect a significant pound movement, since for the most part the CB meeting has already been priced in, but the NFP's tomorrow report will definitely give a signal to action.

And a comment on the Australian dollar. As noted in the note on Tuesday, investors probably will not play against the RBA, which complained to the revaluation of the pound in its press release after the interest rate meeting. Just in time, the weak trade balance has been released, which allowed the Australian currency to continue correction today.