Glimpse of the potential seasonal impact

The first week of August will be a busy one for the financial markets. Employment reports are due for release from the U.S, Canada and New Zealand along with central bank meetings in Australia and the U.K August is traditionally a challenging month for stocks and today we got a glimpse of the potential seasonal impact. The Dow Jones Industrial Average hit a record high at the start of the NY trade but gave up all its gains by the end of the day. U.S data was weaker than expected with the ISM manufacturing index sinking to 59.5 from 60.6. Economists predicted a pickup in manufacturing activity but shortages of raw materials and shift in spending to services caused activity to slow. Overall the number is still strong, particularly given the sharp rise in the unemployment index but that did not stop the U.S dollar from following Treasury yields lower. The big story today was the plunge in yields – at one point 10-year rates were down 5 percent. The Australian dollar was one of the best performers on Monday but most Australian banks are calling for the RBA to renege on its plan to taper bond purchases from September forward. The initial announcement to taper bond buys was made on July 5th. At the time Melbourne was coming out of a lockdown and Sydney just went into what was supposed to be a 2 week long snap lockdown. Darwin, Perth and Brisbane also tightened restrictions which meant that more than 12 million Australians were in lockdown but the period was expected to be short. Fast forward a few weeks and lockdowns in Brisbane and Sydney were extended with Sydney marking its sixth week under stay-at-home orders. All of this has and will continue to take a toll on Australia’s economy as the country faces a reasonable chance of contraction in the third quarter. As the year progresses, differences in monetary policy direction will become a stronger driving force for currencies. This week’s Australia and U.K rate decisions will highlight the divergence between two countries with vastly different COVID situations. Large parts of Australia were in lockdown in July whereas the U.K removed all restrictions last month. The Bank of England will be debating a further reduction in bond purchases. Divergences like these are not unique to these two countries and as they become more apparent, the impact on currency pairs will be more significant.

Euro

The single currency steadied as German consumer prices, to make them comparable with inflation data from other European Union countries, rose by 3.1% in July, a 13-year high, compared with 2.1% in June, leading services sector trade union Verdi to demand significant wage increases. It shows that unrestrained borrowing is no political plan in the long run. Overall, the EUR/USD traded with a low of 1.1850 and a high of 1.1907 before closing the day around 1.1868 in the New York session.

Yen

The Japanese Yen gained as the dollar lurched lower yesterday, back towards the one-month lows hit last week when it became clear the Fed was in no hurry to tighten policy and policymakers broadly shared Chairman Jerome Powell’s view that rate rises were “a ways away”. Markets are awaiting the July non-farm payrolls report, due on Friday. Overall, the USD/JPY traded with a low of 109.34 and a high of 109.81 before closing the day around 109.67 in the U.S session.

British Pound

The British Pound steadied yesterday versus the dollar, ahead of a Bank of England meeting later in the week, as global risk tone improved on optimism for the U.S infrastructure bill. A drop in COVID-19 cases and the reopening of the British economy fueled a rebound in the pound in July, with the currency re-emerging from its biggest fall in nine months in June. Overall, the GBP/USD traded with a low of 1.3886 and a high of 1.3981 before closing the day at 1.3903 in the New York session.

Canadian Dollar

The Canadian Dollar traded higher against the U.S Dollar yesterday. The week ahead contains little of note in the economic calendar for Canada ahead of Friday’s July job report that consensus expects to confirm a 145.7k increase in the number of new jobs created in Canada last month, which is seen pulling the unemployment rate lower from 7.8% to 7.3%. Overall, USD/CAD traded with a low of 1.2419 and a high of 1.2489 before closing the day at 1.2460 in the New York session.

Australian Dollar

The Australian Dollar popped higher after the country’s central bank surprised markets by sticking with plans to taper bond buying, arguing the economy will recover quickly once coronavirus lockdowns ease. The Aussie gained 0.6% when the Reserve Bank of Australia (RBA) said it would trim its weekly bond-buying to A$4 billion ($2.96 billion) in September as planned. Overall, AUD/USD traded with a low of 0.7408 and a high of 0.7485 before closing the day at 0.7421 in the New York session.

Euro-Yen

EUR/JPY is trading below 14, 50 and 100 days moving average. Fast stochastic is giving a bearish tone and MACD is also issuing a bearish stance. The Relative Strength Index is above 46 and lies below the neutral zone. In general, the pair has gained 0.05%.

Sterling-Yen

Currently, GBP/JPY is trading above 14, 50 and 100 days moving average. Fast stochastic is issuing a bearish tone and MACD is also indicating a bearish stance. The Relative Strength Index is above 53 reading and lies below the neutral zone. On the whole, the pair has lost 0.20%.

Aussie-Yen

Currently, the cross is trading below 14, 50 and 100 days moving average. Fast stochastic is giving a bearish tone and MACD is also indicating a bearish stance. The Relative Strength Index is above 38 reading and lies below the neutral region. In general, the pair has lost 0.50%.

Euro-Sterling

This cross is currently trading below 14, 50 and 100 days moving average. Fast stochastic is indicating a bearish tone and MACD is issuing a bullish signal. The Relative Strength Index is above 41 and lies below the neutral region. Overall, the pair has gained 0.24%.

Sterling-Swiss

This cross is trading above 14 and below 50, 100 days moving average. Fast stochastic is issuing a bullish stance and MACD is also indicating a bullish tone. The Relative Strength Index is above 48 and lies below the neutral region. In general, the pair has lost 0.49%.

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