FX Update: Will the USD make a stand this week?

John J. Hardy, FX Consultant, Saxo Bank

FX Update: Will the USD make a stand this week?

The G-20 provided little grist for the market's mill, with global leaders mostly focusing on attempting to show unity on the fiscal austerity front with a pledge to cut budget deficits in half by 2013, while at the same time attempting to stem the market's worry that too much simultaneous fiscal austerity would damage growth prospects. And at least two of the major sinners in the fiscal department - the US and Japan - objected to some of the language on deficit reduction pledges. Regardless, the winds of austerity have been blowing around the world for some time, so this is by no means market-moving news. The G-20 leaders also claimed that agreements were on the way for establishing international standards on capital reserves for major international banks, though there seems to be wide agreement from commentators that any new framework will not have much bite. On the most contentious issue - China's manipulation of the yuan level, the G-20 swallowed China's bait, hook, line and sinker and China received considerable praise from other members for its recent move, though it insisted on the removal of a sentence in the final communiqué that singled out and praised its efforts on currency reform, and continued to suggest that any moves on currency were entirely its own business.

Looking ahead:
Looking at G-10 FX this week, it is clear to us that the over-riding technical focus for the week will be whether the US dollar can make a stand this week through the heavy economic data calendar and as the 55-day moving average in the USD index approaches. The question is particularly pertinent in the USD/commodity currency crosses, where the recent sell-off in risk has failed to generate as much support for the greenback as one would expect - particularly in NZDUSD and AUDUSD. The tanking NBNZ Business Confidence overnight was a bit of worry for the kiwi.

Chart: NZDUSD
NZDUSD has a long history this year of playing cat and mouse with the 200-day moving average and now finds itself sandwiched between that level and the 55-day moving average (black and red lines, respectively). This week is likely to see a resolution to the tension one way or another. We generally favor the downside barring a rally in risk.

Economic Calendar Highlights this week

With the relative lack of new developments over the weekend, we take the chance to preview a few of the highlights from this week's relatively busy an interesting economic calendar below.

Tuesday

• Japan May Industrial Production/Household Spending/Jobless Rate - The month-on-month rates for Industrial Production appear headed back to zero growth as we look for signs of whether the inventory rebuilding cycle is over. Household spending is beginning to look uninspiring again on year-on-year comparisons , but end demand in Japan always looks like it it in terminal decline.
• Sweden Retail Sales - posted the worst year-on-year number since the crisis months of 2008 and 2009. The data needs a rebound or we begin to worry about the fate of the domestic economy in Sweden, especially the implications of a potential housing bubble unwind -and the Riksbank is warming up for its first rate hike later this week.
• UK May Mortgage Approvals - mortgage approvals have tapered off this year from 2009 levels (though they have been essentially flat for several months), even as prices have advanced higher - a sign of topping out in the housing market? A double dip in housing is an imminent danger in the UK as well, as its earlier bubble never has been fully unwound.
• EuroZone Jun. Industrial/Consumer/Economic Confidence - the EuroZone crisis has seen remarkably little impact on confidence surveys, which have largely managed to improve up to this point - can this continue?
• US Apr. S&P/Case-Shiller Home Price Index - month-on-month figures just barely dipped into negative territory in Feb. and March, and we will likely see very ugly numbers through at least June for this index - which is still considered the best house price index despite its tardiness.
• US Jun. Conference Board Consumer Confidence - why is confidence surging even as retail sales have fallen sharply, Obama's popularity is nose diving, and the oil spill continues to spew? Will this survey match the strong gains evident in the Michigan survey? The weekly ABC survey remains range bound, but the Conference Board number contains an expectations component.
• US Weekly ABC Consumer Confidence - see above. This survey has been mired in a very low range for over two years.

Wednesday

• Australia May HIA New Home Sales - the Australian housing market is a ticking time bomb and we have seen higher prices at lower volume in this market in recent months - a troubling sign. The RBA is hiking and most mortgages are financed with variable rates - which are now 150 bps higher than they were a year ago.
• Germany Jun. Unemployment - German official unemployment levels are close to the lowest they have been since....shortly after the 1991 reunification. Can this be possible? The low unemployment level is a result of Germany kurzarbeit program, which allowed more workers to stay on the payrolls, even as hours and wages were reduced, as well as to the global inventory rebound, which is a boon to German production and export industries. As well, Germany never suffered a distorting housing bubble. These factors are worth consideration if the DEM is ever spun off from the Euro.
• US ADP employment change - this number is more worth following than the NFP number as it doesn't include the egregious degree of statistical correction. Worryingly, it appears from this number that payrolls gains topped out earlier this year and only expanded slightly in June.
• Canada Apr. GDP - Canada has been on a torrid growth pace. This could slow in coming months as the housing market tops out and if energy prices remain well below 80 dollars a barrel.
• US Chicago PMI - it appears the inventory building cycle may be topping out. This is the final major regional survey before Thursday's ISM survey.

Thursday

• Australia Jun. AiG Performance of Manufacturing Survey - still strong in May, in contrast with the very bad, and more worrying services survey (due up on Monday).
• Japan Q2 Tankan - likely reasonably strong as Q2 was the heart of the global inventory building phase. This survey is never particularly timely or leading due to its infrequency.
• Australia May Retail Sales - one of the world's most indebted consumers seems happy to keep on spending, though interesting that the recent services survey was so weak.
• Australia May Building Approvals - one of the indicators to watch for signs of the Australia housing bubble rolling over.
• Sweden Riksbank Interest Rate decision - looking for the Sweden to be the final G-10 central bank to join the "hikers" with a 25-bp move as the country. The market is looking for 125 bps of tightening in the year ahead - but will the Riksbank join the RBA, BoC, and Norges Bank in adjusting expectations lower due to the economic uncertainty and the particular EuroZone challenges?
• UK Jun. PMI Manufacturing - recent months were likely the highest this survey will reach for the cycle, though anything over 50 still represents improvement
• US Weekly Initial Jobless Claims - this survey needs to start posting sub-400 levels consistently to upgrade the outlook for US employment. Until then, stagnation at best.
• US Jun. ISM Manufacturing - the manufacturing recovery won't get any stronger than the May number - the question is how quickly the survey drops from here.
• US May Pending Home Sales - this is the first month after the home-buying tax incentive, so it will naturally fall off a cliff, just like we saw with New Home Sales data for May, but this is widely expected.
• US Domestic Vehicle Sales - interesting that, while vehicle sales volumes have risen on average this year, we are still at sales rates consistent with...the mid-1980's. Remarkable.

Friday

• US Jun. Change in Nonfarm Payrolls - this number looks to come in negative due to the distortions from the census hiring and firing, which is why focus has shifted to the "private payrolls" number, which worryingly dropped in May. Let's hope a new downward trend is not on the way. Consensus expects a stronger June reading in private payrolls, though claims data suggests otherwise.
• US Jun. Unemployment Rate - likely to tick back higher from census effects. The worrying thing here is the sustained high level of unemployment, which has never been seen in any post WWII recession in the US.

Economic Data Highlights

• UK Jun. Hometrack Housing Survey saw prices rise +0.1% MoM and +2.1% YoY
• Japan May Retail Trade fell -2.0% MoM and rose +2.9% YoY vs. -0.1%/-4.0% expected, respectively
• New Zealand Jun. NBNZ Business Confidence fell to 40.2 vs. 48.2 in May
• Sweden May Trade Balance out at 2.7B vs. 7.5B expected and 6.4B in Apr.
• Sweden May Household Lending rose 9.1% YoY vs. 9.2% in Apr.
• Germany Jun. CPI rose +0.1% MoM and +0.9% YoY vs. +0.1%/+1.0% expected, respectively
• US May Personal Income rose +0.4% MoM vs. +0.5% expected
• US May Personal Spending rose +0.2% MoM vs. +0.1% expected
• US May PCE Core rose +0.2% MoM and 1.3% YoY vs. +0.1%/1.2% expected, respectively

Upcoming Economic Calendar Highlights

• US Dallas Fed Manufacturing Activity (1430)
• US Fed's Warsh to Speak (1645)
• New Zealand May Building Permits (2245)
• Japan May Overall Household Spending (2330)
• Japan May Jobless Rate (2330)
• Japan May Industrial Production (2350)
• Japan Jun. Small Business Confidence (0500)