USD/JPY: Dollar Eases, But Holds ¥100

The USD/JPY pair was under some selling pressure on Thursday as the greenback eased broadly again. The pair was trading around ¥100.35 during the London session, 0.10% weaker on the day.

The US calendar will offer durable goods orders for July. A big improvement is forecast, which might support the greenback slightly. Moreover, jobless claims will be released, followed by the services PMI for August, which should accelerate to 52.0 points.

More importantly, the Jackson Hole Symposium starts today and investors will focus on every piece of information coming from there, so volatility might be elevated.

Finally, Federal Reserve (Fed) Chair Janet Yellen is due to deliver a speech titled "The Federal Reserve's Monetary Policy Toolkit" at the symposium. This will most likely be the major driver and might set the direction for markets.

"The market is waiting for a fresh trigger from Fed Chair Yellen although it is not guaranteed that she will definitely provide a clearer signal over the outlook for monetary policy which has become more uncertain recently. If there is no clear policy signal over the likely timing of the next rate hike, the market will at least initially take it as a relief that a hike is not imminent weighing modestly on the US dollar," analysts at Bank of Tokyo-Mitsubishi wrote on Thursday.

The buying area is still around the psychological level of ¥100.00 and investors are trying to defend this zone. The resistances appears to be in the ¥100.60 zone and while below, the immediate outlook is bearish.

1. Yellen watched for hints on Fed move

Markets looked ahead to the widely-anticipated speech from Federal Reserve (Fed) chair Janet Yellen at the Jackson Hole Economic Symposium on Friday at 14:00GMT, or 10:00AM ET, for some clarity as to the timing for when the U.S. central bank could raise interest rates.

After a string of hawkish remarks over the last two weeks from various Fed officials, markets were set to gauge Yellen’s own stance at the helm of the U.S. central bank, but experts were skeptical get the Fed chief would be willing to provide specific details.

Fed fund futures priced in the possibility of a rate hike for the September meeting at 27%, while odds for a move in December were 55.4%, according to Investing.com’s Fed Rate Monitor Tool.

2. Dollar, gold and U.S. futures little changed ahead of speech

The assets most affected by potential Fed moves, or lack of action, were staging a holding pattern ahead of the risk event.

The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, slipped 0.08% to 94.60, at 9:49AM GMT, or 5:49AM GMT.

U.S. futures pointed to a flat open on Friday with investors reluctant to make a big move before Yellen’s remarks. At 9:49AM GMT, or 5:49AM ET, the blue-chip Dow futures inched up 7 points, or 0.04%, S&P 500 futures edged forward 2 points, or 0.07%, and the Nasdaq 100 futures traded up 2 points, or 0.03%.

Gold for December delivery on the Comex division of the New York Mercantile Exchange inched up 0.34% to $1,329.15 a troy ounce.

3. Oil drops as Saudi Arabia downplays need for OPEC agreement

Oil prices were lower in early morning trade on Friday, as the Saudi energy minister shrugged off the need for OPEC to intervene to stabilize markets.

Saudi Arabian Energy Minister Khalid Al-Falih told Reuters late on Thursday that "we don't believe any significant intervention in the market is necessary other than to allow the forces of supply and demand to do the work for us", adding that the "market is moving in the right direction" already.

Meanwhile, market participants looked ahead to latest count of U.S. rigs in production from Baker Hughes out later on Friday. Last week, Baker Hughes said the number of rigs drilling for oil in the U.S. last week increased by 10 to 406, the eighth consecutive weekly rise and the 11th increase in 12 weeks, spurring concern over the global supply glut.

U.S. crude oil futures fell 0.30% to $47.19 at 9:52AM GMT, or 5:52AM ET, while Brent oil lost 0.72% to $49.31.

4. Q2 GDP expected to be revised lower

The U.S. will release revised figures on second quarter economic growth at 12:30GMT, or 8:30AM ET, on Friday. The data is expected to show that the economy expanded by 1.1% in the April-June period, downwardly revised from a preliminary estimate of 1.2%.

Besides the GDP report, the University of Michigan will release revised consumer sentiment numbers for August.

5. Japan’s inflation falls the most in 3 years, BoJ under pressure

Japan's consumer price index (CPI) fell by the most in more than three years in July as more firms delayed price hikes due to already weak consumption.

The nationwide core consumer price index, which excludes volatile fresh food prices but includes oil products, fell 0.5% in July from a year earlier, the fifth straight month of declines, according to a report released Friday. It exceeded a median forecast for a 0.4% decline and June's 0.4% drop.

The data will keep the Bank of Japan (BoJ) under pressure to expand an already massive stimulus program.

1. U.S. jobs report for August

The U.S. Labor Department will release its August nonfarm payrolls report at 8:30AM ET (12:30GMT) on Friday.

The consensus forecast is that the data will show jobs growth of 180,000, following an increase of 255,000 in July, the unemployment rate is forecast to dip 0.1% to 4.8%, while average hourly earnings are expected to rise 0.2% after gaining 0.3% a month earlier.

An upbeat employment report will point to an improving economy and support the case for higher interest rates in the coming months, while a weak report would add to uncertainty over the economic outlook and push prospects of tighter monetary policy further off the table.

Besides the employment report, the U.S. is to produce data on personal spending and income, core PCE prices, consumer confidence, pending home sales, and factory orders in the week ahead. There is also ISM data on manufacturing sector activity.

2. Chinese manufacturing data

The China Federation of Logistics and Purchasing is to release data on August manufacturing sector activity at 01:00GMT on Thursday (9:00PM ET Wednesday), followed by the Caixin manufacturing index at 01:45GMT (9:45PM ET).

The official China's manufacturing purchasing managers' index is forecast to remain unchanged at 49.9 this month, while the Caixin survey is expected to slip to 50.2 from 50.6 in the preceding month.

Anything above 50.0 signals expansion, while readings below 50.0 indicate industry contraction.

3. U.K. August PMI's

The U.K. will release readings on August manufacturing sector activity on Thursday, followed by a report on the construction sector on Friday.

The manufacturing PMI is forecast to inch up to 49.0 from 48.2 a month earlier, while construction activity is expected to improve slightly to 46.1 from 45.9.

The Bank of England cut interest rates to a record-low 0.25% and launched fresh easing measures earlier in August in a bid to buffer the economy from a downturn following the Brexit vote.

Economic activity in the U.K. is expected to slow down sharply in the second half of the year as businesses face uncertainty over the country’s future direction in wake of the U.K.'s vote to exit the European Union.

4. Euro zone flash August inflation figures

The euro zone will publish flash inflation figures for August at 09:00GMT (5:00AM ET) Wednesday. The consensus forecast is that the report will show consumer prices inched up 0.3%, compared to a rise of 0.2% in July, while core prices are expected to gain 0.9%, unchanged from the prior month.

Slow growth and virtually non-existent inflation will force the European Central Bank to extend and expand the scope of its asset purchase program at its policy meeting later this month, according to a recent Reuters poll of economists.

5. Canadian growth data

Canada is to release GDP figures at 8:30AM ET (12:30GMT) Wednesday. The data is expected to show that the economy expanded 0.5% in June, after shrinking 0.6% a month earlier.

Odds for Fed rate hike continue to move higher.
Hawkish Fed sends dollar to 2-week highs.
BOJ's Kuroda shows readiness for further easing.
Global stocks creep lower on Fed rate hike bets.
Stronger dollar, fading supply freeze hopes weigh on oil.

Barclays says a positive NFP will add impetus for EUR/USD toward 1.07

We look for nonfarm payrolls to rise 200k. We expect 190k of these gains to come from the private sector, and specifically service-providing employers. However, we see a risk that residual seasonality in August employment could weigh on overall employment. 

A positive NFP report will likely further solidify those expectations, adding impetus for potential modest near-term EURUSD downside, in our view, towards our Q3 forecast of 1.07.

Eurozone Economic Sentiment Indicator Shows Increased Pessimism in August

According to data released by the European Commission, economic sentiment in the Eurozone edged lower in August. The Economic Sentiment Indicator for the month fell marginally to 103.5 from the July revised figure of 104.5 (from 104.6), and below the 104.1 analyst were expecting (Thomson Reuters survey).

Businesses in the all-important services sector showed decreased optimism regarding the state of the industry. The Services Sentiment Index fell to 10 from 11.2 (revised up from 11.1) in July and below the expected reading of 11.2. The decrease was noted as coming from a decline in demand expectations and in managers’ view on past demand and business situation.

The retail industry also experienced a dip on the back of more negative views for both their present and future expectations. The Retail Trade Index moved lower to -1 in August from 1.7 in July.

The Construction Index was the only portion of the overall sentiment index to show an increase in optimism, edging slightly higher to -16.1 from -16.3. This was attributed to an improved outlook for employment.

A survey of executives in the industrial sector showed a material drop in confidence, driven by the largest drop in managers’ outlook of the current level of overall order books since February 2009. The Industrial Confidence Index fell to -4.4 from -2.6 (revised from -2.4) last month and below the -2.7 expected.

The Consumer Confidence Index fell to -8.5 from -7.9 the month prior. This reading reflected a diminishing view on future employment, but was partially offset by rising expectations for savings and a more upbeat view regarding future economic activity.

There was little response by the euro to today’s data. The EUR/USD currently trades at $1.1167, lower by 19 bps.

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USD: The Fed Unlikely To Generate A Range-Breaking Rally

The Fed has played a big role in driving the trend in the USD in this cycle. However, this seems to be coming to an end, at least temporarily.

Figure 3 highlights how the recent stalling in the USD has been partially related to how the Fed is being priced. One can see that after the initial adjustment at the beginning of the hiking cycle in 2014, the USD was bounded by the unwillingness of the market to aggressively price a near-term path higher for the fed funds rate despite forward guidance provided in the dot plot. This has proved to be a prudent strategy as the dot plot has been consistently revised lower, and it’s hard to see why it should change in the near term.

As such, while a hike in 2016 will likely place a floor under the USD, continued conservative pricing of the cycle into 2017 should ensure that it will be difficult for the USD to break to a fresh high.

RBS US Desk Strategy Economics do not believe Friday’s data will compel the Fed to act as early as September. Following hefty increases in each of the prior two months, they look for job growth to have settled back a bit in August, with overall payrolls expected to have advanced by 175k. The details (average hourly earnings and average workweek) are also expected to be soft. As normal, the jerk reaction will be on the headline jobs growth print. However, the lasting impact may depend on details, most obviously average earnings

Below we set out possible currency reactions to a range of payrolls outcomes.

260 and above | USD out-performance as markets become curious about a pair of 25bp hikes

Futures markets price September as a near certainty and prices in a far higher probability of a further 25bp in December. USD out-performs in the G4 space. The prospect of strong US (and global) growth is seen ultimately providing an offset for EM FX but not immediately. The immediate EM consideration is the return of the focus on EM deleveraging and FX debt given more abrupt Fed hike pricing. Short EUR/USD, long USD/JPY, long USD/MYR (1m NDF)

210-260 | Continuation of recent stronger USD theme

A solid report that has a material impact on the pricing of a single quarter point rate hike in 2016, particularly towards the higher end of the band. Perhaps September but more likely December. Long USD/JPY, long USD/KRW

165-210 | Consensus, focus turns to ECB and BoJ meetings

The consensus and RBS US Desk Strategy Economics expectation fall within this band. Only a modest incremental change (higher) in rates expectations, with perhaps December rising to be more likely than not. Reaction on the day may depend on details and ultimately on Fed speaker comments in coming days. USD consolidates. EUR/USD drifts lower. Neutral, to mildly positive for EM FX.

145-165 | Vol suppressor

A volatility suppressing outcome. Re-establishment of carry positions. Mild EUR/USD retracement (higher) and short USD/INR  

50-145 | Profit-taking in USD longs

Still in line with labour force growth, but little reason for the FOMC to act quickly with CPI and wage pressure subdued. Gives Yellen an opportunity to return to her preferred habitat of low rates for potentially much longer. Also a number that could be seen as consistent with a late economic cycle move, suggesting a very low terminal rate. Fed tightening off the table for September entirely.Profit-taking on recent established JPY shorts. There may be more concerns about global growth. Short USD/JPY, Long JPY/KRW.

Disappointing U.S. Jobs Data Doesn't Break The Buck

The US dollar showed an unexpected resilience to the disappointing August employment data. The dollar's resilience in the face of the jobs data may reflect that many see the report did not alter investors' or policymakers' information set. It did not sway opinion very much for or against a move. There is not much market-moving data from the US this coming week outside of the ISM non-manufacturing report.

Investors should not expect much guidance by Fed officials either as the Troika of Yellen, Dudley and Fischer do not have public appearances this coming week. On the other hand, the ECB, Reserve Bank of Australia and the central banks of Canada and Sweden meet. Only the ECB's meet is seen as live with the other central banks on hold. The ECB may extend its asset purchases beyond March 2017 and may have to tweak its self-imposed restrictions on what it is buying to minimize the disruption.

The US Dollar Index slipped to new lows for the week. That low—just below 95.20, which is also the 100-day moving average—completed a 50% retracement of the rally spurred by Yellen and Fischer's comments from Jackson Hole on August 26. The 61.8% retracement is found near 95.00. Initial resistance is seen near 95.85, but it will take a break of this past week's high of almost 96.25, which also corresponds to the 200-day moving average, to signal a resumption of the dollar's advance.

The euro recovered from the midweek low of nearly $1.1120 to $1.1250 after the US employment data. The $1.1260 area corresponds to a 61.8% retracement of the Yellen-Fischer spurred decline. At $1.1245 the euro retraced 50% of the decline since the August high near $1.1365. With reasonable prospects of ECB action, and still lingering ideas that the employment data is sufficient for the FOMC, participants may be hesitant about pushing the euro much above that $1.1250 area. The $1.1100-$1.1150 band may cushion losses. The 200-day moving average is found in the middle of that band. A break of $1.11 could set up a test on the August low by $1.1045.

The dollar has been particularly resilient against the yen. It posted an outside up day on Friday. The dollar was testing JPY100 before Yellen/Fischer, and after a little hiccup on the jobs data (saw JPY102.80), it recovered to make new session highs a little below JPY104. A trendline drawn off the late-May high (~JPY111.45) and the mid-July high (~JPY107.50) is found near JPY104.30 at the start of the new week and JPY103.80 by the end of the week. The 61.8% retracement of the drop since that mid-July high is JPY104.45. A break of that area may spur a move toward JPY105.50.

Sterling is marching to a different beat than the euro and yen. The string of better than expected data is encouraging a bout of short-covering, and forcing participants to re-think the extent that the BOE will ease. We have been monitoring the downtrend line drawn off the post-referendum highs in June, July, and August. It was breached the day before the US jobs report and held on the pullback afterward (~$1.3250). Above $1.3375, the high from early August, a significant test is in the $1.3500-$1.3565 band, the high since the referendum.

The euro was trending lower against sterling this past week. It has convincingly broken below GBP0.8400. We have suggested the August low of GBP0.8345 as a reasonable near-term target. The GBP0.8280 area is the 38.2% retracement of the post-referendum move. A break of that could spur a move to the 50% retracment and post-referendum low near GBP0.8145.

Weak economic data, the drop in oil prices, and the prospect of a Fed hike has kept the Canadian dollar on the defensive since the middle of August. The US dollar approached the CAD1.3150 area before pulling back before the weekend. The US dollar initially sold below CAD1.30; it quickly met new buyers. To signify anything important, the US dollar would need to be sold below CAD1.2980. In lieu of that, the greenback can return to the CAD1.3100-CAD1.3140 area.

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German anti-immigrant party beats Merkel in her home district

German Chancellor Angela Merkel's Christian Democrats were beaten into third place by the anti-immigrant and anti-Islam Alternative for Germany (AfD) party in a north-eastern state election on Sunday, TV exit polls showed.

In a stinging defeat for Merkel in her home district that could weaken her chances of a fourth term in next year's federal elections, the upstart AfD took 21.9 percent of the vote behind the center-left Social Democrats (SPD) in their first election in Mecklenburg-Vorpommern by campaigning hard against the chancellor's policies on refugees, according to a projection by ARD TV at 1.15 p.m. ET.

"This isn't pretty for us," said Michael Grosse-Broemer, one of Merkel's top deputies in parliament in Berlin in a ZDF TV interview. "Those who voted for the AfD were sending a message of protest."

Merkel's approval rating has plunged to a five-year low of 45 percent, down from 67 percent a year ago, due to spreading disenchantment with her open-door policies on refugees.

According to a Der Spiegel magazine report, Merkel wanted to announce her intention of running for a fourth term this year but put that on hold due to resistance from her Bavarian sister party, the Christian Social Union. The arch-conservative CSU has demanded that Merkel put limits on the numbers of refugees.

"This was a dark day for Merkel," Thomas Jaeger, a political scientist at Cologne University, told Reuters. "Everyone knows that she lost this election. Her district in parliament is there, she campaigned there, and refugees are her issue."

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