Action Insight

The forex markets are pretty steady today with Japan on holiday. Upbeat economic data from China didn't trigger much reactions. Traders are having their mind on the upcoming central bank events in the week, most notably ECB rate decision and press conference. In addition, there will be quite a number of key economic data to watch including UK CPI, Australia employment and Canada CPI. As for today Eurozone CPI final for June will be released. Canada will release international securities transactions while US will release Empire State manufacturing index. Also, some attention will be on EU and UK as the second round of Brexit negotiations starts.

China's macroeconomic data for 2Q17 surprised to the upside. China's GDP expanded +6.9% y/y in 2Q17, same pace as the prior quarter but above consensus of +6.8%. Economic activities in June continued to improve. Industrial production growth accelerated to +7.6% y/y in June, beating consensus of and May's +6.5%. Retail sales expanded +11% y/y in June, up from +10.7% a month ago. The market had anticipated mild deceleration to +10.6%. Fixed asset investment in urban areas grew +8.6% y/y in the first half of the year, same pace as in the first five months of the year. The government acknowledged that the country's economy continued to improve. It appears that the country's growth is on track to meet the government target of “around +6.5%”.

Dollar ended last week as the weakest currency as markets took Fed Chair Janet Yellen's testimony as a dovish one. Traders further pared back bet on a rate hike in September. And the development was accompanied by surge in stock indices to record highs. Canadian Dollar ended as the second strongest as lifted by BoC rate hike and rebound in oil prices. But it was outshone by Australian dollar which soared on iron ore prices. Sterling followed as markets continued to adjust their expectations on a near term BoE hike after central banker comments. Euro and Swiss Franc followed Dollar as the weakest ones ahead of ECB meeting this week. Meanwhile, Yen traded mixed as focus is turning to BoJ meeting.

Dollar's decline accelerates in early US session after weak economic data. Headline CPI slowed to 1.6% yoy in June, down from 1.9% yoy and below expectation of of 1.7% yoy. Core CPI was unchanged at 1.7% yoy, in line with consensus. Meanwhile, headline retail sales dropped -0.2% in June, below expectation of 0.2%. Ex-auto sales dropped -0.2%, also missed expectation of 0.2%.

Dollar stays soft on cautious comments from Fed officials. Testifying before the Senate Banking Committee, Fed CHair Janet Yellen indicated that risks from inflation are two-sided, and it was premature to conclude that the underlying inflation trend would continue to fall below the 2% target, despite the slowdown in the price gains in recent months. Dallas Fed President Robert Kaplan advocated a cautious approach to rate hike and said that "future removals of accommodation should be done in a gradual and patient manner."

Dollar trades generally weaker today except versus Yen and Canadian Dollar, where it's consolidating in oversold conditions. The greenback, nonetheless, continues to feel the weight added by dovish testimony of Fed Chair Janet Yellen. Yellen will have the second round of her testimony today but that will likely bring little news. Meanwhile, overwhelming strength is seen in Aussie and Kiwi today, as lifted by rebound in commodity prices and solid Chinese trade data. Euro, on the hand, is also struggling as traders start to turn cautious on ECB policy bets. Sterling is believed to be saved by comments from BoE hawk Ian McCafferty and rebounds against most others.

Dollar trades broadly lower as markets generally percevied Fed chair Janet Yellen's testimony as a dovish one. DOW ended up 123.07 pts, or 0.57% at record high of 21532.14. Meanwhile, 10 year yield closed sharply lower by -0.035 at 2.327. A focus today is on 112.88 in USD/JPY which could trigger further selling of the greenback on breaking. EUR/USD retreated quite sharply overnight but is holding on to 1.1382 minor support, and thus maintains near term bullishness. And of course, USD/CAD is set to extend it's near term down trend towards 1.2460 low as the Loonie is boosted by BoC's neutral rate hike and rebound in oil price.

As the market had widely anticipated, BOC has increased the overnight rate target, for the first time in 7 years, to 0.75%, from the historical low of 0.5%. The Bank Rate and the deposit rate rose to 1% and 0.5% respectively. Policymakers acknowledged the improvement in macroeconomic data, noting that the central bank's confidence in its outlook for above-potential growth and the absorption of excess capacity in the economy had been improved. Although inflation has remained soft, BOC judged that it is temporary and would reach the target by the middle of 2018.

Canadian Dollar surges broadly as BoC delivered the highly anticipated rate hike as widely expected. The overnight rate target was raised by 25bps to 0.75%. More importantly, the central bank delivered a upbeat outlook and adopts an open stance to further policy adjustments. USD/CAD extends recent decline to as low as 1.2824 and is still on course to retest 2016 low at 1.2460. EUR/CAD drops through recent support at 1.4649 and is heading to 1.4597 key near term support level.

Dollar trades mixed in early US session as Fed chair Janet Yellen sounds balanced in her prepared speech for the testimony to Congress. The greenback is trying to rebound against Euro at the time of writing. Though, that's mainly due to Euro's own weakness after yesterday's rally. And the greenback is staying weak against Yen and Aussie. Sterling rebounds today on better than expected job data and is firm against Dollar too. Canadian Dollar is treading water as markets await BoC rate decision.

The set of June data released so far has pointed to a steady growth trend in China, the world's second largest economy. Released earlier in the week, headline CPI stayed unchanged at +1.5% y/y in June, shy of consensus of +1.6%. Persistently soft food price (on deflation) continued to put downward pressure on the headline reading. For instance, pork plummeted -16.7 and egg price fell -9.3%.PPI, upstream price levels, steadied at +5.5% in June, in line with expectations. Subdued inflation offers the government room to maintain its targeted tightening measures, focusing on cracking down overheating asset prices. Yet, soft PPI suggested that growth in industrial profits would be limited.

Euro surged broadly overnight, with the help from selloff in Sterling and then Dollar. Strength in the common currency carries on in Asia session today. Fed Governor Lael Brainard's cautious comments regarding rate hike is seen a a factor triggering the decline in the greenback. Fed chair Janet Yellen's testimony to Congress today will be the key to decide whether the greenback will suffer more selling. Meanwhile, Sterling tumbled as markets continued to price out a near term BoE hike. BoE Deputy Governor Ben Broadbent's lack of comments on interest rates was taken as a sign of neutral stance. Meanwhile, Canadian Dollar is staying in range against Dollar as markets are awaiting the highly anticipated BoC rate hike.

The financial markets lack a general theme today. DOW opens flat and is set to extend recent range trading. European indices are trading mixed at the time of writing with FTSE and CAC in red. The strong rebound in Nikkei earlier today had no follow through in other markets. Gold is struggling in tight range between 1210/5 while WTI crude oil is bounded between 44/45. In the currency markets, Sterling dips notably as markets are disappointed by the lack of hints on monetary policy from BoE deputy. New Zealand Dollar remains the weakest for today, followed by Swiss Franc and Yen. Technical development in Sterling will be closely watched in the US session. Key levels are 1.2849 in GBP/USD, 0.8879 in EUR/GBP and 146.03 in GBP/JPY.

Yen remains generally weak today but it's weakest spot was overtaken by New Zealand Dollar. Meanwhile, Dollar, Euro and Sterling are staying in recently established range against each other. Economic calendar is rather light and traders are generally holding their bets ahead of the key events later this week. In particular, BoC rate hike tomorrow will catch as much attention as Fed chair Janet Yellen's testimony. Meanwhile, Euro could stay mixed until there are fresh inspirations about ECB's timing for tapering. In other markets, gold recovered ahead of 1200 handle but struggled to find follow through buying above 1210. WTI crude oil is trying to regain 45 after dipping through 44 last week.

The forex markets are generally staying in tight range today. Yen is attempting to extend recent down trend but momentum is relatively weak. In particular, USD/JPY is feeling a bit heavy ahead of 114.36 key medium term resistance level. Euro is firm as Sentix investor confidence stayed closed to 10 year high in July. But both Dollar and Sterling are mildly stronger and they pare some of last week's losses. Canadian Dollar is also in consolidation even though markets are expecting BoC to deliver a 25bps rate hike later in the week. In other markets, Gold dips to as low as 1204 and is held below 1210 handle so far. WTI crude oil is mildly lower at around 44.0.

Yen stays weak in an otherwise quiet start to the week. G20 meeting didn't give impact to the markets. Global leaders pledge to continue to "fight protectionism including all unfair trade practices" and "recognize the role of legitimate trade defense instruments in this regard." While leaders have taken note of US's withdrawal from the climate accord, all but US "agree that the Paris Agreement" is irreversible. Regarding migration, G20 somewhat toughen up and said that "we emphasize the sovereign right of states to manage and control their borders and in this regard to establish policies in their own national interests and national security, as well as the importance that repatriation and reintegration of migrants who are not eligible to remain be safe and humane."

Central bank comments and rate expectations continued to be the main drivers in the global financial markets last week. However, the developments reminded us that no matter how hawkish central bankers sound, monetary policies have to be supported by data. Canadian Dollar being an example that BoC Governor Stephen Poloz's hawkish comments were supported by strong employment data. And the Loonie ended as the strongest major currency as markets are generally expecting a BoC rate hike on July 12 this week. Dollar ended as the second strongest one after solid ISM indices and non-farm payroll headline number even though markets are not convinced of a September Fed hike. Meanwhile, Euro was the third strongest as markets perceived the ECB monetary policy meeting accounts as a hawkish one.

Dollar is quite unfancied by the stronger than expected headline non-farm payroll number. NFP showed 222k growth in June versus expectation of 173k. Prior month's figure was also revised up from 138k to 152k. However, unemployment rate rose 0.1% to 4.4%. And more importantly, average hourly earnings rose 0.2% mom versus expectation of 0.3% mom. Prior months wage growth was also revised down from 0.2% mom to 0.1% mom. EUR/USD spikes lower to 1.1388 but is quickly back at 1.1420. Nonetheless, USD/JPY is firm at around 113.70, but as supported by Yen's weakness.

Yen tumbles broadly as global bond rout continued and pushed yields higher again. German 10 year bund yields broke 0.5% level for the first time since January 2016. Meanwhile, US 10 year yield jumped to a near two month high and closed firmly at 2.37, up 0.036. The resumed selling in bonds were believed to be triggered by the hawkish ECB minutes which indicated the discussion of removing easing bias. Also, some believed that weak results of French 30 year bond-auction was another trigger. UD/JPY reaches as high as 113.83 as recent rise resumed. GBP/JPY also hits as high as 147.60. Meanwhile, EUR/JPY is even stronger and hits 129.91, set to take on 130 handle.

The minutes for the June ECB meeting turned out more hawkish than expected, sending EURUSD to a 3-day high of 1.1397 and Europe's Stoxx 600 stock index to a 11-week low 378.45. The minutes unveiled that policymakers had discussed removing the guidance on the bond asset purchase program (QE), if necessary. Policymakers just shrugged off recent weakness in headline inflation as core inflation continued to climb higher.