SW Weekly Market Update 1 2

2021 August Outlook for G7 Currencies

2021 August Outlook for G7 Currencies

Dollar Currency Index: Bullish above 91.800
On the daily time frame, prices are facing bullish pressure from the support zone at 91.800 which coincides with the graphical low, 38.2%, 78.6% Fibonacci retracement and 100% Fibonacci extension. The crossover above the 50 EMA which now acts as a dynamic support is adding confirmation to the bullish scenario. A pullback in prices to test its support zone at 91.800 presents an opportunity to play the bounce to the next resistance target at 94.200, which coincides with the -61.8% Fibonacci retracement and graphical resistance.1

DXY Fundamentals
The Dollar recovered in July given the strong US data and a more neutral view by Federal Reserve Chairman Jerome Powell. Earlier in July, we see the NonFarm Payroll (NFP) improved month-on-month to hit new highs of 850,000 jobs, up from the 583,000 in June. Even though unemployment rate remained relatively similar to June’s, the 5.9% reading in July shows that the US still has more room to grow before it returns to pre-pandemic levels. Elsewhere, the Fed reiterated its commitment to maintain the current pace of its bond purchases until “there is substantial further progress” in the labour market. Meanwhile, despite a spike in core CPI month-on-month from the 0.7% in June to 0.9% in July, risks of high inflation were downplayed, indicating that there is no rush to shift away from the current accommodative monetary policy. Further improvements in the core retail sales m/m 1.3% (up from the -0.9% in June) and the expansion of Purchasing Managers Index (PMI) registering 60.6% in June shows the US economy is slowly picking up.

Moving into August, we expect the Dollar to extend its rally with better than expected NFP numbers along with vaccination programs continuously being rolled out. That said, the upside in the Dollar remains limited as July’s CPI reading only rose by 0.5%, after climbing 0.9% in June, suggesting that rising inflationary pressures could be transitory and are expected to moderate overtime, in line with the Fed’s expectations. This removes pressure from the Fed to begin tapering its asset purchases, limiting the Dollar’s upside. Other notable publications to look out for in August includes the core retail sales data and the Jackson Hole Symposium where the Economic Policy Symposium would be attended by Central Bankers.

Euro Currency Index: Bearish below 118.20
On the weekly frame, prices broke the ascending trend line, opening room for further downside. On the daily time frame, prices are testing a key support zone at 117.20, which coincides with the graphical low and 127.2% Fibonacci retracement. We could see a limited bounce above this area to test the resistance level at 118.20, which coincides with the daily descending trend line and 61.8% Fibonacci retracement. Prices are also holding below the 50 EMA which now acts as a dynamic resistance, adding confirmation to the bearish scenario. A pullback in prices to test its resistance zone at 118.20 presents an opportunity to play the drop and a break below the current support zone at 117.20 would provide the bearish acceleration to the next support target at 116.20.

EUR Fundamentals
Euro had a relatively neutral July, with European Central Bank (ECB) taking a strong dovish stance, limiting any upside on the Euro. Elsewhere, the Delta COVID-19 variant is posing a lot of uncertainty to the economy as well. On the data front, results were mixed among the EU countries While Germany’s final Manufacturing PMI has done exceptionally well 65.1, France and Spain are lagging at 59.0 and 60.4. Overall, unemployment did improve fairly from the 8.1% in June to 7.9% in July. Despite signs of improvement, the Delta variant is causing some delays in the easing of restrictions and that supply chain problems continue to weigh on manufacturing production. Elsewhere, the ECB monetary policy announcement earlier in July steered clear of any taper talks and adopted a higher inflation tolerance level, an indication that much needs to be done to return to pre-pandemic levels. Looking ahead coming August, with the Delta virus variant posing uncertainty in the economy, we expect a much-muted August as the Eurozone look forward to publish its publishing their preliminary estimates of second-quarter GDP, inflation rates and jobless data.

British Pound Currency Index: Bearish below 139.80
On the daily time frame, prices are holding below the resistance zone at 139.80, which coincides with 61.8% Fibonacci retracement and descending trend line. The crossover below the 50 EMA which now acts as a dynamic resistance is adding further confirmation to the bearish scenario. A pullback in prices to test the resistance zone at 139.80 presents an opportunity to play the drop to the next support target at 136.50, in line with the graphical low, 38.2% and 78.6% Fibonacci retracement.

GBP Fundamentals
Sterling performed well against most major currencies past month. Meanwhile, inflation has been the hot topic in the market as core CPI y/y increased by 0.3% to 2.3% in July. Bank of England Governor Andrew Baily continuously cooled inflation talks earlier this month by urging policymakers not to overreact to what he said was likely to be a “temporary jump in inflation”. Elsewhere, UK’s rapid growth surge is likely to fade given the weaknesses in the labour market and supply chain bottlenecks which pose further downside risk. On the policy front, BoE is not expected to scale back on its stimulus possibly until 2022 as COVID-19 still looms behind the backdrop while the base rate is expected to maintain guidance at 0.1%. In general, Sterling rallied higher in July supported by Final Services PMI suggesting a healthy expansion of 62.4 (up from 61.7 in June) although unemployment rate remained at 4.8% in July, up 0.1% from June but still shy of pre-pandemic levels. Looking ahead in August, we expect a decision on the asset purchase facility to review BoE monetary policy direction for the month ahead. Unemployment rate is also expected to improve as UK is slowly recovering from the reopening of their lockdown mid-July.

Australian Dollar Currency Index: Bearish with a clear break below 73.80 support zone
On the daily time frame, prices are hovering about the support zone at 73.80, which coincides with the 61.8% Fibonacci retracement and 127.2% Fibonacci extension. That said, we do caution the limited upside, with prices holding well below the 20 EMA which serves as a dynamic resistance where we saw prices tested and reversed below the 20 EMA multiple times. A strong break below the current support zone at 73.80 could see a further downside in prices, with 72.20 as the next support target. The 72.20 support target coincides with the 78.6% Fibonacci retracement as well as the 161.8% Fibonacci extension. Otherwise, a bounce above the current support zone at 73.80, accompanied with a crossover above the 20 EMA could see a further upside in price, with 75.80 as the next resistance target, in line with the 50% Fibonacci retracement.

AUD Fundamentals
Aussie edged lower in July, although there might be some relief for consumers. Reserve Bank of Australia (RBA) continued to hold their official interest rates at record low levels and keep its quantitative easing program unchanged. Meanwhile, RBA Governor Philip Lowe was dovish as the national economy is expected to bounce back and recover as they look to maintain the cash rate at 0.1 percent while sticking with its plan to start winding back purchases of government debt to $4 billion a week until at least November. Even though unemployment rates improved from 5.1% in June to 4.9% in July, the CPI q/q of 0.8% in July is still lagging behind most countries as Australia struggles to get the economy back on track to pre-pandemic levels. Retail sales m/m has also taken a huge hit from 0.4% in June to -1.8% in July, which indicates the lack of confidence in consumer spending. Come August, we expect more challenges as Australia battle against the soaring COVID-19 outbreak as major cities such as Sydney are expected to extend their lockdown which might hamper the efforts of recovery.

New Zealand Dollar Currency Index: Neutral between 69.20 and 71.50
On the daily time frame, prices are trading between the resistance zone at 71.50, in line with the 78.6% Fibonacci extension and 61.8% Fibonacci retracement as well as the support zone at 69.20. A clear break above the 71.50 level is needed to provide the bullish confirmation. Following a break above the 70.40 resistance zone, price could push higher to the next resistance target at 71.50. Likewise, a clear break below the 69.20 support zone could see a further downside in prices, with 68.00 as the next support target, in line with the 100% Fibonacci extension.

NZD Fundamentals
Kiwi had a relatively good run though it whipsawed at times throughout July. Surprisingly, the Reserved Bank of New Zealand (RBNZ) Governor Adrian Orr was more hawkish in terms of outlook. There was a huge decrease in unemployment rate of 0.6%, down to 4.0% in July behind a higher than CPI q/q of 1.3% in July, up from the 0.8% in June. The Monetary Policy Committee has agreed to reduce the current stimulatory level of monetary settings in July to better meet consumer price and employment objectives over the medium-term. RBNZ has maintained to keep the Official Cash Rate (OCR) at 0.25 percent and Funding Lending Programme unchanged for now, however, they consider to tighten mortgage lending standards in the month to come. Come next month, we expect Kiwi to perform just as well as we look forward to an improved unemployment rates and an earlier than expected tapering from the RBNZ monetary statement later in August.

Canadian Dollar Currency Index:
On the daily time frame, prices are holding below the resistance zone at 80.50, which coincides with the descending trend line, 61.8% Fibonacci retracement and 61.8% Fibonacci extension. The crossover below the 20 EMA which now acts as a dynamic resistance is adding further confirmation to the bearish scenario. A pullback in prices to test its resistance zone and 20 EMA below 80.50 presents an opportunity to play the drop to the next support zone at 78.20, in line with the recent graphical low.

CAD Fundamentals
The Canadian Dollar dipped at the start of July before paring recent losses at the second half of the month. This was mainly due to the Organization of Petroleum Exporting Countries (OPEC) cancelling their upcoming production meeting when major players were not able to come to an agreement in increasing production output. While the initial breakdown in negotiations between Saudi Arabia and the largest OPEC producer, United Arab Emirates triggered a surge in oil prices, the rally was short-lived as concerns that some national producers could ramp up oil production kept oil prices under pressure. Elsewhere, Canada expanded with over 230,700 new employments with their unemployment rate dropping from 8.2% to 7.8%. The massive jump in jobs was mainly due to their economy reopening across the country. However, the gain was unable to recover from the jobs lost over the April and May periods. Looking ahead in August, we expect the Canadian Dollar to remain under pressure with risks emerging in China and US as we are witnessing a spike in the number of Coronavirus cases amid the highly contagious delta variant, which could threaten stricter lockdown measures, thereby cutting demand for fuel. On the data front, API data also showed stocks of crude oil in the US fell by 0.879 million barrels in the week ended July 30th, following a 4.728 million drop in the previous week, shy of market expectations of a 2.9 million drop.

Japanese Yen Currency Index: Bearish below 91.80
On the daily time frame, prices are testing resistance at 91.80, in line with the weekly resistance zone and 61.8% Fibonacci retracement. We could see a reversal below this resistance zone to the 90.50 support zone, in line with the graphical low and 61.8% Fibonacci retracement. Stochastic is approaching its resistance at 86.22 as well, in line with the bearish bias. A break above the resistance at 91.80 could see prices push higher with 92.80 as the next resistance target.

JPY Fundamentals
The Yen continued its slump in July as the country and economy battles against COVID-19. Japan’s economy has been relatively muted as we see a lower-than-expected Core CPI y/y of 0.1% and minor improvements in unemployment rate of 2.9% in July (down from 3.0% in June) and a small expansion in final manufacturing PMI of 53.0 in July (up from 52.2 in June). Even though there was some relief from Japan hosting the 2020 Tokyo Olympics, the backdrop is still shrouded by the exponential increase in the number of COVID-19 cases. As Japan looks to keep the spread in check, we expect the Yen to be relatively bearish in nature compared to the major currencies given much uncertainty in the Japanese markets.

Salzworth Asset Management