We see the confluence of risk reduction, improving US data, underperformance of US Treasuries and weaker energy prices all placing upward pressure on the USD this week. While investors may remain reluctant to trade EUR itself amid heightened uncertainty on Greece, the broader pick-up in volatility should remain a constraint on risk-appetite and we expect USD to benefit.
- There have been several notable changes in Fed speak, starting with Yellen’s appraisal that transitory factors holding down inflation should begin to dissipate in early 2016. More dovish members of the FOMC have also begun to sound more hawkish of late. Eric Rosengren of the Boston Fed, dove and voter in 2016, suggested that he might even see lift-off in the Fall, well in advance of where short rates are priced, with December only discounting 16bps at present. Should speakers this week extend this more hawkish tone and downplay the degree of pass through from external developments, it could catalyze USD appreciation. Chairman Yellen’s testimony on 15 and 16 July will be closely watched in this regard, with George, Mester, Williams and Fischer also due to speak.
- On the data front, retail sales, housing starts, building permits and CPI are expected. The former poses upside risk for USD, since strength in core sales would confirm that consumer spending remains strong moving away from temporary weakness seen earlier this year.
- On a spike from USD, we may look to take profit on this position ahead of the BoC meeting. However, the increasingly dovish outlook on the BoC, combined with weakness in oil and commodities makes CAD an attractive vehicle for USD longs. Money markets discount close to a 50% risk for a cut from the BoC, implying downside for CAD should a cut be seen in line with Citi’s forecast. With the BoC likely to cut its forecasts and potentially use somewhat more dovish language in the Monetary Policy Report, a decision not to cut may be seen more as a surprise of timing than direction. This should skew risk-return in favor of CAD shorts.
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