FX Daily Strategy: N America, Aug 18

The week started with a familiar dichotomy still very much in play. On the one side, the summer low volatility risk mood intact. That, in combination with the trimming back in Fed expectations, helping keep the dollar capped and especially dollar/risk recently giving ground. 

Compartmentalised on the other, the ongoing standoff on Iran, seemingly going nowhere as both double down into a staring contest, seeing who running down time breaks first. While recent inventory data did take the edge off last week, that is keeping the oil curve propped, prone to drift out, and with more pressure evident out in distillates with refining more the bottleneck. Trump lashing out at Oman, Iran threatening to shift to ‘fully offensive’ and the US ruling out extending the temporary ceasefire has underscored that message and has energy continuing to creep out. 

Pulling off this dual track mentality has been the trend, although how long that can survive out of the summer doldrums is to be seen. Indeed overnight action did show the first 'wobbles' as the reality of the entrenched and escalating Iran tensions did temper the equity mood and prop the dollar with it. Risk events lurking down the track out of holiday season remain. These include Iran, the US election, sustainability of the latest retail risk pump, and also, potentially, the lasting ripple effects of drought in Europe into the autumn. The latter spans the direct agricultural impact through to river freight and resulting industrial production logjams. This topic will be discussed in more detail in a separate report later, but the upshot is that some of the water level extremes registered in recent days could play out to further price vs growth risk headaches for Europe in coming weeks.

Where both sides of this schizophrenic market mood is still tending to more logically support is precious metals, that typically sitting in the the sweet spot of risk on and risk hedging.

CAD remains a particular focal point for the week going into Wednesday’s deadline. Talks continue ‘to the wire’ with US and Canada provinces having their own sticking points. The Trump-factor makes this genuinely unpredictable, and not even just on the day itself. Canada CPI data meanwhile was ignored into this key date. Under normal circumstances the firming data would be backing up the message coming from the real economy side and making more of an impression. The fact that the market remains almost at the peaks for CAD shorts, even now one week later on the IMM data, still underscores the fact that positionally some risk downside is being covered and the market is skewed towards short covering in the event of positive or neutral outcome.

CHF has taken a breather, after finding the test of the stronger EUR/CHF Dec25 0.94~ highs exhaustive for now. Pullback support remains at 0.9350 and extends to 0.9325. Overbought conditions aside though there’s no change in tone implied yet outside of the corrective trade. It would likely take a notable spike in the volatility and risk backdrop to be turning the broader trend.

Turning to Tuesday, the UK had the June/July labour market data. While that didn't have any real sterling impact it did nonetheless come in soft. with private sector ex-bonus pay easing to 2.8%, lowest since Oct20, while unemployment held 4.9% (mkt 4.8%). HMRC payrolls data also showed a 13k drop in July, the second straight small slip. Vacancies were also at five year lows. Data should again help the BoE stick to its current wait and see stance through the summer with the majority still viewing downside growth risks as outweighing upside inflation risks while second round effects are not apparent.

In the US, we expect July housing starts to fall by 4.7% to 1360k while permits fall by 0.3% to 1370k. July pending home sales are also due. Tuesday also sees July industrial production, where we expect a 0.4% increase overall with manufacturing rising by 0.2%, and July import and export prices.

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