US$ Gains for 5th Day v. Sterling; Range bound v. Euro

USD

The U.S. dollar is mostly unchanged overnight, with the Bloomberg U.S. Dollar Index flat.  The greenback has gained modestly early this week after strong Non-Farm payroll data on Friday boosted prospects that the Federal Reserve may raise again in 2016.  Prior to the Friday’s jobs data, the chances of a Fed hike sat at 38%, but have since risen to nearly 50.0%, boosting the greenback.

Today’s economic docket will remain light with only second tier data slated for release.Nonfarm productivity contracted 0.5% in the second quarter, weaker than expected.  The print has had little effect on the greenback. Later wholesale inventories are expected to register flat in June, from a modest uptick of 0.1% in the month prior.

The major risk event of the week remains Friday’s release of Advanced Retail sales.  Traders will use this print to gauge the health of the overall economy in an effort to predict the Fed’s future monetary policy.  The central bank appears to be balancing an improved labor market with slowing GDP.  It is our belief the Federal Reserve wishes to keep the can down the road into 2017 as global risks still threaten the American economy.

NZD

The New Zealand dollar continues to hold near its yearly highs against the U.S. dollar, even as the Reserve Bank of New Zealand looks to slash interest rates.  Futures show that traders are certain the RBNZ will reduce its cash rate by 25 basis points at Thursday’s meeting.  But more than half expect the central bank to cut rates by at least 50 basis points by November. There is only a 20% chance of a 50 basis point cut this week.

RBNZ chief Graeme Wheeler has stated that he wants a weaker currency to boost import prices and drive inflation back into a 1-3% target band.  An interest rate cut generally would do the trick, except markets have this week’s cut already priced in and interest rates are higher in New Zealand than many of its counterparts which attract foreign investment.

GBP

The British pound continued its decline against its American counterpart overnight, falling for a fifth consecutive day.  The sterling is now 3.0% lower than a week ago and 13.0% weaker from before the “Brexit” vote.

The sterling came under renewed pressure overnight after Bank of England policy maker Ian McCafferty said that the central bank may entertain further rate reductions and additional quantitative easing may be warranted.  The dovish comments come after the Bank of England cut rates last week for the first time since 2009 and added 170 billion pounds to its balance sheet.  However, McCafferty’s dovishness is noteworthy considering he voted to increase rates as recently as January.

The sterling shrugged off some positive data as well, as retail sales rose at their fastest pace in six months.  The bright spot was overwhelmed by McCafferty’s warnings and sluggish manufacturing and industrial data.