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Fed Chairman Powell begins two days of testimony before Congress as he delivers the Federal Reserve’s semi-annual Monetary Policy Report. His testimony will be closely scrutinized for clues into the possibility of a near-term rate cut and how last Friday’s positive jobs report has impacted the Fed’s economic outlook.

The Bank of Canada releases its latest rate policy decision today. The expectation is for no change, leaving the overnight lending rate at 1.75%. Canada’s recent strong economic performance has bolstered the BoC’s hawkish stance and has fueled the Canadian dollar’s strength this year.

Yesterday’s abrupt resignation of Mexico’s finance minister continues to reverberate in the currency markets today, driving peso weakness to multi-week lows. The peso closed yesterday with a 1.27% decline vs. the dollar and is currently down another 0.49% today. Near-term resistance is seen at 19.3000.

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The USD has had a strong start to the month with the Dollar Index gaining 1.20% MTD. July’s gain recoups a significant portion of June’s DXY decline of 1.66%. The dollar’s gains among the G10 currencies are concentrated against the European pairs… +0.89% vs. the GBP & SEK, +0.57% vs. the NOK, and +0.54% vs. the EUR, and smaller gains vs. the DKK and CHF.

The US dollar’s Achilles heel has recently been the Canadian dollar which has gained 0.57% against the greenback during July, adding to June’s out sized gain of 2.62%. The CAD’s advance is attributed to a string of isolated events, namely (1) the Fed’s shift in rate policy outlook on June 19^th; (2) the bombing attack on two oil tankers near the Persian Gulf; (3) the shooting down of a US military drone on June 20^th; and (4) the explosion on June 19^th and subsequent permanent closure of the Philadelphia Energy Solutions oil refinery in Pennsylvania, the largest refinery operation on the Eastern Seaboard. Each of these events is a reason to buy the CAD, and the nearly daily unfolding created a synergy favoring CAD strength.

Friday’s Nonfarm Payrolls report showed a gain of 224K jobs vs. a 160K estimate. This is a significant outperform and stark improvement over the previous month’s jobs report of 75K.

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U.S. Housing Price data released yesterday for April showed housing prices unchanged compared to last month, vs. an estimated 0.10% increase. And on a year-over-year basis April home price increases for 2019, at +2.54%, were slightly behind last year’s pace of +2.68%.

New Home Sales data for May (also released yesterday) was a disappointing -7.8%, compared to the market estimate of +1.6%. May’s decline outpaced April’s -6.9% drop.

Consumer Confidence for June was reported at 121.50, well below both the market estimate of 131.0 and the prior reading of 134.10.

Yesterday Federal Reserve Chairman Powell underscored the Fed’s recent view that the U.S. economy is in the early stages of a downturn and reaffirmed the Fed’s commitment to adjust fiscal policy as needed.

Federal Reserve President Bullard also made headlines yesterday in an interview on Bloomberg TV but struck a more hawkish tone when he said that any rate cuts would be ‘in the realm of insurance’ and that a 50bps cut would be overdone. Bullard has been an outspoken ‘dove’ and was the only Fed President to cast a dissenting vote in the FOMC’s recent policy decision to keep rates unchanged.

The dollar’s recent selloff has paused as support for the U.S Dollar Index at 96.00 developed over the last three days. The DXY had declined 1.7% following the release of last week’s FOMC policy statement where the Fed signaled two rate cuts by the end of 2019.

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In yesterday’s FOMC policy statement the Fed left rates unchanged (as expected) and removed the phrasing that included the word ‘patient’ and replaced it with more accommodative language, i.e. ‘closely monitor’ (also as expected). The markets anticipated a more ‘dovish’ tone from the Fed, but given the dollar’s selloff following the policy announcement, it’s clear the Fed went beyond what was expected. So what else did they say? A few key changes from the Fed’s May policy statement:

·         Economic activity went from ‘solid’ to ‘moderate’

·         Inflation compensation went from ‘low’ to ‘declined’

·         ‘Uncertainties have increased’

·         ‘patient’ to ‘closely monitor’

In the wake of the Fed’s announcement the US Dollar Index declined 0.54% yesterday and is currently down 0.47% today at 96.662. Next medium-term support is seen at 95.400, or 1.3% below current levels.

The dollar has declined against each of its G10 peers but not all losses are equal. The primary declines today are against the NOK (-1.71%), CHF (-1.11%), SEK (-0.86%), NZD (-0.75%), CAD (-0.74%), and AUD (-0.67%).

Dollar declines have been exacerbated against currencies with exposure to oil (particularly the NOK, CAD, and AUD) due to the overnight downing of a U.S. military drone by Iran. Increasing tensions in the Middle East have led to an increase of 7.90% in oil prices over the last three days.

USDCAD: Currently trading below long-term trendline support at 1.3250. Next support at 1.3090 and 1.2900.

USDMXN: Support seen at 18.7400 and 18.5000. Resistance at 19.4900 and higher at 19.7500.

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Overnight FX trading ranges were narrow ahead of today’s FOMC rate policy decision. The US Dollar Index is lower by 0.09% with only a 0.15% difference between the day’s high and low.

Today’s Fed rate statement is set for release at 2pm EDT (the policy statement is usually three paragraphs and averages 280 words). While the expectation is for no rate change, the policy statement will likely reflect a shift towards a more accommodative stance due to persistently low inflation readings and worrying signs from the global economy.

The specific focus of the policy statement will be on whether the word ‘patient’ is dropped and replaced with language more suggestive of future rate cuts (to be read as ‘we have lost patience in waiting for inflation to surface and will adjust rate policy as needed to achieve target levels’).

The risk for today’s announcement is that the market is already ahead of the Fed in the shift towards lower rates. Since it is unlikely that the Fed will be as dovish as expected, dollar strength will be the likely path following the Fed’s statement.

USDCAD – Inflation data released for Canada today was reported above expectations. CPI (YoY) was reported at 2.4% vs. the 2.1% estimate. And month-over-month CPI was reported at 0.4%, above the expected 0.1% increase. USDCAD gapped lower in response to the positive data, the US dollar losing as much as 0.33%.

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The FOMC started its two-day policy meeting today. Given the recent global economic turmoil stemming from US/China trade and ongoing Brexit uncertainty, combined with the malignant absence of inflation and new signs of a contracting U.S. economy, this week’s meetings will be anything but business-as-usual. The probability of a Fed rate cut has risen steadily, increasing from 0% last November to 22.9% for tomorrow’s announcement. For next month’s policy meeting (07/31) the probability of a rate cut has increased from 0% to 89.20% over the same period. While some analysts are predicting a rate cut at tomorrow’s statement the most we are likely to see from the Fed is a shift towards a more dovish (accommodative) tone.

ECB President Draghi rattled the rate cut saber in comments overnight. Lagging inflation and deteriorating economic fundamentals in the EU have prompted the ECB’s recent shift to threats of added stimulus. The EURUSD declined as much as 0.55% shortly following the remarks and remains down 0.24% during today’s session.

Canadian Manufacturing Sales data for April was released today and came in at -0.6% vs. the estimate of 0.4%. Any time the actual has a different sign than the estimate is a significant miss. 

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