Balance prevails across currency markets


Foreign exchange markets are entering the week finely balanced between two opposing dynamics. On one hand, markets are looking forward to increased stability across the financial system.
Recent regulatory reforms appear to have more bark than bite, and the G20 has clearly articulated a desire to keep stimulative policies in place for the time being, while committing to an eventual return to fiscal discipline.
On the other hand, a series of surprisingly weak data releases over the last week pointed to a sharp slowdown in the United States, which may negatively impact economies around the world.
This balance has led to a number of interesting effects across the markets, with gold and bond markets rallying simultaneously while currencies are moving in a more nuanced fashion than we have seen for some time.
In essence, with data pointing to a wide variety of possible outcomes, different groups of market participants are pursuing a wide variety of objectives.
Those seeking safety are moving into the US dollar and the Japanese yen, while those expecting a swift return to growth are bidding up the commodity currencies.
The pound sterling has gained in recent weeks as the government’s fiscal measures reassure markets, while many longer-term traders are taking the opposite side of this trade, expecting these measures to have a negative effect on growth.
The euro has consolidated, with participants on both sides of the market relatively evenly matched.
For the Canadian dollar, this background is mildly supportive. Because the Canadian economy is considered to be both growth sensitive and a safe haven in times of trouble, two large groups of market participants see value in holding Canadian dollars.
Given this context, currencies have settled into relatively stable trading ranges, awaiting a more decisive change in sentiment.
Balance to shift?
The week ahead may see a tipping of the scales, with a wide range of data releases adding weight to arguments on both sides of the market.
In the United States, Pending Home Sales, the Case-Shiller Housing Price Index, and the Conference Board Consumer Confidence Index are all scheduled to hit the wires. Elsewhere, purchasing manager data will be printed in China, the European Union and the United Kingdom.
April GDP for Canada will be made public on Wednesday, and with it, the potential to surprise markets. The elephant in the room is Friday’s release of June Non-Farm Payrolls report in the US.
This has become one of the most closely watched economic indicators in the global markets, and the headline number is expected to show a sharp drop in employment as temporary hiring for the US census is removed from the total.
While the consensus estimate is for a loss of 75 000 jobs, recent months have seen significant deviations from expectations, and with unstable expectations come unstable markets–