Global FX and USD Index

The USD clawed back some of its post-GDP losses yesterday as petro-FX in particular came under pressure from falling crude prices. After tumbling more than 20% from its peak in early June (and officially entering a bear market), WTI futures dipped below the $40/bbl mark for the first time since April amid renewed oversupply concerns. With August usually a soft month for commodity prices, the outlook doesn’t look too pretty; signs of inventory builds or US supply gains in this week’s API (today) and EIA (tomorrow) stockpiles data could fuel the bearish momentum in crude prices. This is likely to point to further short-term weakness in commodity currencies and especially those that exhibit a tight correlation with oil (CAD, RUB and MXN). Today’s US data docket sees the release of core PCE inflation (the Fed’s preferred measure) and Jun personal spending/income stats, which will have already been accounted for in last week’s 2Q GDP data. Ahead of this, we’ll also hear from the FOMC’s Kaplan; while he yesterday stated that a Sept. hike was still “on the table”, we suspect this was more a formality rather than an actual conviction. Near-term US data will continue to drive markets, with all eyes on Friday’s US jobs market report. DXY to trade within the 95-96 range.

UR/$’s narrow trading range looks set to continue in the absence of any major surprises in today’s US core PCE inflation data. We suspect that Friday’s jobs report will provide greater directional steer, but until then the pair is likely to trade tight within the 1.1150-1.1220 range. In the UK, the focus is on the final Jul construction PMI reading; GBP crosses came under pressure after yesterday’s downward revision to the manufacturing estimate and any additional signs of a decline in sentiment will increase the burden on the BoE to act more forcefully on Thursday. While markets await the official unveiling of PM Abe’s highly anticipated fiscal stimulus package, a leaked draft confirms that the material extra spending due to be announced for the current fiscal year will only surmount to a feeble ¥4.6trn. This is once again likely to disappoint markets and we could see $/JPY push below the 102 level once we receive confirmation of this “bold” package. Amid softer inflation dynamics and diminished housing market risks, the RBA concluded that further easing was required to meet its inflation mandate and opted to lower the cash rate by 25bp today. An “appreciating exchange rate” was once again deemed to be undesirable, although the central bank did refrain from explicitly jawboning the AUD lower. Friday’s quarterly SMP projections will shed further light on where the RBA’s future policy bias lies; given the balance of risks, we suspect that today’s move does not mark the bottom for the policy rate and thus we wouldn’t rule out further easing in 1Q17. Expect bearish AUD/USD bets to resurface, with a move below the 100-dma (0.7490) confirming this bias.