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Half-Way Point of 2014: Steady Melt-Up Prevails

The last day of the quarter and the half-way point of the year is upon financial markets, with overall sentiment decidedly cautious as participants digest the events that transpired over the weekend.   The  breakaway ISIS  militants in Iraq  have raised their threat level by declaring  a Caliphate in areas under there control, effectively creating an independent Islamic state in Northern Iraq and parts of Syria.   Though the violence still continues, key oil supply lines remain unaffected by the Caliphate, and we’re seeing oil markets softer as we head into the opening bell in North America; WTI managed to find some support above $105/barrel, while Brent has experienced a slightly steeper drop and now sits in the mid-$112/barrel range.

After a big data day for the Eurozone, the common-currency is trading flat, with the mixed results giving traders little motive to push the Euro in either direction before the ECB meeting later in the week.   The flash CPI reading for June came in at 0.5% as expected, the same level which was registered in May.   Where things diverged was with money supply heating up  with an  increase of 1.0% compared to the previous twelve months (vs. the median forecast of 0.8%), yet private loan growth lost all momentum and slumped back to -2.0% from the 1.8% witnessed in May.   Today’s data is unlikely to drastically change the ECB’s message at their meeting  on Thursday, and since the targeted LTRO measures won’t be introduced until September, there’s a good chance this month’s policy meeting is a bit of a non-event as the central bank re-articulates their last message.   Midway through the European session and the major bourses are trading with slight weights to their tapes, though the Dax is currently pivoting around unchanged and is the only major in the green.   The Euro has managed to hold steady and is unfazed by the  confirmation of continued struggles with price levels, changing hands against the around the 1.3650 level.

Heading into the North American open, equity  futures  are struggling to find direction as the books close on the first half of the year, though as the day progresses it is likely portfolio re-balancing will have a greater impact on price action.  The Loonie is taking a bit of a breather this morning, with further gains stymied by GDP growth in April coming in less than  forecast with only a 0.1% increase, the same pace  as March.   Retail  sales and wholesale trade of machinery and equipment  showed  strength in the month, while  construction and  petroleum extraction were the main detractors from GDP.    After the figures were released USDCAD popped  back to the 1.07 handle before finding resistance, with the next catalysts for today’s trading environment coming from Chicago PMI and Pending Home Sales that will be released  later this morning.

The Week Ahead…

The abbreviated trading week due to a smattering of bank holidays in North America will create some interesting conditions market participants will have to navigate throughout the week.   With liquidity  already  quite dry due  to  the  summer doldrums and  World Cup,  Canada Day  on Tuesday  and Independence Day  on Friday  will only exacerbate the already parched trading conditions.

After the Canadian GDP figures were released earlier this morning, Loonie traders will now be turning their attention to  the big data day for the week  on Thursday.    Trade balance figures for the month of May  are due to hit the wires, and expectations are for the  trade deficit to narrow slightly  with a pick-up in export growth.   After some consolidation  in the pace of  increases in export growth  during  April, a  resumption of the upward trajectory could  give the Loonie bulls more fuel in the tank to  propel  the  domestic currency higher, though a disappointing figure could lead to a quick unwind in some of the unbridled strength witnessed in the past few weeks.   Depending on how much of an  affect the Vancouver Port strike had on business,  the end of the strike may skew the numbers to the upside, thus bringing with  it the potential for a  positive trade  balance surprise.

South of the 49th parallel, the Independence Day holiday  on Friday  has pushed forward the release of  US Non-Farm Payrolls for June to  Thursday, the  focal point of American economic data for the week.   Another print north of 200k is expected, and would extend the run of prints above 200k to the fifth consecutive month in a row.    While  the creation of around 210k new jobs would match most consensus estimates, the bigger surprises could come from the ancillary reports used  to judge the amount of slack in the economy, like  average  earnings and the amount of people underemployed.   Earnings and  average workweek hours are expected to remain flat  at 0.2% and 34.5hr respectively, but watch for any upside surprises to  staunch some of the  USD’s bleeding.    Another important economic data  point for the American economy to watch will be  Tuesday’s  ISM Manufacturing PMI report,  which is expected to generate  a slight increase from May, but continue  move upward and get  closer to the levels where it  topped out late in 2013.   A decent print around the 56 mark should help ease some concerns around the ability of the US economy to rebound in Q2,  though any  signs of weakness will most likely bring out the bears and hammer yields on  US treasuries lower.

Further reading:

Canadian April GDP +0.1% – USD/CAD rises

USD/JPY: Trading the ISM Manufacturing PMI

Scott Smith

Scott Smith

Scott Smith is a Senior Corporate Foreign Exchange Trader with Cambridge Mercantile Group and has a diverse background in the foreign exchange industry, with previous experience in both credit and trading related functions. Scott holds a Bachelor of Commerce degree from the University of Victoria, has completed all three levels of the Chartered Financial Analyst designation, and is currently working towards the Derivative Market Specialist certification offered through the Canadian Securities Institute. Cambridge Mercantile Group.