The lack of U.S. data this morning has made for a quiet North American open that has the dollar unchanged or stronger against most of the major currencies. China reported very strong export figures on Saturday but the third month of declining imports has some traders worried about the appetite of Chinese consumers. Although it may be a quiet trading day, it should not be a quiet trading week thanks to the busy economic calendar. The intraday reversals in the GBP/USD and USD/JPY suggests that the dollar could give up its gains and there is a good chance that could happen with most of this week's events posing a risk to the U.S. dollar. Here are the top 5 things that could affect how currencies trade this week in order of importance:
1. U.S. Retail Sales Report
The most important event risk this week is the U.S. retail sales report. Concerns about the sustainability of the U.S. recovery and the degree of consumer spending has been one of the main reasons why investors have turned against the dollar. The market's focus has shifted from the balance sheet problems in Europe to the disappointments in U.S. data. Recent reports show the housing market has taken a turn for the worse while manufacturing and service activity have slowed. Private sector payrolls continue to grow but the economy as a whole has returned to net job losses. Consumer spending is the missing link to this whole puzzle and if American consumers are still spending, then these worries are overdone. However if consumers cut spending for the second month in a row, like the market expects, then the dollar could be headed for big trouble.
2. Chinese Economic Data
Although this weekend's trade numbers from China did not have a big impact on the forex markets, the rest of the data due this week are important enough to trigger a meaningful reaction in the market. Second quarter GDP, inflation, retail sales and industrial production are amongst the economic reports scheduled for release. Based upon the consensus forecasts, analysts expect the Chinese recovery to slow. If they correct, we could see the data trigger a wave of risk aversion and the weaker the numbers, the more significant the sell-off. However if the data surprises to the upside and they certainly could after the strong export numbers, we could see the rally in the forex market resume. The risk appetite in the financial markets this week is as dependent on Chinese data as it is on U.S. economic data.
3. Earnings Releases
The earnings season kicks off this evening with reports from Alcoa. According to a Wall Street Journal article, analysts believe the largest U.S. companies will post a 19.3 percent yoy increase in per share profits this quarter. Given the strength of the dollar in the second quarter, which can hurt the profitability of multinational U.S. companies, these projections may be overly optimistic. If Yum Brands, Google or General Electric and other companies reporting this week warn about the impact of FX fluctuations on earnings, it could strip away some of the optimism. JPMorgan, Bank of America and Citigroup are also amongst the big names reporting week and how the corporate sector has performed could affect how USD/JPY and other currencies trade.
4. EcoFin Meeting on Tuesday
The finance ministers of the European Union hold their regular monthly meeting on Tuesday. Typically no major announcements are expected but members of the EU could make suggestive hints about the stress test results due on July 23rd. There have been concerns that the scenarios being tested are not extreme enough but a German newspaper quoted ECB member Stark today saying "the [stress test] assumptions will be made in a way that the test results will be credible." The main focus of the meeting is to "decide on the opening of excessive deficit procedures and will follow up the procedures already initiated." However a press conference will be held when the meeting ends and the euro could be affected if any comments are made about the stress tests.
5. FOMC Minutes
On Wednesday, the Federal Reserve is scheduled to release the minutes from its most recent monetary policy meeting. The latest comments from Bernanke suggests that he is still very worried about the outlook for the U.S. economy and because of that, we expect the minutes to contain a very subdued tone, which could weigh on currencies.
Most of this week's events pose a risk for the U.S. dollar and because of that, currencies and equities should trade very cautiously. Bernanke is speaking at 10am NY Time but he is only giving opening remarks at a Fed forum on "Addressing the Financing Needs of Small Businesses" which is not expected to be market moving.