It had been a good week for markets with a broad lift for global indices, although the likes of the DAX had experienced significant pressure from the fervent strengthening of the EUR. Better-than-expected Q2 GDP figures from China, rising crude oil prices and earnings-driven rally in the US had kept the sun shining on equity markets in the region. Notably, the MSCI Asia Pacific ex-Japan index had rose to touch the highest level since 2008 in the week, last seen with an approximate 1.3% gain week-to-date (WTD) into Friday afternoon.
The primary focus for the week had been on monetary policies. This time from the Bank of Japan (BoJ) and the European Central Bank (ECB). While both being the only central banks amongst advanced economies that currently holds a negative interest rate regime, the direction taken by both parties had been vastly different. The BoJ had largely acted according to the market’s script, keeping monetary policy unchanged, lowering the inflation forecast, and even went a further step to delay their timeframe in hitting the 2% inflation target.
Comparatively, against some market participants’ expectation of efforts by the ECB to keep a lid on the raging EUR strength, comments by ECB President Mario Draghi on the upcoming bond-buying discussion in September saw bulls taking EUR/USD to a near 2-year high. The movements had dealt a corresponding blow upon the USD.
Where now with the US dollar?
The baton is expected to be passed back to the Federal Reserve in the upcoming week, with the Federal Open Market Committee (FOMC) meeting decision due and US Q2 GDP to follow. The start of the week may however finds preliminary July Markit PMI figures to be of interest. The market is once again expecting the gap between manufacturing PMI in the US and Eurozone to close, which could see the EUR/USD pair experiencing some reversal.
Nevertheless, the case for a US dollar reversal is not a strong one in the upcoming week. Despite the decline of the US dollar index down to the lowest level since August 2016, the Fed may hold little power in their hands and find little impetus to steer away from the current dovish perception accorded to them and buoy prices. This is particularly so with Fed chair Janet Yellen’s Congressional testimony still fresh on investors’ minds. Substantial improvements in inflation numbers, the Fed’s key concern, may be the only panacea for USD weakness. Some consolation could however arrive with the Fed potentially diving into timing of their more decided balance sheet reduction plan or with any surprise on the upside for Q2 GDP into the end of the week.
Asian markets, which had rallied post the exceptional Q2 GDP figures this week, may be looking at little leads to keep up the excitement ahead of PMI updates in the following week. Besides the abovementioned US leads that could drive movements for the Asian region, earnings releases across the US and Asia may be the highlight for regional markets in the week ahead.
Amongst the sectors on the comprehensive S&P 500 index, we have seen gains being led by the utilities sector on a WTD basis while the IT sector follows. The same could be said for the MSCI Asia-Pacific ex-Japan index where the defensive real estate sector sees the IT sector trailing closely in leading gains this week. Post earnings report rallies in the likes of Netflix and Microsoft had been triggers for the Nasdaq to reach another all-time high, gaining for the 10th consecutive session as of Thursday. Next week’s Alphabet Inc., Amazon.com Inc. and Facebook Inc. reports are amongst ones that are not to be missed.
Meanwhile within the data docket, the focus may zoom in to inflation numbers in Australia and Japan for Asian hours with the current monetary policy focus. The local Singapore market would see June CPI and IP numbers due on Monday and Wednesday respectively, where a strong 6.5% year-on-year (YoY) growth had been penciled in for the latter. Notably another one for the radar would be the first of the trio of Singapore banks, OCBC Corp., which will also be releasing their Q2 2017 earnings on Thursday, 27 July.