GDP Puts Fed in Focus

Some one-off factors made Friday's release of US GDP especially strong in the first look at Q2 but other signs point to solid continuing growth, and that raises the odds of two more Fed hikes. One the day before the last of the month, the Canadian dollar is the strongest among G10 FX so far this month. The short USDCAD from 1.3150 remains open. CFTC positioning data showed rising yen shorts. A new Premium trade was posted on Friday. Markets turn to this week's Fed meeting, the anticipated BoE rate hike and US July jobs report.

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Innuendo of a very strong US Q2 GDP report turned out to be false as growth climbed at a 4.1% pace compared to 4.2% expected. That led to a quick dip in USD/JPY with the pair falling as low as 110.80 on Friday and put Ashraf's latest trade in the money.

One-off factors were a strong driver to GDP as trade added 1.06 pp, including 0.5 pp from soybean exports alone, rushed ahead of US tariffs. That will reverse in the coming months but other one-off factors did the opposite. Inventories cut 1.0 percentage points, which will also reverse. Spending was strong with personal consumption up 4.0% compared to 3.0% expected.

On net, the Fed is likely to gain some confidence from the report. In the Fed funds futures market, the odds of two hikes this year have risen to 63% from 54% a week ago. On that front, the FOMC meets Wednesday. No rate hike is expected  this week, but signals about confidence in the outlook could give the dollar a boost. Having said that, USD optimism will be mitigated by signs of continued undershooting of inflation figures.

International trade remains the x-factor. More comforting signs on trade with Europe and NAFTA progress have been emitted last week, but we've seen this all before and we remain cognizant that it can reverse in the time it takes the President to write a tweet. Indeed, on the weekend Trump said he would be willing to shut down the government if Democrats don't support funds for building a border wall.

CFTC Commitments of Traders

EUR +29K vs +21K prior GBP -47K vs -38K prior JPY -74K vs -59K prior CHF -46K vs -42K prior CAD -44K vs -47K prior AUD -45K vs -41K prior NZD -25K vs -25K prior

Aside from the euro, we're struck by how large and stubborn all the bets on the US dollar remain. The net short in the yen is the largest since May and was formed since the beginning of June when USD/JPY was at 110.00. A further fall in USD/JPY would quickly put all those specs underwater and a squeeze on the longs could send the pair quickly lower.