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While there were quite a number of key events last week, Swiss Franc came up as the surprised biggest mover. The Franc tumbled broadly as safe haven funds flowed out in accelerated pace. Franc has indeed ended the week down over -3% against Sterling, Aussie, Canadian, Kiwi and Euro. Against Yen and Dollar, Franc closed down -2.8% and -2.4% respectively. Dollar ended as the second weakest one as FOMC statement was taken as a dovish one while GDP price data missed. Also, continuous political drama in the White House means that there is still no clear light on when US President Donald Trump's tax reform would be implemented. Commodity currencies closed generally higher as supported by surge in energy and metal prices. Nonetheless, another surprise was that Sterling ended as the strongest one as it recovered on position squaring ahead of BoE Super Thursday.

Swiss Franc tumbled on Eurozone improvements

Swiss Franc and Euro are on two sides of the same coin. Funds will flow into the Swiss Franc when risks in Eurozone increase and flow out when situations stabilize. This could be clearly demonstrated by the strong rise in EUR/CHF from 1.0670 to 1.0812 on a gap open following French President Emmanuel Macron's win in the first round of election. On the background, political risks in Eurozone, according to some ECB officials, had become "tailwinds" already. Growth momentum in Eurozone has improved, which can be illustrated by IMF's upgrade of growth forecast. ECB is now widely expected to start at least tapering its bond purchases next year and stimulus exit is not too far away. Meanwhile, the strong rally in energy and metal prices would likely boost Eurozone inflation which further affirm the direction of ECB policy path.

Successful Greece bond sales the trigger

Policy divergence is a key in EUR/CHF's strong rise and Swiss Franc's selloff. SNB chairman Thomas Jordan reiterated earlier in the week that the Franc remained significantly over-valued, indicating that he's not ready to change the negative rates policy. But in our view, the trigger for the accelerated selloff was the successful bond sales in Greece, the first one since 2014. Greece sold EUR 5b of its five-year bond was sold at yield at 4.625%, notably lower than 4.95% back in the auction in 2014. The overall developments pushed Spanish/German yield spread to the tightest level since 2015. Italian/German yield spread also dropped to the lowest level since December. All point to reduced need for safe haven parking in the Franc. And indeed, Franc could now be viewed as a ideal candidate for carry trades as the financial markets are generally in full risk-on mode.

Swiss to be weaker than even Yen

Development in CHF/JPY suggests that there is more downside potential in the Swiss Franc ahead. Last week's sharp fall argues that the corrective rise from 101.66 could have completed with three waves up to 118.69 already, on bearish divergence condition in daily MACD. Focus is now back on 112.48 support. Break there will affirm this bearish view pave the way to 107.67 key support level next. As we noted many times before, we're expecting Yen to be pressured as markets enter into an era of monetary stimulus exit. Current reversal in CHF/JPY argues that the Swiss Franc could be even more pressured.

Dollar lower on FOMC, GDP

Dollar ended generally lower as markets perceived FOMC statement as a dovish one. Fed left its monetary policy unchanged, maintaining the federal funds rate target at 1-1.25%. The Fed made two tweak in the statement, though. First, it noted that balance sheet reduction would begin 'relatively soon', signaling that the official announcement would come in September. And that means, Fed will pushed back another rate hike to December to hold the card on its hand first. Second, policymakers revised lower the outlook on core inflation. Q2 GDP grew 2.6% annualized, up from prior 1.4% and versus consensus of 2.5%. However, GDP price index slowed to 1.0%, down from 1.9% and below expectation of 1.3%.

IMF added more pressure

Adding pressure to the Greenback, IMF kept global growth forecast unchanged at 3.5% for 2017 and 3.6% for 2018. But, growth forecasts for the US was lowered to 2.1% in 2017 and 2.1% in 2018, down from April projection of 2.3% and 2.5% respectively. IMF noted the "uncertainty" over US President Donald Trump's policies as the main factor for the downward revision. IMF said that "the major factor behind the growth revision, especially for 2018, is the assumption that fiscal policy will be less expansionary than previously assumed, given the uncertainty about the timing and nature of U.S. fiscal policy changes."

In addition, IMF said in another report that the US dollar was overvalued by 10% to 20% based on near-term economic fundamentals. Meanwhile, Euro, Yen and Yuan exchange rate are broadly in line with fundamentals. IMF also urged US to address current account imbalances and warned that "if they're not dealt with appropriately and through the right policies, we could have a backlash in the form of protectionism."

Dollar index still heading to 91.91/93

Dollar index's decline from 103.82 extended last week to close at 93.26. Further is expected in near term. But the index should target to get enough support from 91.91 cluster level, 38.2% retracement of 72.69 to 103.82 at 91.93 to contain downside and bring rebound. Break of 95.47 resistance will be the first sign of reversal. However, firm break of 91.91/93 will pave to way through 50% retracement at 88.25, possibly to 61.8% retracement at 84.58 before completing the correction from 103.82.

Sterling recovered ahead of BoE, but risks skewed to the downside

While Sterling ended higher against all others last week, there was no indication of change in trend yet. Indeed it was merely traders adjusting positions ahead of BoE Super Thursday. And, it should be noted that UK was another country IMF lowered growth forecast for this year. Q2 GDP released last week showed sluggish 0.3% qoq growth only. CPI slowed sharply from 2.9% yoy in 2.6% yoy in June and that's a key factor limiting any rebound attempt in the Pound. BoE super Thursday and PMIs would be closely watched this week.

There is little chance for BoE to hike interest rate this time. The most hawkish member Kristin Forbes has left the MPC already. It's uncertain whether her replacement would vote for a hike. Chief economist Andy Haldane, though hawkish, seems not ready to vote for a hike yet. Overall, there would be at most three members voting for a hike, and the base case could indeed be two, just Michael Saunders and Ian McCafferty. Should either Saunders or McCafferty changes is mind, that would be a rather dovish voting. BoE's updated forecast will also be watched.

Volatility for sure this week

Looking ahead, there are quite a number of important events scheduled this week. And volatility is like certainty. ISM indices and non-farm payroll are important data. But we'd like to emphasize that they're not going to change Fed's plan to start unwinding the assets in September. And Fed will need a string of strong inflation related data, including wage growth to convince it to hike again in December. Dollar's risks to NFP are skewed to the downside and any post NFP rebound might be short-lived. In addition to that UK will release PMIs and BoE rate decision. Eurozone will release PMIs and CPI. Canada job report will be a key for the Canadian Dollar. RBA meeting and a string of Chinese data will be important for commodities and Aussie.

EUR/CHF Weekly Outlook

EUR/CHF surged sharply to as high as 1.1405 last week as recent rally accelerated. The strong break of 1.1198 resistance confirmed underlying bullishness. Initial bias remains on the upside this week. Current rise will target 200% projection of 1.0652 to 1.0986 from 1.0830 at 1.1498. On the downside, below 1.1304 minor support will turn intraday bias neutral and bring consolidations, before staging another rally.

In the bigger picture, sustained break of 1.1198 key resistance confirms resumption of the long term rise from SNB spike low back in 2015. In this case, EUR/CHF would eventually head back to prior SNB imposed floor at 1.2000. For now, this will be the favored case as long as 1.1087 resistance turned support holds.

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U.S. Review

The U.S. Economy Rose 2.6 Percent in Q2

• The first look at economic growth in the second quarter came in at 2.6 percent, boosted by strong performances in personal consumption, nonresidential investment and trade.
• Earlier in the week, new data on the housing market, new and existing home sales and home prices, all came in close to expectations and pointed to healthy demand running into supply constraints. Consumer confidence surprised to the upside for July as did the durable goods report for June.

GDP Growth Comes Back in Q2

As we expected, economic growth bounced back in the second quarter, up 2.6 percent after a downwardly revised 1.2 percent growth in Q1. There were few surprises; personal consumption, nonresidential investment, government and trade were all supportive of second quarter growth. Residential investment declined after an outsized Q1 gain, and change in inventories had very little effect.

Residential fixed investment fell 6.8 percent in Q2 following its impressive 11.1 percent increase in the first quarter. Mild weather was a boost to construction in the winter months, which was partially at play in the Q1 jump. With more normal weather in the spring, the housing market in Q2 reflected two competing economic pressures; strong income and job growth is pushing up demand while the supply of available homes remains stubbornly lean. Home sales data for June underscored this imbalance. Existing home sales declined more than expected, falling 1.8 percent to a 5.52M-unit annual pace. Much of the crowding out has been on the lower end of the price range. Homes priced less than $250,000 account for the smallest share of sales in four years, when the National Association of Realtors began tracking the distribution. The resulting pressure on home prices continues to build; both median and average prices of resales were at record highs in June. We looked closely at home price measures in our publication Western Markets Drive Home Prices Higher this week, which is available on our website or by request. New home sales rose slightly in June, but downward revisions to previous months brought the Q2 sales level below that of Q1, which was reflected in the GDP print this morning. On a positive note, the median price for a new home declined in June as sales shifted toward lower priced homes—a welcome development for firsttime buyers.

The Conference Board's Consumer Confidence index surprised to the upside in July. The University of Michigan's consumer sentiment survey indicated election euphoria was wearing off, though the confidence measure disputed that notion. Mixed messages from the two measures of the mood of the consumer, the most important source of economic growth, bear watching. Confidence about the present situation is the highest it has been since the early 2000s, as consumers are increasingly finding jobs plentiful. Consumer sentiment about the current situation has also skyrocketed in recent years, echoing the idea that the U.S. economy is on solid footing and more consumers are benefitting from it. The two surveys also show diminished expectations, though the confidence survey reversed in July, which suggests the unease over Washington gridlock may have a smaller impact on the consumer than initially thought.

A strong jump in aircraft orders boosted durable goods orders by 6.5 percent in June, though orders excluding transportation, a proxy for future activity, eased from May's stronger-than-firstreported showing. Core shipments, a proxy for current business investment, also eased somewhat. The three month annualized rate softened to its lowest pace this year for both orders and shipments of core capital goods.

U.S. Outlook

Personal Income • Tuesday

Personal income growth accelerated in April and May, rising 0.3 and 0.4 percent, respectively. The continued pace of job growth has helped to maintain momentum behind income growth since the beginning of the year. More importantly, in our view, for the prospects for real consumer spending growth is real disposable income, which rose 0.6 percent in May. The low inflation environment that has persisted over the last few months has helped to lift discretionary income for consumers. The headline PCE deflator has declined in two of the last three months. On a yearover- year basis the headline deflator is up just 1.4 percent. We expect another soft inflation print in June with a flat reading. We also expect personal income growth remained steady at 0.3 percent in June, which supports our case for continued gains in real consumer spending in the second half of the year.

Previous: 0.4% Wells Fargo: 0.3% Consensus: 0.4%

ISM Manufacturing • Tuesday

The Institute for Supply Management's manufacturing survey jumped 2.9 points in June to 57.8, the highest reading since August 2014. The forward-looking new orders component also rose sharply from 59.5 in May to 63.5 in June. While the optimism among the manufacturing sector is welcome news, we are skeptical that such a robust trend can continue for a couple of reasons. First, we saw a surge in business investment in Q1 which downshifted in the second quarter. With only modest improvement in global demand, we do not see business investment accelerating much in the second half of the year. Second, the surge in optimism coincided with expectations for a large corporate tax cut. While we still assume some tax cuts will take place, we are skeptical that they will be large. Looking ahead to July's reading, we expect the ISM manufacturing reading pulled back to 56.1 for the month.

Previous: 57.8 Wells Fargo: 56.1 Consensus: 56.4

Employment • Friday

Nonfarm payrolls rose by 222,000 in June while the unemployment rate edged higher to 4.4 percent. One of the more disappointing aspects of the report was the very modest rise in average hourly earnings. While there have been minor month to month fluctuations in the headline nonfarm number, as can be seen in the graph to the right, the 12-month average has remained relatively steady over the past several months at 187,000. Looking ahead to next Friday's employment situation release for July, we estimate that nonfarm payrolls increased by 195,000 in July and the unemployment rate fell back to 4.3 percent. As the year progresses, we continue to estimate average monthly job growth in the 150,000 range and expect the unemployment rate to fall to 4.2 percent by the fourth quarter of this year.

Previous: 222,000 Wells Fargo: 195,000 Consensus: 180,000

Global Review

Lack of Inflation in Japan Buys BoJ More Time

• The year-over-year rate of CPI inflation in Japan came in at just 0.4 percent in June. The Bank of Japan (BoJ) is the only major foreign central bank not even discussing normalization of accommodative monetary policy. Given these inflation numbers, there is no hurry.
• In this week's Global Review on page 4 we also discuss the latest GDP figures for the U.K. and Korea as well as the latest signals of business activity in Europe.

Eurozone PMIs: Less "Robust"

After ECB President Draghi's reference last week to the "robust recovery" going on in the Eurozone, financial markets started this week with news that the July business activity in Europe was weaker than expected. While the PMIs have been in expansion territory for the past four years, only recently have they broken north of 55. Although this gauge of business sentiment slipped in July, the current level for both the manufacturing and the service sector remains above 55; still consistent with steady expansion. As we discuss on the next page in the International Outlook, next week brings the first look at GDP data for Q2.

Soft U.K. GDP Means Less Urgency for Bank of England

Recent meetings of the Bank of England's (BoE) Monetary Policy Committee have shown growing dissent over keeping rates unchanged with some members calling for rate increases. The shift to a more hawkish bias was one of a number of factors driving British pound sterling higher over the past few months.

The momentum toward an eventual rate hike has been dealt with a series of modest setbacks beginning with a June CPI report released last week which showed virtually no inflation in the month-over-month rate for June. Then earlier this week, we learned that second quarter GDP growth in the United Kingdom remained modest. After a 0.2 percent increase in the first quarter, the economy there grew 0.3 percent (1.2 percent annualized) in the second.

Given the soft inflation backdrop, we expect the BoE will refrain from raising rates through at least the end of 2017. Our forecast looks for real GDP growth in the United Kingdom to strengthen modestly in 2018, although uncertainty related to Brexit continues to lurk in the background as a major downside risk to the economy.

Korean Economy Poised for Growth Despite Tepid GDP

The Korean economy downshifted in Q2 partly due to a slowdown in trade. But a newly announced economic plan and indications of détente in the trade spat with China suggest upside potential in the second half.

Additionally, the Korean government announced a new 5-year economic plan which aims to maintain expansionary fiscal policy to support what it reckons will be 3.0 percent growth this year, up from 2.6 percent previously. The Bank of Korea also revised its own forecast, lifting the full-year growth figure to 2.8 percent.

Lack of CPI Inflation Justifies Dovish Stance at BoJ

At its policy meeting last week, the Bank of Japan maintained its comprehensive program of policy easing with no clear end in sight, even as other central banks are at least talking about the eventual normalization of monetary policy.

Japanese CPI came in this week at just 0.4 percent year over year, which justifies the BoJ's accommodative stance. Aside from a brief spurt after the 2014 consumption tax, sustained inflation north of 2.0 percent has not been achieved since the early 1990s.

Global Outlook

Mexican GDP • Monday

Much like the colossus sitting on its northern border, the Mexican economy has been growing at an uninspired pace over the past few years. In recent quarters, real GDP growth has been driven by the primary sector (agriculture) and the tertiary second (services). In contrast, growth in the secondary sector (manufacturing, mining and construction) has generally been weak, although manufacturing output has accelerated in recent months. The pickup in manufacturing production in Mexico is due, at least in part, to strength in auto exports.

The consensus forecast looks for some payback in the year-overyear real GDP growth rate in Q2 from the relative strength that was registered in Q1. That said, most analysts, ourselves included, look for the Mexican economy to slowly pick up steam in coming quarters as global GDP growth continues to firm.

Previous: 2.8% (Year-over-Year) Consensus: 1.9%

Eurozone GDP • Tuesday

Real GDP in the Eurozone grew 0.6 percent (not annualized) in Q1-2017, the strongest rate of sequential growth in two years. Moreover, the expansion is becoming increasingly self-sustaining as the drivers of growth are broad based and not concentrated in one sector or one spending category. We and the consensus look for another solid growth performance in Q2.

Nevertheless, inflationary pressures in the euro area are benign at present. In that regard, the "flash" estimate of CPI inflation in July will be on the docket on Monday. Unless inflation should rise suddenly, which we think is unlikely, the ECB likely will continue to maintain an accommodative policy stance for the foreseeable future. The July PMIs for the manufacturing and service sectors will also print next week, although they likely will not be materially different from the preliminary estimates that were released last week.

Previous: 0.6% (Quarter-on-Quarter) Wells Fargo: 0.5% Consensus: 0.6%

Bank of England Policy Meeting • Thursday

Following its 25 bps rate cut last August in the immediate aftermath of the Brexit referendum, the Monetary Policy Committee (MPC) has maintained its main policy rate at 0.25 percent. In our view, there is a high probability that the MPC will keep the Bank Rate unchanged at its August 3 policy meeting as well as for the foreseeable future. As noted on page 4, real GDP grew only 1.2 percent at an annualized rate in Q2-2017. Although CPI inflation is currently running above the MPC's target of two percent, slow economic growth in conjunction with the recent stability in the value of sterling should cause inflation to recede in coming months.

There are very few data points from the third quarter yet, although next week's release of the manufacturing PMI (Tuesday) and the service sector PMI (Thursday) will give analysts some insights into the present state of the British economy.

Previous: 0.25% Wells Fargo: 0.25% Consensus: 0.25%

Point of View

Interest Rate Watch

Defining Normalization

Since the 2008-2009 recession, the PCE deflator has consistently averaged less that the two percent target that the FOMC has identified. In fact, in only one year, 2011, did the pace of the PCE deflator exceed two percent and that one year result reflected a coincidence of transitory factors. The year 2011 was characterized by a jump in oil prices, dollar weakness which boosted import prices for energy and food and then finally the earthquake in Japan which lifted auto prices.

Late Cycle Pressures

As the economic cycle matures, increases in economic growth typically are associated with a reduction in the remaining economic resources that are idle and therefore the price for these resources is bid up. This provides the basis for the expectation at the FOMC that inflation rises as the cycle matures.

Yet, as illustrated in the middle graph, the PCE projections for 2017 did not reflect an acceleration of the PCE measure of inflation and in fact the projections dropped even as the unemployment rate declined.

If resource constraints matter, why not an acceleration of inflation in 2017 as the unemployment rate declined?

Over the Long Run, Real interest Rates to Rise?

Long-run unemployment rate projections, bottom graph, illustrate the FOMC expectations that the unemployment rate would decline and, given a Phillips model, the expectation for inflation to rise.

With the Phillips model projection of higher inflation, the FOMC would be expected to raise the nominal FFR over the next year at a pace in excess of the expected increase in the rate of inflation implied by the FOMC projections. Moreover, reduction in the Fed balance sheet would put added upside pressure on benchmark U.S. Treasury rates.

Net, real interest rates would be expected to rise with an anticipated negative impact on economic growth.

Credit Market Insights

Confidence Suggesting Loan Growth?

The Conference Board's Consumer Confidence Index revealed continued widespread optimism in June. The present situation index as well as the future expectations index increased over the month, while the difference between the jobs plentiful and jobs hard to get indices indicates that expectations are for the unemployment rate to continue its descent. This most recent reading was the second highest in 16 years, reflecting the significance and scope of optimism.

Interestingly, plans to buy in the June report were mixed despite this level of confidence. Plans to buy a home jumped to 6.7 percent over the month from 6 percent the month prior, while plans to buy an automobile creeped up slightly to 12.7 percent, up from 12.6 percent. While survey responses do not necessarily translate into action, the increased plans and desire of consumers to purchase large items, such as homes and automobiles, could signal a spike in demand in mortgage and consumer loans. Auto loans in particular have shown growth, up 9.0 percent over the year, but have not quite reached pre-recession levels, while mortgage debt has grown at a slower pace. However, putting a damper on these encouraging plans to buy, consumers planning to buy major appliances dropped broadly on the month. This drop raises questions, as overall consumer confidence is soaring while actual consumer plans to buy major appliances has declined. However, we expect that consumer demand will catch up to confidence, and that consumer loans could experience a jump as well.

Topic of the Week

Something for Optimists and Pessimists Alike

The International Monetary Fund's (IMF) July World Economic Outlook report portrayed the global economy as steadily improving. Although the IMF's headline global growth forecast was unchanged, the forecast revisions diverged for two of the world's largest economies.

The United States and the United Kingdom both saw downward revisions to economic growth projections for 2017, and the IMF shaved a sizable 0.4 percentage points off of its 2018 forecast for the United States. The IMF cited less expansionary fiscal policy assumptions as the key driver of its lower forecast. Outside of these two countries, most of the world's advanced economies saw upward revisions in light of improved economic activity, including Canada, Japan and the euro area, particularly Spain and Italy.

China also received a small boost to its growth forecast, with the IMF now expecting real GDP to rise 6.7 percent in 2017 and 6.4 percent in 2018. The IMF sees the medium-term risks for China as tilted to the downside, however, as Chinese policymakers try to balance the competing demands of deleveraging while also keeping the economy's deceleration to a minimum.

The rebound in global trade from 2015-2016 levels has helped to spur faster growth in the global economy. Our own outlook calls for real global growth to rebound to 3.4 percent this year and hold at that pace through 2018. Although some central banks have either embarked on tightening policy (the Fed, Bank of Canada) or hinted at tighter policy in the future (European Central Bank), on balance monetary policy in many of the world's major economies remains relative easy. That said, a return to the supercharged growth of the past two expansions seems unlikely. Many of the world's advanced economies are grappling with aging populations and sluggish productivity growth, while emerging market economies face still-low commodity prices and must innovate as the low-hanging economic fruit disappears.

U.S. Highlights

• It was a good start to the week for U.S. equities, with stock prices boosted by another round of strong earnings reports and a weakening in the US dollar to its lowest level in over a year. However, these gains were offset by dips in health care and tech stocks by Friday afternoon.
• As expected, the FOMC voted unanimously to leave its benchmark rate unchanged, while signalling that the balance sheet normalization process will likely begin in October.
• The American economy accelerated in Q2, returning to a slack-absorbing pace of 2.6% growth, led by strength in consumption and private fixed investment.

Canadian Highlights

• The Canadian dollar hit a 2-year high of 80 US cents this week, marking a 10% gain since May. Gains were driven by robust economic data, expectations for further Bank of Canada rate hikes and rising oil prices.
• The Canadian economy expanded by 0.6% in May, with growth fairly broad-based across industries. This puts tracking for the second quarter at 3.8%.
• The WTI oil benchmark rose 7.5% from last week's close, to over US$49 per barrel, driven by another decline in US inventory levels and a pledge from Saudi Arabia to reduce exports.

U.S. - Growth Accelerates in Q2

It was a good start to the week for U.S. equities, with stock prices boosted by another round of strong earnings reports. Consumer discretionary and staples led the sectors in performance, a reflection of the increasingly important role that consumer spending is having in lifting growth. Energy stocks also posted large gains, helped by a rebound in the price of oil amid Saudi Arabia's commitment to restrict oil exports in August and another bullish U.S. inventory report (Chart 1). By the end of the week, the weighty tech and health care sectors offset these gains. A weakening in the USD provided support for equities, notably early in the week, while European indices were weighed down by an appreciation in the sterling and the euro vis-à-vis the greenback – which fell to its lowest level in over a year.

The dollar did not get much support from the FOMC. As expected, the Committee voted unanimously to leave its benchmark rate unchanged, but the policy statement highlighted a dovish turn, with the Committee appearing more concerned about the tepid inflation data. This led markets to push out Fed hike expectations. Despite this, the Committee expressed their intention to begin the process of balance sheet normalization "relatively soon". This is likely to be announced at the FOMC meeting in September, with run-off to begin in October. However, another rate hike is unlikely until at least the end of the year. We expect that a December hike may yet happen, but such an outcome depends on inflation firming in the coming months. Many of the disinflationary pressures appear to be transitory in nature, with cell phone discounts, lower commodity prices, and falling prices of imported goods related to past US dollar strength. But these pressures should ease in the second half of the year, while the USD upside potential remains limited for three reasons. For one, the Fed's rate hike trajectory looks to be more gradual than previously communicated. Secondly, the balance sheet normalization will have a smaller currency impact than an equivalent rate increase, and lastly, strengthening global economies should allow central banks such as the ECB and BoE to pare back supportive monetary policy measures. Second quarter data supports this view, with both French and Spanish economies having expanded at a healthy pace in Q2.

The American economy also accelerated in the second quarter, largely as expected, returning to a slack-absorbing pace of growth (Chart 2). Led by strength in consumption and private fixed investment, the second quarter saw the economy expand by 2.6%. The consumer's role in Q2 growth was highlighted by strength in spending on goods after a weak showing at the start of the year. And with job and income growth remaining strong, there is room for further advancement on this front over the remainder of the year.

Remaining top-tier domestic data releases this week telegraphed a mixed picture of the housing market. Existing home sales pulled back to a still healthy 5.52 million (annualized) as lack of inventory and eroding affordability prevented purchases. At the same time, new home sales ticked up 9.1% from a year ago, suggesting that demand remains intact. We look forward to next week's bevy of reports that should clarify how the economy has done in the first month of the third quarter, with the employment, income & spending, and ISM survey reports being top of mind, as we seek confirmation that economic momentum remains robust during the third quarter.

Canada - The Loonie Continues To Soar

It was a quiet week in terms of Canadian economic data, with this morning's GDP report the only key release. But that didn't stop the Canadian dollar from soaring to a two-year high of over 80 US cents. The loonie has generally been on the rise over the last couple of months, up 10% from a low of just under 73 US cents in May. The recent appreciation has been driven by a few key factors, including strong economic growth, some convergence in the direction of monetary policy – and thus a narrowing in bond yield spreads – with the U.S., and higher oil prices.

The Canadian economy has been outperforming since mid-2016, and it looks like growth in the second quarter of this year will continue the trend. Following a 0.2% advance in April, the Canadian economy expanded by an eye-popping 0.6% in May, with the growth fairly broad based across industries. This puts the second quarter on track for robust growth of 3.8%. The steady string of strong economic data, particularly relative to other G7 countries including the U.S., has certainly been supportive for the Canadian dollar.

It has also helped underpin the about-face by the Bank of Canada with respect to its stance on monetary policy, with a six-week period of hawkish rhetoric leading the central bank to hike rates for the first time in seven years in July. Indeed, the Bank indicated that despite a soft inflation backdrop, the economy is on a stronger footing and the emergency level of interest rates that were needed during the oil price collapse are no longer warranted. This follows the lead of the Federal Reserve that began a slow rate hiking cycle at the tail end of 2015. This change in direction of monetary policy – putting it more in line with that in the U.S. – has helped drive the loonie higher.

Meanwhile, crude oil prices have also picked up, reaching a two-month high of US$49 per barrel this week. This marked a 7.5% increase over last Friday's close. Gains were largely prompted by a third consecutive decline in weekly U.S. inventories and a pledge from Saudi Arabia to reduce exports, particularly to the U.S. where stock levels are heavily scrutinized. Indeed, the Saudi rhetoric was the only constructive development that came out of the meeting of the OPEC-Non-OPEC group at the start of the week, as the deal was essentially left unchanged. The group did however indicate that Nigeria and Libya – which are currently exempt from output restrictions and have been ramping up production in recent months – could become part of the deal once they reach a specific level of production on a sustainable basis.

Given the relatively quick ascent of the loonie in recent weeks, the upside is likely limited going forward. While we expect oil prices to gradually creep higher, they will remain vulnerable to any bearish indicators, with the risks largely tilted to the downside. Meanwhile, the economy is unlikely to maintain the stellar pace of growth seen in recent quarters. Still, it should remain healthy, allowing the Bank of Canada to hike rates again in the fall of this year and twice more in 2018. With much of these expectations already priced in, we expect the Canadian dollar to hold at around 79 US cents through 2018.

U.S.: Upcoming Key Economic Releases

U.S. ISM Manufacturing Index - July

Release Date: August 1, 2017
Previous Result: 57.8
TD Forecast: 56.9
Consensus: 56.2

TD looks for ISM Manufacturing to post a modest pullback to 56.9 from 57.8. The dip partly reflects a correction from the June pickup and would be in line with the slips registered in both ISM-adjusted Empire and Philly Fed indexes. Hard data such as manufacturing production is supportive of only a partial reversal.

U.S. ISM Non-Manufacturing Index - July

Release Date: August 3, 2017
Previous Result: 57.4
TD Forecast: 57.0
Consensus: 56.8

The ISM non-manufacturing index released later in the week should show a similar story of sustained strength as its manufacturing counterpart, albeit at a slightly softer pace (57.0 vs 57.4). Both releases would be supportive of above-trend GDP growth in the third quarter.

U.S. Employment - June

Release Date: August 4, 2017
Previous Result: 222k, unemployment rate 4.4%
TD Forecast: 190k, unemployment rate 4.3%
Consensus: 180k, unemployment rate 4.3%

We expect July nonfarm payroll employment to moderate to a 190k pace after registering a better than expected 222kk gain in June. Labor market indicators on balance point to another gain in the vicinity of 200k. However, we see risk for a sharp pullback in government jobs from their outsized 35k gain in June, thereby dampening headline growth.

We expect the unemployment rate to slip back to 4.3% on the back of robust employment growth. On wages, calendar effects point to a 0.3% m/m increase in average hourly earnings, but base effects may leave a year-on-year pace lower at 2.4% vs 2.5%. A pickup in wage growth will help strengthen the Fed's, and the markets', conviction on raising rates this year, and thus we expect this indicator to drive the market response.

U.S. Personal Income & Spending - June

Release Date: August 1, 2017
Previous Result: Income 0.4% m/m, spending 0.1% m/m
TD Forecast: Income 0.4% m/m, spending 0.1% m/m
Consensus: Income 0.4% m/m, spending 0.1% m/m

Headline PCE inflation is expected to advance 1.4% in June, which we believe is consistent with a 1.6% pace for Q2 as a whole as reported in the advance GDP release. That would reflect unchanged prices on the month, including a drag from energy prices. We look for the June core PCE index to rise 0.1% m/m, consistent with the core CPI release. On a year-ago basis, the advance Q2 GDP release suggests that core PCE inflation likely rose 1.5% y/y in June, which is slightly above pre-GDP consensus expectations for a 1.4% y/y increase. The June report itself should show continued weakness in "transitory" factors, including cellphone services, with risk for further softness in healthcare services prices.

Nominal PCE (personal spending) is expected to post a relatively soft 0.1% rise in June, though past revisions point to risk for a slightly stronger gain. The quarterly gain is already reported and came in at a solid 2.8%, but the June figure is important for gauging the handoff to Q3. We also expect a solid 0.4% increase in June personal income, though past revisions also suggest scope for surprise.

Canada: Upcoming Key Economic Releases

Canadian International Trade - June

Release Date: August 4, 2017
Previous Result: -$1.10b
TD Forecast: -$1.40b
Consensus: -$0.90b

The international trade deficit is forecast to widen further to $1.4bn in June. The appreciation of the Canadian dollar following the Bank of Canada's hawkish pivot should lead to softer exports and imports while another decline in energy prices will weigh on the nominal print. Crude oil prices fell by roughly 6% in June but we think there is scope for export volumes to increase after a surge in production during May. Meanwhile, non-energy exports should see a more modest decline due primarily to a drag from weaker motor vehicle shipments. On the other side of the ledger, imports should see a modest decline to offset the pullback in export activity. Aircraft imports, which contributed over half of the 2.4% gain last month, could see a minor pullback but should retain most of their strength on deliveries to Air Canada.

Canadian Employment - July

Release Date: August 4, 2017
Previous Result: 45k, unemployment rate: 6.5%
TD Forecast: 0k, unemployment rate: 6.5%
Consensus: 19k, unemployment rate: 6.5%

Employment growth is forecast to pause in July following two months of robust gains. Small business sentiment and hiring intentions have cooled since peaking in May and survey data has pointed towards more subdued hiring conditions in manufacturing. The details of the report will likely show a relative outperformance in goods-sector hiring owing primarily to a pullback in professional services, which is coming off its strongest two-month gain on record with 53k added jobs in May and June. We also expect a continuation of last month's rotation towards part time employment. Seasonal patterns tend to support part time hiring in July and part time employment remains well below its peak level from January, despite full time payrolls adding 175k employees since.

The unemployment rate should hold steady at 6.5% so long as labour force growth does not exceed 20k, which is unlikely following the 0.3pp increase in the participation rate over the last two months. Wage growth could see a pickup on the lagged impact of reduced slack but any improvement should be marginal.

US economic fundamentals to drive dollar this week

The US dollar is lower against the major pairs after the political uncertainty in Washington and mixed economic fundamentals took their toll on the greenback. The first week of August will be full of economic releases with major central banks on the agenda as well as the week wrapping up with the biggest economic indicator in the market, the United States Non-farm payrolls report.

The Reserve Bank of Australia (RBA) will release their August rate statement on Tuesday, August 1 at 12:30 am EDT. The cash rate is not expected to change despite the AUD trading at two year highs versus the USD and RBA policy makers arguing for a lower Aussie. The Bank of England will host another Super Thursday on August 3 at 7:00 am EDT with the release of the Quarterly Inflation Report, the Monetary Policy Summary, and Minutes of the meeting. The rate is expected to remain unchanged despite the narrow vote in June. The rate setting committee is mixed on when to hike rates but the exit of a prominent hawk has pushed back the timing.

US employment has been the biggest driver in the economic recovery narrative and could be called once again to spark USD strength. Jobs week kicks off on Wednesday, August 2 with the publication of the ADP non-farm employment report at 8:15 am EDT. Unemployment claims will be released on Thursday, August 3 at 8:30 am EDT and the week will close with the Non Farm Payrolls report on Friday, August 4 at 8:30 am EDT. Job gains are forecasted to be above 180,000 and wages could gain 0.3 percent pushing the unemployment rate down to 4.3 percent.

The EUR/USD gained 0.716 percent in the last five days. The single currency is trading at 1.1761 as the US dollar has weakened following a period of political uncertainty in Washington as well as economic growth meeting but not exceeding expectations after the release of the first estimate of gross domestic product (GDP) for the second quarter.

The highlights of the week were the Federal Open Market Committee (FOMC) rate statement and the US GDP first estimate for the second quarter. Both were more dovish than expected. The Fed did as expected by not raising rates and keeping the balance sheet timing in plain view without talking about actual dates but the downgrade on inflation could mean a more patient approach to rate hikes going forward. That decision to remove the "somewhat" language is the Fed admitting inflation is running below its 2 percent target.

The GDP release met expectations with a 2.6 percent gain. The first estimate will be followed by two more revisions, but this one is the one that has the most impact as it sets the basis for Fed forecasts. The euro gained more from the softness of the dollar rather than by improving conditions in the EU. This week the mix of political and fundamental releases did not make the case for a strong dollar. The USD will look ahead to employment data, where once again inflationary data in the form of wage growth will be heavily anticipated.

The USD/CAD lost 0.734 percent in the last 24 hours. The currency is trading at 1.2446 after a strong monthly GDP figure in Canada boosting the loony ahead of the dollar. The US GDP released at the same time met the forecast but the lack of wage growth is putting more pressure on the Fed to rethink its third interest rate hike of the year. The Federal Reserve has already raised interest rates twice in 2017 and is expected to begin shrinking the balance sheet it accumulated from its QE program in the fall.

Political uncertainty has sapped the momentum out of the USD. The rally at the beginning of the year is gone after the debacle that has been the attempts to pass healthcare reform. The Trump administration is now focusing on tax reform, but it remains to be seen if they have the political capital left after a very contentious period to repeal Obamacare. Pro-growth policies were also one of the factors behind the dollar rally earlier in the year, but as they got reprioritized that shift also hurt the greenback against majors. A back to basics approach with tax reform learning the lessons from the failure to pass healthcare policies could end up boosting the dollar before the end of the year.

The loonie continues to gain versus the dollar in a rally that started when the Bank of Canada policy makers made hawkish comments back in June and compounding rhetoric changed market expectations on Canadian monetary policy. The BoC hiked interest rates in July and given the pace of growth could do so again in October. Another 25 basis points would bring the Canadian interest rate to 1 percent, where it sat prior to the 2015 cuts and a significant drop in oil prices.

The price of energy gained 1.242 percent on Friday. West Texas Intermediate is trading at $49.48 as the price of crude continues to rise. Bigger than expected drawdowns for the past three weeks and comments from US producers hinting at less output has driven prices higher. The OPEC and other major producers had so far limited output but with the US, Brazil and Canada out of the agreement the global supply glut was not being drained fast enough.

Citing a cutback in capital expenditure US operations will take a step back. At the same time Saudi Arabia has said that it will cut its production further and warned members of the production cut agreement that compliance will be more stringent to make sure stability returns to oil prices.

Oil has gained 8.41 percent in the last five days as the US dollar retreat has also made crude more expensive. Large financial institutions have cut forecasts for this year to a range around $60 per barrel. The two month high that WTI is currently sitting in is a good start, but not enough to convince investors the levels are sustainable. The biggest risk to oil prices remains the continued support from OPEC and other major producers. Infighting inside the OPEC could escalate and tear the organization apart as Saudi Arabia and Iran could take their ideological disputes a step further.

Market events to watch this week:

Tuesday, August 1

• 12:30 am AUD Cash Rate
• 12:30 am AUD RBA Rate Statement
• 4:30 am GBP Manufacturing PMI
• 10:00 am USD ISM Manufacturing PMI
• 6:45 pm NZD Employment Change q/q

Wednesday, August 2

• 4:30 am GBP Construction PMI
• 8:15 am USD ADP Non-Farm Employment Change
• 10:30 am USD Crude Oil Inventories
• 9:30pm AUD Trade Balance

Thursday, August 3

• 4:30 am GBP Services PMI
• 7:00 am GBP BOE Inflation Report
• 7:00 am GBP MPC Official Bank Rate Votes
• 7:00 am GBP Monetary Policy Summary
• 7:00 am GBP Official Bank Rate
• 7:30 am GBP BOE Gov Carney Speaks
• 8:30 am USD Unemployment Claims
• 10:00 am USD ISM Non-Manufacturing PMI
• 9:30 pm AUD RBA Monetary Policy Statement
• 9:30 pm AUD Retail Sales m/m

Friday, August 4

• 8:30 am CAD Employment Change
• 8:30 am CAD Trade Balance
• 8:30 am USD Average Hourly Earnings m/m
• 8:30 am USD Non-Farm Employment Change