What Happened

• U.S. Dollar very volatile in July, ultimately not dramatically changed from start to end
• Doubts over economic progress taking hold of markets did boost safe-haven JPY and CHF
• Sterling was the third-best performer as re-openings spurred optimism in the U.K.
• European Union officials agreed that inflation needs to be allowed to run, kept a loose stance
• Oil supplies and the prices of commodities fluctuating all over facing uncertainty as the globe’s recovery remains uneven

GreenShootsFX’s View

• The Delta variant keeps causing damage as the global efforts vary to combat the disease
• Pacific Rim countries will need to evidence improvements as safety measures come back
• Greenback back-and-forth is likely to remain in August as medical assessment continues
• We shall see if August brings with it a holiday in Congress or an infrastructure spending bill that could represent trillions in spending
• The remainder of the Summer will be a test of inflationary growth and return to business

In Focus

• Yen improved by almost 2% in July after fears gripped markets mid-month
• The buck has gained 6.6% against the Yen over the course of the year, but those losses could be reduced going forward
• Japan is currently hosting an audience-less Olympics that left many desiring more
• Record daily infections as the Delta variant of COVID came about led to the joyless decision
• We believe that a globe that fails to meet growth expectations could likely benefit JPY

In Depth

Covid is making sure markets remain uncertain and nervous with the Delta variant.

It is possible we may experience a bit of a slowdown in the middle of this fight with the pandemic. As we wrote about for the July outlook, it was very possible the buck could experience losses if there was a change of perspective.

Indeed, the dollar fell slightly, not over abundance in optimism, but rather because the Fed continues to remind us that this situation is unprecedented, complicated, unfortunate, and medically we are not out of it yet.

The virus has evolved, and regions within North America and worldwide are seeing infections previously experienced during the worst of the virus last year. While hospitalizations and deaths may not be as dire, it is evident that we are not a united front as a globe, and it is starting to hurt the recovery.

We mentioned a few countries when discussing the virus last time, but throughout the month, all regions seemed bound for a setback in their attempt to normalize general activity. One major problem is the struggle in distributing the vaccines equally; the other is related to a refusal by many to receive them.

As even seen among Olympic performers, the pandemic is dragging us all down. The dread of the unknown combined with economic aftershock within the last year and a half has tested us plenty, and it is starting to wear us out. Delay seems to be a theme for our current lives until there is a sense of true accomplishment in this battle against COVID. Doubt keeps everyone on edge as the development of a new variant makes us question if we should fully lift safety measures.

This year began with hopes of putting the tragedy of 2020 behind us, but despite progression, there is a feeling growing that we may be heading towards regression. We saw this in central bank meetings where leaders stated how the uneven nature of the economic comeback has started to reveal significant gaps that monetary policy will not fill.

Although governments want to spend money, there will not be much real growth until we can guarantee people’s safety from this deadly condition that does not discriminate.

That opinion has been presented most certainly by the Federal Reserve, which rang the bell of dovishness once again in its most recent meeting. Then, of course, there is the admission that inflation is experiencing partial and rapid growth thanks to people consuming, going out, and traveling.

Nevertheless, there is no way the Fed can start tapering because the economy’s fundamental problem remains unresolved. In fact, at the time of writing, mask-wearing requirements indoors were reinstated in Washington, DC, and by various large companies such as Disney. Unfortunately, these are spots with a resurgence in tourism that could fade.

The United States has been steadily making advances while most places have found it challenging to vaccinate their population. Additionally, fear and misinformation have made it difficult to get cooperation from the general population to achieve herd immunity. At the current pace, it would take another nine months to vaccinate 75.0% of the people here in America.

As a nation, we have been handing out millions of doses to other countries which has helped. Looking ahead, we have questions about what impact the U.S. infrastructure and investment plans could have on the economy and the dollar. It seems like a bipartisan agreement may come to fruition in a divided congress, but the key is in the details, and often figures have changed from just over $1.0 trillion in spending to as much as $3.5 trillion.

Subsequently, will this mean equities will flourish and further hurt the buck’s value, or are global forces more significant for FX next couple of months?

Real physical pandemic woes do not allow the economy to get hot as no company or industry is immune to the supply shocks and the increments in production costs. These are strange times that are testing the dynamics of economic growth as well as pricing. In the middle of July, the markets began to question if the recovery has already peaked and if there is too high an outlook for growth.

We shall see if, as Powell says, inflation is just “transitory” or if higher demand amidst such a supply shock will indeed keep prices going up as suppliers charge more for taking on any more work to do orders.

Other central banks will likely follow in this same wait-and-see approach since uncertainty clouds policy decisions. We feel that the Fed will hype potential for considering tapering QE the next few meetings and then assess at year’s end then telegraph its moves, if any, for 2022. August will only have one major central bank announcement as the Bank of England gathers on the 5^th.

We missed our forecast for Sterling as we did not see the breaks the U.K. was going to catch last month. Protocols over the exchange of goods in Northern Ireland have caused friction between U.K. and EU authorities who want to prevent smuggling and collect the correct tariffs.

As a result, a legal battle was brewing that could compromise commercial trade even further with delays and confusion at the border with Ireland. However, this will not be happening as the EU is being flexible.

Watch out for the euro! Euro-zone activity grew at the fastest pace since 2000, while Purchasing Managers Index reached its highest point since 2006. So perhaps we will be accurate €-bulls this time.