FX News

FX Update: A quiet start to the week

Overview
Last week ended on a mixed note as although the S&P 500 closed on Friday at an all-time high, there was negative news, with Hong Kong receiving a credit rating downgrade from Moody’s from Aa1 to Aa2, this followed a cut, for the first time since 1989, in China’s debt rating on Wednesday. A shortened trading week due to the US Memorial Day holiday yesterday will give traders a lot to digest over a reduced period as a raft of economic data is released this week. Markets are pricing in an 80% chance of a Fed rate hike in June but as always data is key. Later tonight will bring US personal consumption expenditure index data, the central bank’s preferred gauge of inflation. Wednesday will bring initial jobless claims and ADP payrolls, a day later traders get manufacturing survey results, and the week culminates with monthly Non-Farm payroll data, the bright spot of the economy. 

These figures will help set expectations for whether the Fed will raise rates as Fed officials forecast back in March. With President Trump back in the White House after his overseas sojourn there is likely to be more ongoing drama (tweeted  or otherwise) , but markets are looking for refocusing on the Administration’s  tax and infrastructure polices to get back on track .

Australia
Quiet trading in the Australian dollar overnight within a narrow 0.7425-0.7450 range. Building approval data for April is out later today and while it is expected to be up  around 1% , certainly better than March’s -13.4% but approvals continue in a downturn . Concern is also growing that further Chinese data will be weak thus capping any potential for a higher Australian dollar. April retail sales figures on Thursday will be closely watched. The tone for the AUD remains largely negative as softer commodity prices undermine support and the lower holiday volumes to some extent have helped the AUD hold its current levels. If this week’s US data releases are solid prepare for more downside in the AUD with support at 0.7330 coming under pressure. Immediate support is at 0.7420 a break of which would see an extension towards 0.7365.

New Zealand
The New Zealand dollar was quite during early week trading as the US Dollar took a break with US Memorial Day. Overnight the kiwi climbed to a two month high of 0.7088 but was soon back trading at Monday’s open of 0.7035 after traders cashed in with profit taking during thin markets. The odds of a Fed rate hike is still high one key indicator is the Core PCE (Personal Consumption Expenditure) which prints tomorrow and shows only individual consumption a key inflation measure for the Fed. With this in mind if the reading shows April figures are approximately 2% this will increase the chances of a June 15 hike in rates. A quiet week locally with just the RBNZ Financial Stability Report to print Wednesday, this will give us a broad View of the NZ economy’s health highlighting areas such as interest rates, inflation and overall economic conditions. A plethora of US data is to be released over the coming days including Non-Farm payroll figures Friday. The NZD technically is showing higher highs and higher lows suggesting its comfortable sitting above 0.7000 previous resistance. Past current levels we have thin air to 0.7230 the high of 23rd February 2017, expect a bumpy ride towards the end of the week..

United States
With Trump back in town hopes will be for his policy agenda to get kick-started, particularly around infrastructure spending and tax, but given recent history we are doubtful if we see any positive moves anytime soon…!! Emphasis for the US is all on the major data dump this week. Expectations are that this week’s data will show a US economy that continues to improve and we expect Friday’s NFP increase should be around 190,000 jobs for the May period with the unemployment rate remaining steady at 4.4%. This would maintain the course for a rate increase by the Fed at its meeting on 15th June. What does all this mean for USD levels? White House distractions aside, the US economy should look to being very much to be back in the grove if this week’s data is positive, if this is the case it will confirm our concerns that the USD is undervalued at current levels and that the increasingly divergent paths by the Fed vis-a-vis other Central banks (especially given the ECB president’s comments yesterday) point to the EUR/USD heading back to the sub 1.0800 territory over the next 2 months.

United Kingdom
A tough week for the UK last week for Prime Minister May as the suicide bomber in Manchester was a cold reminder that the terrorism scourge is persistent and then there is the matter of the economy. First quarter GDP growth was slashed from its initial estimate of 1.2% annualized to 0.7%, largely on the back of weaker net trade (so much for a weak pound’s helping hand) and slower consumer spending (some of that due to higher inflation) also, the CBI reported that British retail sales fell to a four-month low in May. The upcoming election is now not looking as rosy for the Conservatives as first indicated, it is now just is just two weeks away (June 8th) and the Conservatives lead over the Labour Party in the polls has narrowed to just 5 % according to one poll, the smallest since  April 2016. Just a week ago, the Conservatives had a 9-point lead, and 18 points two weeks ago! Not helping were the headlines on the U-turns made by PM May, such as backtracking on the “dementia tax”. Let’s not forget our old friend Brexit. EU leaders have unanimously agreed that the exit bill would total €100 bln gross, or €55 bln-to-€75 bln net, an amount so incredibly high that Brexit Secretary David Davis has threatened to quit the talks before they even begin. The ECB’s Constantio effectively dismissed a Brexit impact on the Euro Area economy. He acknowledged that “of course Brexit is very significant for the UK, but in view of the relative size it is much less meaningful for the rest of the EU”. It will certainly not strengthen Britain’s ability to negotiate if the issue is dismissed for being not meaningful.

Europe
Economic data for the Eurozone continues to improve, but comments from ECB President Draghi in his testimony before the European Parliament yesterday, that the euro area still needs expansive monetary stimulus to restore stable inflation even as its economy accelerates caused the EUR to soften. He went on to say “We remain firmly convinced that an extraordinary amount of monetary policy support, including through our forward guidance, is still necessary,” Draghi told lawmakers on Monday in Brussels. “Domestic cost pressures, notably from wages, are still insufficient to support a durable and self-sustaining convergence of inflation toward our medium-term objective.”
So essentially more of the same for a while, (read until at least year-end),  in the  ECB stimulus policy which will mean that  key influences of EUR levels will fall back to US Fed interest rate policy and US economic data releases. The old Greece problem reared its head again overnight, on reports that the Greek government is preparing to possibly go without next bailout payment (amount of EUR 7bn) if creditors cannot agree on debt relief…this saw the EUR drop back around 30 points against the USD. Look for the EUR to come under renewed pressure this week if US data continues to be positive, a move to 1.1080 is expected and if the EUR/USD returns to sub 1.1000 territory look for a deeper extension towards   1.0850.

Japan
The Japanese Yen showed little movement trading in a narrow range during Monday’s session with US markets closed for Memorial day. The stronger global economy has strengthened support for Japanese products of late with GDP first quarter expanding at an annualised rate of 2.2%. Markets are not expecting the Bank of Japan to tighten its monetary policy in the foreseeable future despite an economy which seems to be moving forward. Later today we have Household Spending, Unemployment rate and Retail Sales. The long range target is still 108.00 with the pair consolidating around 111.00 we may see further strength develop in the Yen, 110.20 the previous low the immediate target this week.

Canada
The Canadian Dollar made its second successive weekly gain coming from 1.3530 levels to close the week at 1.3450. A slow start to the week with US Memorial Day has seen little volume traded. US political risk has put the US Dollar under pressure of late as speculation has surfaced that there may indeed be a Russian connection, a good chance we may yet see the Canadian Dollar back trading at the early April low of 1.3220. This week the most significant data release is the Current Account with the release of the Fridays Trade Balance likely to be overshadowed by the US Non-farm Payroll release.

Major Announcements
•    The Bank of Canada leave rates unchanged at 0.5%
•    UK GDP Second Estimate 0.2% vs 0.3% expected
•    US Core Durable Goods Orders -0.4% vs 0.4% expected
•    US Prelim GDP 1.2% vs 0.9% expected

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