Overview:
Daily FX Wrap: FX ranges extremely tight, but FOMC ahead keeping many on the side-lines, as the US payrolls stats on Friday. EU-UK exchanges over negotiations ahead not looking acquiescent and GBP starting to feel the strain. AUD losses on copper, oil adding to CAD woes.
Looking past the FOMC announcement tonight, where many had assumed few were expecting fireworks from the statement, we have a number of data points to look to on Thursday away from the US. There are some outside calls for communication on balance sheet adjustment, but the Fed will be keen to avoid market volatility at this stage.
In the wake of the non manufacturing ISM number however, where business activity jumped from 58.9 to 62.4, we saw a very tight response from the USD, with the headline rise from 55.2 to 57.5 reflected by a mere 5-10 ticks in USD/JPY. Modest gains through the day may have taken the sting out of the move, but other factors at play are the cautious mood on the reflation trade in general combined with the familiar reluctance to commit ahead of the key payrolls release on Friday. To that end, the employment index softened a little from 51.6 to 51.4, and this may be limiting participants until we get a fuller picture.
Out of Europe, more PMIs to contend with as the services components will complete the composite measures, but the upcoming French elections on Sunday are dominating EUR trade, as the proximity to polling day sets nerves jangling again. Macron remains in the lead either side of 60/40 against Le Pen according to the latest surveys, which have been pretty consistent over the past week, and positioning looks to be favouring this view, but to what degree? 1.0950 still caps the EUR/USD rate on the topside, and this should hold into the weekend barring any major surprise over the US jobs report on Friday.
In the UK, economic data may have taken a back seat as talk of the EU exit payment (and estimates thereon) permeates through the market, but services PMIs are a major mover on the domestic front, and GBP bulls will be looking for some ‘harmony’ with the rise in the manufacturing and construction indices released already. A strong number should see a cable move on 1.3000, but struggling ahead of this level in recent sessions alongside a unified EU intent on a hard-line stance into the negotiations with the UK, and these numbers take on added significance given their timing.
Focus reverts to Australia in the overnight session as the latest trade data points to a moderation in the Aud3.5bln surplus, and given some of the volatility seen in recent months, could prove instrumental in determining whether we test or hold the 0.7400-0.7700 range that looks to be in play at the current time. Recent weakness has been primarily down to the drop off in Copper prices, but despite the sharp drop, techs will point to the range lows above USD2.45.
The RBA’s governor Lowe is also scheduled to speak overnight, but so soon after the RBA announcement, it is unlikely to be a game changer. We also watch AUD/NZD after the latest round of losses from the NZD perspective. The latter has benefited from the healthy jobs report early Wednesday, and to a lesser degree the GDT auctions, but notable was the resistance seen in NZD/USD ahead of 0.7000, pulling the pair half a cent off its highs.
Trade data also due out in Canada on Thursday, but the familiar drivers continue to pound away at the CAD, which has been in a near straight line move lower against the USD, EUR and GBP. On Friday, we get the chance to see whether this can continue, either way, as strong numbers may help reverse the move, while any weakness will tests the market’s appetite for further downside. We continue to point to the 1.3800-50 area as a major resistance zone, coinciding with calls from local names that the exchange rates are getting overstretched.
Oil prices also continue to weigh, and with the latest DoE report showing a smaller draw than expected and also that of the API reported Tuesday night. We sense oil traders are more inclined to test the lower limits, beyond USD47.00 in WTI, where USD45.00 has been touted as the stronger support point which OPEC have also designated as the lower leg on their near term target range.