After a week of range trading, the USD should see a pick up (of sorts) as we get a little more colour on the economy from hard data rather than mere rhetoric (from the Fed). Due to the spectrum of views on the rate path ahead, mid curve yield has seen little movement in the last 5 days, with the key 10yr rate pivoting on 2.15%; we continue to hold off 2.20%. This in spite of the optimistic overtones from Yellen and Dudley, who continue to see the rate path and normalisation ‘on track’, based on expectations that some of the data fade is transitory. Over Thursday and Friday of next week we get the revisions (if any) to Q1 GDP (3rd reading), and this is allied with the latest PCE index as well as personal income and spending – all readings for May.
Given that much of the reflation trade has been ‘unwound’ – subjective to a degree – USD/JPY is holding levels inside 111.00-112.00 this week, in anticipation that yields have (at least) based out. Some also point to equities holding better levels, but this link has diminished to some degree, as have a number of correlations across the various asset classes. There are tentative signs that Japanese divestment is picking up again, but the spread across the majors suggest the cross rates could be a little more influential than the lead USD rate.
On Monday, we also have the May durable goods orders to provide some modest volatility, but the month on month fluctuations can be erratic at times, and prove to be less influential as a result. To that end, we expect USD direction to be more prominent in the latter stages in the week.
Out of Japan, Friday carries a large tranche of economic releases; May CPI (Jun stats for Tokyo), industrial production, unemployment and construction orders are all on the slate.
Ranging views of rate policy have also been a feature in the UK, which is caught up in the turbulence of Brexit. The link between the two is down to the uncertainty led exchange rate drop to lift inflation levels closer to 3.0%, and this is the primary factor causing the shift towards a hike/rate cut reversal among MPC members. Governor Carney is firmly in the dove camp, but with the vote split at 5-3, Haldane through the cat amongst the pigeons this week in declaring his intentions as we head into H2. This will balance out the vote, with some pundits now calling for a rate hike in August.
Not that this has impacted on GBP near term, with Friday’s rally largely down to the concessions due to be proposed by Theresa May in the EU Summit in Brussels which will allow 3 million EU citizens to stay in the UK permanently. This saw Cable return to the mid 1.2700’s, while EUR/GBP is back under 0.8800, but we expect ranges to hold with EU talks yet to start in earnest, and the Conservatives yet to agree a deal with the DUP.
The UK data schedule sees the latest Q1 GDP calculation on Friday, with business investment levels also under the spot light. Broader Cable limits lie at 1.2400-1.3000, but for EUR/GBP, we still expect pre-0.8700 to limit losses here, and this is largely down to the pre-emptive positioning ahead of the ECB policy adjustment.
This factors into the consistent EUR/USD bidding into the low 1.1100’s, but failing to gain any traction through or even to 1.1200 has prompted calls for a deeper setback before we can re-attempt 1.1300 higher up. Irrespective of sluggish inflation – the second reading for Q1 due on Friday – Euro wide growth rates have improved, but while the governing council maintains the current stance is appropriate, QE tapering is expected later this year, and traders are loath to miss out on the eventual impact this will have on the single unit. Fair value levels lie higher up, certainly through 1.1500-1.1600, but this area is the initial target for EUR bulls.
The German IFO survey and employment report are also due out - at either end of the week, with EU sentiment indices noteworthy on Thursday.
Back to North America, and north of the border, we get the Apr GDP reading for Canada, where the market will be looking to some form of momentum/continuation to the 0.5% rise in Mar. After the hawkish comments from the BoC over a week ago, CAD progress will depend on whether this change in tack is justified, as the levels below 1.3200 against the USD will require some conviction. Given Oil prices are on the back foot, this will have been intensified, as growing shale production levels in the US suggest there is little chance of a sustainable recovery in WTI and Brent in the meantime. Pre-1.3400 caps the topside for now, but is back in focus with the May inflation read coming in lower than expected – yoy rate now 1.3% vs 1.6% previously.
For the other commodity linked currencies, NZD strength will take some reining in, as we continue to eye 0.7300 and above against the USD, but more specifically 1.0350-70 against the AUD. If the latter breaks below here, we technically have a potential move on the 1.0200 level, with calls for parity sure to follow!
Since the announcement of the budget surpluses last month, there has been a tide of optimism sweeping the NZD higher across the board. This was underpinned by the RBNZ rhetoric this week mirroring the views and perceptions of many in the market, but they did also note that the current policy stance will remain in place for a considerable period of time, along with continued concerns over broader inflation as well as external factors which have somewhat faded into the background. Nevertheless, Monday’s session offers up the latest terms of trade data (for May), so the above levels could be ‘emphasised’ either way.
Personal and housing credit numbers are on the agenda in Australia, and may perhaps be a little more influential in light of the recent downgrades to 4 leading banks, citing exposure levels to certain areas of the mortgage market. However, as above, the steady risk tone has aided the AUD/USD support ahead of 0.7500, but at these levels, it is AUD/NZD which is attracting more of the attention at present.
Other data points on the schedule next week include the KoF leading indicator in Switzerland, with retail sales in both Sweden and Norway also due. In terms of the respective currency pairings, a stable EUR/CHF rate in the mid 1.0800’s suggest there is limited diversification to measure here, while the upturn in NOK/SEK has not gathered enough momentum to suggest any major change in trend as yet. Through 1.0400 makes things a little more interesting here.