Submitted by Shant Movsesian (RANSquawk) and Rajan Dhall MSTA
Weekly FX Outlook:
Politics dominate yet again, as focus on Comey testimony set to determine Trump and USD fate. Fed minutes and OPEC meeting on the same day with the BoC thrown in! EUR on the front foot and leading the pack as growth and inflation stats heighten tapering expectations, greenback flagging.
Late Thursday, social media released a video suggesting the ex-FBI director denied any experience of interference to any ‘bureau’ investigations, but questioning was not inferred on Donald Trump. As such, the president is not off the hook – far from it. Thin market conditions at the time produced some sharp USD moves to the upside, but have been all but reversed in full as US Treasury yields remain on the heavy side.
Based on economic considerations, where the data has been tailing off of late, politics now ‘overlap’ as delays on tax reform will be seen to be exacerbated by the allegations on the head of state. Next week’s schedule picks up midweek, with the Fed meeting minutes making for a volatile North American session at the very least. The FOMC are likely to see recent softness (in growth, inflation and wages) as transient – a popular word of late – so expectations over a June hike may have receded from 90%+ to 74%+, but the yield curve has been wilting in the mid curve to signal market focus beyond next month and 2017.
Of the data releases seen, Friday’s Q1 GDP seconding reading is standout, along with real consumer spending and the price index. Durable goods are also out at this time, with Q1 corporate profits also noteworthy. The day before we get the latest trade data, with housing data and the Markit PMIs set to be ‘lost’ in the Trump and Fed circumstance.
For now, USD/JPY has tested some key levels and rebuffed them, with 114.50 holding on the upside, while pre-110.00 bids set the base after the recovery through 111.00. We see little prospect of a retest on the upper levels in the current climate, so it is not hard to see the rationale behind the near-term resistance ahead of 112.00.
USD/CAD has also been confined to some relatively narrow ranges in the last few days, with the rejection of the 1.3800+ resistance levels we highlighted, largely down to exhaustion more than anything else. Yes, there are plenty of reasons to stay cautious on Canada, with the overhang of NAFTA renegotiations along with heavy Oil prices – which have since recovered some – and the Home Capital Group fiasco, but as we have seen in selling on uncertainty, there is clearly a limit, and we have gone past fair value levels, especially with some healthy data reads.
Inflation is the exception to this, as today’s release confirmed. Core yoy CPI dipped back to 1.1% from 1.3% with the headline unchanged at 1.6%. This is something the BoC have consistently highlighted, in their seemingly perennial cautiousness, but this has been mirrored by the RBNZ and to a lesser degree the RBA. The Canadian central bank meeting is on Wednesday, so the volatility metrics are totting up (!), especially with OPEC scheduled to meet.
Oil traders are looking for the major producers to extend the existing output deal, with consistent OPEC rhetoric suggesting an agreement has been made in principle. Saudi Arabia and Russia have touted a 9 month extension to the current production levels, so this would be the minimum which would appease the market, with WTI already struggling to reclaim the USD50.00 handle. Nb, Monday is a Canada day holiday.
Onto Europe, and from a data perspective, there seems to be little which can deviate the market away from looking to a change in policy communication later in the year, perhaps next month? The rate of EUR gains seen against the USD may suggest this to a degree, but a large part of the move has been USD related. As such, barring any significant weakness in the PMI reports through the week and the German IFO survey on Tuesday, we can assume the single currency will remain near or at the top of the ‘destination flow’ list; the strong current account status adding appeal also.
This has been a major detractor for the Pound over the years, but somewhat selectively so; coincidentally when Brexit fears were at their peak. This does not seem to be an issue at the moment though, with the data holding up well in the face of the uncertainty of life outside of the EU. Fears over the negotiations have also subsided to a significant degree, but EUR/GBP is pushing higher to suggest the tide may be turning again. Key trading partners Germany have been a little more conciliatory than some of the other member states, but the UK are adamant that they will walk away with no deal if it proves unfavourable. This would have hit GBP hard either side of the new year, but with the larger fund managers now looking at the UK with a positive light on a longer-term basis – as we suggested when Cable was trading nearer to 1.2000 – the mood on the Pound has changed, more so against the greenback.
Key levels in the spot rate now lie at 1.3060-70 to upside, which has been initially rejected, but 1.3170 (ish) is next up should we push through this. EUR/GBP is struggling ahead of the 0.8600, briefly piercing this level over Wednesday and Thursday, but through here could see a run up to 0.8700, though pre-0.8800 is where the stronger selling interest lies. Thursday next week sees the preliminary GDP for Q1 (second reading), with business investment also one to watch. BoE head Carney testifies on inflation and the economic outlook to the TSC on Tuesday.
For the Antipodeans, there is only the Q1 construction work done to look to in Australia, but this is the first metric to be incorporated into the GDP stats. Other than this, all eyes are on metals and the iron ore markets – demand from China ever a concern – which saw a modest relief recovery on Friday. Copper is back above USD2.55 for now, having survived a test on the band of support seen from USD2.50 to USD2.45.
In NZ, the focus will be on the domestic Budget, but there will be relatively little towards business policies, and looks skewed towards social investment – teaching to get a large chunk. As such, there is unlikely to be much here to impact on the NZD, so broader risk sentiment and AUD/NZD trade will dictate.
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