FX Week Ahead, courtesy of Rajan Dhall from fxdaily.co.uk
Despite the NY market holiday over Independence day in the US, we have a number of notable data releases leading up to the main event next week in the May employment report (Friday).
In a half day session on Monday we get the ISM manufacturing index and alongside the new orders component, the employment index should carry some weight due to the strong correlation with headline jobs growth of late. The non mannufacturing ISM is not until Thursday, ahead of which is the ADP private jobs survey which somewhat wrong-footed the market last month. The lead non farm payrolls number at the end of the week is expected to show a 180k rise after the disappointing 138k print for April, but the Fed are also keen to see a pick up in wage growth again with average hour earnings expected to improve slightly at rate of +0.3%.
In the mix, Wednesday's FOMC minutes are unlikely to alter sentiment on the USD, as scepticism over the Fed rate path espoused by Fed chair Yellen and colleagues such as the NY Fed's Dudley have been at odds with the economic feedback. Recent weakness has been seen to be transitory and there have been certain elements in the latest stats for enouragement. The Q1 GDP figure was revised a little higher to 1.4% last week despite core PCE still slipping, but personal income growth for May also exceeded expectations.
Until we get improvement in the hard data, the USD will remain on the back foot, but going against the drop in the ($) index has been a resilient USD/JPY rate. That said, we hit a wall of resistance at 113.00 las week, but 113.40-50 is the area we are watching here. Calls for levels north of 115.00 have been pretty quiet of late, and this in spite of moderate acceleration in Japanese divestment flow. Europe has been a key beneficiary with notable economic momentum building up and a relative underperformance in the EU bourses offering value against Wall Street. EUR/JPY is destined for 130.00 or higher as a result, while elsewhere we see GBP/JPY with an eye on 150.00 and CAD/JPY having outpaced its commodity counterparts. From the Japanese perspective, the BoJ continues to plug away with their stimulus program as domestic inflation remains frustratingly sluggish, as are improvements in broader activity and growth. The Tankan survey has lost its influence under the present circumstances, but we get the latest activity reports on Sunday night.
The Canada day holiday on Monday may tame some of the CAD gains, which have now taken out 1.3000 vs the greenback, and below here we watch the 1.2950-20 zone which will has been pressured by the ongoing reversal in the record short positioning seen recently. It took a change in BoC rhetoric to prompt the more aggressive moves to the downside here, responding to the healthy growth and employment data in the last 6 months, but we would not be surprised to see a near term correction as the RSIs (4hr and daily) delve into oversold territory. Manufacturing PMI's due out when Canada returns on Tuesday, and trade on Thursday but Canadian jobs Friday are the main event.
Onto Europe, and the concern over the strong EUR gains are clearly starting to unnerve the ECB, ever wary of sparking a full-on taper tantrum. In the latest EUR/USD run higher, we have seen the 1.1300 level removed, and it was not long before we were testing the next area of note up at 1.1440-50. We are likely to see continued tests higher, especially as USD bears need little encouragement, but we are also seeing traders taking up any slack in the other notable EUR pairs, with the CHF rate now into the mid 1.0900's where 1.1000 higher up has been particularly strong.
It is unlikely that the pan European PMI data will materially impact on the aggressive positioning for an eventual QE taper later this year, but if EUR/USD rushes up to 1.1500-1.1600 in the week (or two) ahead, we expect to see a more sizeable pullback. Many anticipated a deeper pullback through 1.1100 a little over a week ago. The ECB minutes will likely serve as a reminder of the turn in sentiment, with presdident Draghi's comments this week on 'reflationary pressures' still ringing in the ears.
EUR/GBP also shows signs that it is 'waiting in the wings' for the next push up. UK rate hike jitters were set off on Haldane's shift in sentiment and were compounded by gov Carney later in the week sending Cable on another jaunt through 1.3000. As a result, we may have to weather some further downside in to the low 0.8700's, if not 0.8650 or so. If GBP is indeed gaining on the hawkish developments at the MPC, then we expect the initial target in Cable will be 1.3200-1.3300, with the higher end representing levels seen just ahead of the pre-emptive rate cut last August post Brexit.
There is also an element of a more conciliatary mood over the EU talks ahead with PM May's weakened hand (of her own making) suggesting to some that she may have little option other than to adopt a softer line. We maintain that in the lengthy period of talks ahead, there is far too much uncertainty to base a bullish call on GBP at this stage, but our perceived 1.2400-1.3000 range may have to be widened - in both directions!All three PMI releases in the UK are released in the first half of the week, but there is little need to emphasise the services component due out on Wednesday. Trade stats and industrial production also on the schedule later on.
Back to Asia, and also at the very start of the week, we get the release of Caixin manufacturing PMIs, and this comes after last week's official figures showing modest improvement (from 51.2 to 51.7). This fuelled a little more of the recovery in Iron ore prices after some heavy losses of late, while the broader risk tone also benefited.
As we mentioned above, cross/JPY is on an upward trajectory but in some cases we are moving into overbought territory. Carried along with the buoyant outlook on the NZ economy, NZD/JPY is now moving ever closer to the highs seen at the start of the year. We ended last week near the weekly top a little shy of 82.50, coinciding with ongoing congestion in the key 0.7330-50 area in NZD/USD. There is little next week to derail positive sentiment on NZ other than the Fonterra dairy auctions on Tuesday, but prices will have to deviate significantly from futures pricing to impact on NZD. Fluctuations have been much tighter this year.
AUD/NZD has also reflected the mood in NZ, such that we have tested key support levels below 1.0400. The weekly series of higher lows now show 1.0350-70 as major area, but as noted, metals prices have recovered well and this has revived the AUD upturn. AUD/USD breached 0.7700 last week in line with Copper tipping USD2.70, but we look to the RBA meeting ahead, where we expect another balanced outlook to preserve their neutral stance near term. The prospects for AUD remain to the upside, as recent central bank rhetoric has been relatively upbeat, and this can only have been enhanced by the commodities backdrop. 0.7750-0.7850 is a major target area, but just as we expect with NZD near 0.7500, higher levels may push both the RBA and RBNZ to try and rein in some of this strength with some well chosen words. Nb, RBNZ were pretty relaxed in their recent views on the currency, and we expect it will be a similar line from the RBA. Through the week, we also have the AIG PMIs - manufacturing on Monday - with trade data later in the week.
Manufacturing PMIs in Sweden and Norway are also due out next with both indices firmly above thre expansionary 50.0 - Sweden now close to 60.0. Focus will be on the Riksbank, where the market feels the central bank is delaying a move on its ultra loose policy stance. However, the ECB are set to rein in purchases and neutralise rates, pre-emptive SEK buying shows the market is positioning for a potential change in tack. In contrast, the Norges bank have highlighted the improvement in the economy, notably higher capacity utilisation, but maintain rates are not likely to move (up) until 2019. The NOK/SEK cross rate has been hit down towards parity as a result, though has held up on initial attempts.