Submitted by Rajan Dhall FXDaily.co.uk and Shant Movsesian of RANSquawk
FX Week Ahead: Focus returns to the US economy as politics have run riot once again. Theresa May clearly made a big mistake in calling the snap election, and the Pound has suffered accordingly, though gains had perhaps run their course. NZD still looks good, while CAD weathers Oil price drop as domestic data supports.
It is a key week for central banks next week, headlined by the FOMC meeting on Wednesday, which is widely expected to result in a 25bp rate hike as the Fed maintain course for ‘normalisation’. In recent weeks, the run of data has been less than encouraging on the face of it, with wage growth sluggish given the average pace in job gains seen in the last year or so. We had some tenuous signs that this may change over the course of the following few months with this week’s JOLTS rising significantly - above the 6 million mark – and there is a case to be made that employers could be struggling to find requisite skilled workers.
The above alone will do little to revive the more aggressive rate path we had been looking to beyond June, and ahead of the Fed meeting on Wednesday, we have the latest CPI and retail sales figures for May, which will be something to consider alongside the rhetoric from the accompanying press conference. Industrial and manufacturing production stats on Thursday also due. Little down on the political schedule which could impact on risk sentiment per say. The JPY and CHF having retreated some way – partly down to the ‘tame’ Comey testimony - but the market should be on watch for any fresh ramifications after the ex-FBI director (and indeed some of the questioning Senators) ‘highlighted’ his impromptu dismissal by president Trump.
Having survived 109.00, Friday trade saw USD/JPY pushing through the half way mark in the 110.00’s, but north of 111.00, we expect sellers to overwhelm once again. This may prove to be a temporary affair, but with Wall Street still near record highs, the correlation with stocks may prompt buyers a little more actively into dips.
There are more comfortable carry trades out there, with NZD/JPY seemingly top of the pile. In NZ next week, we have the Q1 GDP release on Wednesday which is seen rising from 0.4% to 0.7%, but the yoy rate is expected to remain at 2.7%. Amid the backdrop of the budget surpluses announced last month, the current account numbers may be of little interest the day before.
Across the waters, the Australian week kicks off with a holiday on Monday, in observance of the Queen’s holiday. Even so, the RBA’s assistant governor Debelle is down to speak that day, but data-wise Thursday’s employment report is the main event. With this relatively modest line-up of events, we expect a period of consolidation for AUD, with downside exhaustion largely behind the recovery. This ran out of steam well ahead of the 0.7600 mark, and this in spite of a strong pullback in copper price at the end of the week. AUD/NZD is also at a key crossroads as fundamental differentials fight against the technical support from the weekly trend line seen below 1.0400. A break under 1.0300 will see the market focusing on parity again!
Out of China, it is also worth noting industrial production for May, due out alongside retail sales which should remain strong given import data seen this week. Fixed Asset Investment data also out.
In Japan, we cannot get excited above BoJ policy meetings these days, as the persistent flow of communication points to ongoing stimulus measures remaining in place amid subdued inflation. We also saw GDP slowing as Q1 recorded a 0.3% rise vs 0.6% in Q4 2016, but CapEx rose more than expected. Even so, economic traction looks some way off, and we are certainly nowhere near policy change any time soon.
In Europe, EU wide CPI at the end of the week (final reading) is standout, but after this week’s ECB meeting, where inflation forecasts have been downgraded, any weakness here will have been weathered to some degree, with the lead EUR/USD rate still garnering bids on modest dips lower. This is in anticipation of an eventual reining in of the extraordinary measures in place, deemed appropriate at the present time, but which was previously forecast (to change) in late Q3 before some of the more eager proponents suggested we may have seen a stronger signal yesterday (Thursday). This should also underpin EUR/GBP, if not the general election result which proved to be a horrendous decision by Theresa May. Far from providing stability into the Brexit negotiations, which are (were?) scheduled to start on 19 June, the Tories are now in a position where they needed to form an alliance, with the DUP lining up as the number one contender despite their insistence on a more policy focused collaboration.
For the Pound, we see little light on the horizon near term, though going into the election we saw limited upside in Cable given the already-tense relationship with Europe after some of the recent exchanges, notably from Brexit minister David Davis (for now?) as well as the PM herself. The spot rate had already run into a wall of selling interest north of 1.3000 in the weeks running up to the Jun 8 vote, and despite the resilient tone overall, we could see a sea-change which could eventually return the pair back to circa 1.2400-1.2500 initially. It will take a major breakthrough in the (eventual) talks ahead to see us get back to levels near 1.3000 again.
EUR/GBP levels of note on the upside lie ahead of 0.9000, with the large chunk of the resistance zone from 0.8800-60 worked through in the aftermath of the election result. Pre 0.8650 looks strong on the downside, though any break below here will run into even stronger demand in the mid 0.8500’s.
Inflation, employment and retail sales stats all due for release out next week in the UK, and all are due out ahead of the BoE meeting, with the central bank stance set to edge back towards a more neutral stance (lower for longer?) due to fresh political uncertainty. This week will have been another headache that governor Carney and co could do well without, but if the Pound can avoid any renewed bouts of sharp devaluation, the current policy stance will suffice. Finally in Canada, Friday’s strong job report was further evidence that a moderate, slow-paced recovery could be developing. There are a number of external factors weighing on the domestic economy and the CAD, but losses in Oil price should be, and perhaps have been tempered by the recent BoC statement which suggests the adjustment to current levels is largely complete. With WTI falling back into the middle of the USD40-50 range, we have seen upturns in USD/CAD to be a little more reluctant. This was certainly the case towards 1.3600, so we are not averse to seeing a push lower towards 1.3100-1.3200, but demand either side of 1.3400 has been restrictive. The NAFTA reset has also been a dark cloud hanging over Canada, but we believe this will have greater ramifications for Mexico, as the benefits of the accord have been largely beneficial to the US and Canada in equal measure.
No data of note next week in Canada, so traders will focus more on Oil price, but with a justifiable bias towards a more positive CAD tone. CAD/JPY has tested the support levels just under 81.00 again, and as we saw in mid-Apr and mid-May, has found good support here to join NZD/JPY in showing healthy promise in the weeks ahead.