US – Japan rift dominates G7
There was a subdued open to global markets, with risk appetite mixed and trading volumes thin.
As we expected, the Sendai G7 meeting of finance ministers and central bank governors provided nothing of substance. Members were able to sketch out a negotiated agreement on the coordination of macro-policy. However, there is a growing sense that coordination is breaking down between member nations.
This comes on the back of a rising sentiment among members that independently managing their own domestic policy is the cleanest solution. The division is highlighted by the friction between the US and Japan and the fiscal approach rejected by Germany and the UK. Again, this is a case of action versus words.
We anticipate that this week's Ise-Shima G7 summit on May 26-27 will stick to the company line, although executions may be deficient.
Outside of policy issues, the G7 members were united against a “Brexit.” UK polls are showing a clear deviation away from Brexit as undecided voters migrate to the “remain” camp, with bookmakers predicting a 20% (from 24% last week) probability of UK leaving the EU.
Asian regional equity markets were mostly higher, with marginal weakness stemming from the Nikkei and antipodeans. USD was weaker against G10 and Asia EM FX as hype of a June Fed rate hike cooled over the weekend. IMM data indicated that short USD bets have been pared down.
Interestingly, it was commodity-linked currencies that lead the way. NZD/USD continued to grind higher after a bounce off 0.6711 weekly lows, rallying to 0.6804 below a strong resistance at 0.6850.
Commodities firmed, following news that China had increased iron ore stockpiles, with crude oil hovering around the 6-month high at $47.60, driven by supply disruptions. Precious metals remain at the whim of Fed policy path, as gold eased to $1250.
With an extended calendar of risk events this week, commodities and EM are vulnerable as trader shift back into a risk aversion stance.
In a clear shot at US policymarkers, BoJ governor Kuroda indicated that Japan's monetary policy still had "enough ammunition" and would use whatever tools necessary. He insisted that the BoJ would still hit its 2% inflation target.
Kuroda stated that a stronger JPY would pressure Japan’s tepid recovery and that the BoJ would “not hesitate” to ease or intervene. This defiant commentary at the G7 talks comes on the back of a fresh warning from the US against competitive currency devaluation.
In the European session traders will be watching PMI data from France, Germany, and headline Eurozone. In the US session, following last week’s Fed signal that June remains a live meeting, Fed speakers and US data will become the main point of focus.
Today St. Louis Fed President Bullard, FOMC voter and known hawk, is scheduled to speak. We anticipate Bullard will continue his hawkish tone by advocating an early rate hike.
Currency Technicals
EUR/USD
R 2: 1.1714
R 1: 1.1465
CURRENT: 1.1396
S 1: 1.1217
S 2: 1.1144
GBP/USD
R 2: 1.4959
R 1: 1.4668
CURRENT: 1.4643
S 1: 1.4300
S 2: 1.4132
USD/JPY
R 2: 112.68
R 1: 111.91
CURRENT: 106.94
S 1: 105.23
S 2: 100.78
USD/CHF
R 2: 1.0093
R 1: 0.9913
CURRENT: 0.9621
S 1: 0.9476
S 2: 0.9259