Brief recap of last week’s European Central Bank (ECB) meeting: it was clear after ECB president Mario Draghi’s press conference that the central bank is set to move on policy in June. It is my assumption that the critical focus will not be so much the next batch of staff projections on inflation, but, as Draghi said in his opening statement on Thursday, the (further information and analysis on) “the availability of bank loans to the private sector”. As well, Draghi’s mention of EUR 160 billion in capital flows from Russia is a shocking number and could help to explain much of the Euro’s resilience over the last several weeks, even as it became clearer that the ECB is set to ease policy. Last week, Russian president Vladimir Putin showed signs of blinking in the confrontation over Ukraine and sent Russian stocks sharply higher – suggesting at least some of this flow has reversed, or at least that the pressure is easing. This could be a key element in helping the euro lower as well and may explain some of the force of the sell-off since Thursday.
Chinese president Xi Jinping signaled over the weekend that the Chinese government is not set to launch any major new stimulus and that China must adapt to a “new normal” of lower growth. This is a key policy signal that lowers the prospects for growth globally. The argument has been thrown around that the Chinese government at some point could panic in avoiding a deflationary and growth crunch from a collapsing credit bubble, but no signs of this are forthcoming…
The Eastern Ukraine referendums on secession proceeded over the weekend, but were widely condemned as illegitimate and poorly executed. Markets appear calm in Russia on this even as the signs of conflict on the ground are worrisome.
Note that New Zealand House Sale volumes were down 20 percent year-on-year in April. Lower activity is the first sign of a slowing market, preceding lower prices – stay tuned.
Looking ahead
The calendar this week is fairly quiet, but we’ve had a tremendous “setup” coming into the week after the reaction to the ECB meeting and as the US dollar is staging a comeback attempt, and not just in EURUSD. The comeback comes importantly just after the greenback set new lows for the cycle. Key questions this week are whether the cable reversal will deepen, whether the USDCAD has turned sustainably back higher, and whether the AUDUSD rally fades below the first support levels.
Chart: GBPUSD
GBPUSD reversed late last week to the first important support level around 1.6820. That level and down to perhaps 1.6750 is an important support zone that, if breached in the wake of Wednesday’s Bank of England inflation report, could mean that we’ve put in a cyclical high. On the flip-side, the pair needs to take out 1.7000 to prove the bullish case, (a soft euro, by the way, might have GBP bulls preferring to short EURGBP).
Such a setup coming into this week will likely mean a better environment than we have seen for some time for technical traders as the low in volatility is hopefully in the rear-view mirror.
The most important data points this week include:
Tuesday
- German May ZEW Survey – the April survey showed further decline in the expectations component, but the April IFO did not confirm that. The market may be highly reactive to data this week considering the size of recent moves in EURUSD.
- Sweden – CPI. This is a key release for determining the degree of likely dovishness from the Riksbank as inflation has turned negative at the core in Sweden and the Riksbank still has some policy room to work with in terms of potential easing.
- US April Retail Sales – the market is looking for some mean reversion back lower after a very strong March report.
Wednesday
- Bank of England Quarterly Inflation Report – critical for whether EURGBP can break through to new territory below 0.8150 and whether, on the more bearish side for GBP, GBPUSD reverses through support. Look for mention of the degree of “slack” in the UK economy and any changes to the rhetoric on the exchange rate.
Thursday
- Japan Q1 GDP and BoJ’s Kuroda out speaking. There is still a bit of wait and see in the Bank of Japan’s stance at the moment, as it may take a while to assess the state of the economy after the sales tax hike. The JPY has looked fairly resilient until proven otherwise.
- US April CPI – this data series has headed lower, but is far from levels that could move Fed rhetoric, though watch for large surprises either way.
- US Fed’s Yellen to speak – how can she get any more dovish?
Friday
- US April Building Permits and Housing Starts – the housing market is showing signs of fatigue in the US – the next couple of months tell us whether to notch the worry level higher on this front
Economic Data Highlights
- Japan Mar. Adjusted Current Account Balance out at -¥783B vs. -¥546B expected and -¥36B in Feb.
- Australia Apr. NAB Business Confidence out at 6 vs. 4 in March
- Australia Apr. NAB Business Conditions out at 0 vs. 1. In March
- New Zealand Apr. REINZ House Price Index rose +0.1% MoM
- Japan Apr. Eco Watchers Survey Current Situation out at 41.6 vs. 45.0 expected and 57.9 in March
- Japan Apr. Eco Watchers Survey Outlook out at 50.3 vs. 40.0 expected and 34.7 in Mar.
- US Fed’s Plosser to Speak (1600)
- UK Apr. BRC Sales Like-for-like (2301)
- Australia RBA’s Ellis to Speak (2315)
- Australia Q1 House Price Index (0130)
- China Apr. Retail Sales (0530)
- China Apr. Industrial Production (0530)