The USD continues to trade on its back foot as the expectations for tomorrow’s Federal Open Market Committee are that the Fed will be happy with the market’s assessment of the forward trajectory of Fed rates – ie that we will see only approximately 50 basis points of rate hikes over the coming 12 months.
It’s hard to see a dovish undershoot to this view, but it’s also hard to see anything dramatically hawkish after the recent string of weak data (and particularly if we see an ugly GDP print tomorrow), in which case, a passive statement will mean it is up to the market positioning and conviction on the USD trend. I suspect the USD eventually reverts back to the strong side, with a large dose of uncertainty on whether that process starts tomorrow or not for another week or more ahead.
The Reserve Bank of Australia governor Glenn Stevens was out speaking overnight and judging from the action in AUD pairs overnight, one might think that he said something of interest – but this speech was focused on risks to the Australian financial system and was delivered at a “Banking and Wealth Summit” and contained no policy hints of note.
AUDNZD moving above 1.0300 looks interesting, though nothing looks definitive until we’ve see the other side of the Reserve Bank of New Zealand meeting on Thursday.
Some of the EUR resilience in EURUSD and yesterday’s EURCHF surge may be on the latest news out of Greece, as Prime Minister Tsipras both threatened a popular referendum if Greece didn’t get concessions from its creditors on key issues, but also said that he expected a deal to be in place by May 9.
Japan’s Economy Minister Amari said that the government is planning “bold fiscal discipline to maintain market trust” according to a Reuters headline a day after Fitch cut Japan’s sovereign credit rating. What could the plan possibly be? Japan’s fiscal situation remains a mess and the next hike of the sales tax has been delayed until late next year. Any austerity would immediately wreck an already fragile Japanese economy.
Chart: AUDUSD
It is difficult to take much away from AUDUSD trading marginally above the recent high, as we still have some range to work with up toward 0.7940 and we have the FOMC (also – the 100-day moving average, which comes into fashion when the 200-day moving average is too far away, comes in near the overnight highs of 0.7880+).
Chart: AUDNZD
The action in AUDNZD is heating up ahead of tomorrow night’s (or Thursday for those in Asian time zones) RBNZ meeting, as the bears gunning for parity have been squeezed out of their positions as the market begins to smell the potential for more dovish guidance from the RBNZ.
The move above the important 1.0300 area here is technically interesting, though for full confirmation, we’ll need to see dovish rhetoric from the RBNZ. A move to 1.0500+ suggests the end of the local bear market since late 2014.
The G-10 rundown
USD: On the defensive ahead of the FOMC. There is plenty of room for a reaction in either direction depending on how the Fed adjusts its language.
EUR: A probe to new highs yesterday was beaten back and we won’t know the next leg until the other side of the FOMC meeting, where it’s all about the 1.1000/25 resistance or whether the bears will be off to the races again.
JPY: Interested in getting long JPY in some of the crosses like EURJPY, but it appears these trades depend on the USD putting up a fight as well as the JPY continues to shadow the USD’s moves with lower beta. The very weak retail trade data, by the way, is due to the implementation of the higher sales tax last April.
GBP: A strong UK Q1 GDP data point expected today and GBPUSD is strongly bid as election jitters have been brushed aside and on the contrast with expectations for a weak US GDP print tomorrow and a say-nothing FOMC statement later tomorrow. There is room for further upside from an interest rate spread perspective, particularly if the Fed is particularly cautious tomorrow, though I’m increasingly sceptical with every tick higher.
CHF: EURCHF reacting with a small follow-on rally on the tightening of EU spreads and Greek yields settling lower yesterday. Plenty more potential higher if we move toward a new Greek deal in the days/weeks to come. 1.0425 is the first hurdle to the upside. USDCHF support at 0.9500 still hanging in there, by the way.
AUD: Remains resilient and squeezing higher ahead of the FOMC meeting announcement tomorrow and amid a rally in iron ore. Looking at AUDNZD for upside interest, but also whether AUDUSD can break the upside range above 0.7900. The post FOMC action will be critical.
NZD: RBNZ late Wednesday/early Thursday, depending on your time zone, is the key, with more potential downside ahead if we get a dovish shift in forward guidance.
SEK: Riksbank meeting tomorrow and large gap risk either way. They would like to avoid any reaction that sees a stronger SEK as was seen after the February meeting – but that may mean they need to.
NOK: EURNOK looking lower, but likely to need strong oil prices if we’re to see a test of the range lows.
Economic Data Highlights
- Japan Mar. Retail Sales out at -1.9% MoM vs. +0.6% expected
- Japan Mar. Retail Trade out at -9.7% YoY vs. -7.5% expected
- Japan Apr. Small Business Confidence out at 47.4 vs. 49.0 expected and vs. 49.8 in Mar.
Upcoming Economic Calendar Highlights (all times GMT)
- UK Q1 GDP Estimate (0830)
- Canada Bank of Canada’s Poloz to speak (1245)
- US Feb. S&P/CaseShiller Home Price Index (1300)
- US Apr. Consumer Confidence (1400)
- US Apr. Richmond Fed Manufacturing Index (1400)
- Euro Zone ECB’s Weidmann to Speak (1730)
- New Zealand Mar. Trade Balance (2245)
- New Zealand Apr. ANZ Activity Outlook and ANZ Business Confidence surveys (0100)