The Federal Open Market Committee meeting minutes last night failed to provide much to go on, at least if we’re to use the Fed Funds futures as our measure, as these were virtually unchanged in the wake of the release.
The overall language was actually relatively more hawkish than the market’s current pricing of the Fed’s policy trajectory, but it looks like we’ll need to see another cycle or two of data for the market to believe that the Fed will achieve lift-off, and possibly more importantly, hike more than twice over the next 12 months.
Aren’t the two scenarios really a) the economy shows more improvement and the Fed hikes 150 basis points over the 12 months after the first hike or b) the economy continues to stumble and the Fed does nothing? In other words, there is something unsustainable about the idea that we can hold our breath for another few months on whether and when. If I’m wrong and the market has appropriately priced the forward Fed policy (it hardly ever does), it might be because the economy has improved enough for the Fed to hike, but it is reluctant to go faster despite a clear need to do so because the USD is rallying too steeply, for example.
The Bank of Japan meets tonight and there is noise that it is becoming disenchanted with quantitative easing, based on its relaxing the rhetoric on hitting the 2% inflation target and signals that no new stimulus is in the works. In addition, the BoJ may consider upgrading its assessment of the Japanese economy as some of the recent numbers have beaten expectations. This would be in interesting development, considering that USDJPY is trading up against the key 121.50/122.00 zone and will either break free or dive deep back into the range. For JPY upside potential if the market takes this as a particularly hawkish meeting, pairs like AUDJPY and EURJPY may be more interesting.
Chart: EURUSD
Technical focus in EURUSD at the moment on the tactical resistance around 1.1150 and the more significant support at 1.1065. Any break to the upside and the market may look toward the Fibonacci retracement levels, starting with the 38.2% retracement around 1.1215, but more important resistance up around 1.1300, from where this move unfolded.
The G-10 rundown
USD: Looking strong until proven otherwise, with a few key levels that still need to be crossed for real breakout significance – these include the 1.1000/65 zone in EURUSD, GBPUSD of 1.5450/1.5000, USDJPY above 122.00, etc. Do we have to wait for the next batch of data before seeing the USD bull in full swing?
EUR: Still weak on the recent comments from ECB board member Benoit Coeure – not sure how today’s PMI surveys will be greeted by the market when the bank's policy is so well established, but weakness is perhaps more interesting than strength. Also watch for the ECB’s “Account” of its meeting. Meanwhile, the timeline for interesting news from Greece is getting a bit more explicit as the Greek government itself has said that a June 5 payment to IMF cannot be made without fresh funds.
JPY: BoJ meeting tonight a bit more interesting than usual as discussed above. Watching 120.50 in USDJPY on the downside and 121.50 on the upside over the BoJ meeting.
GBP: Retail sales up later – a particularly weak number could be interesting for GBPUSD as the 1.5450/1.5500 zone looks so pivotal, but let’s see. In EURGBP, the focus is on the range lows near 0.7115 on any upside surprises.
CHF: Reaction to Greece in coming weeks seems to be the key for EURCHF. For USDCHF, it’s the technical interest in the 0.9350-0.9500 zone and whether this will be crossed in the days ahead.
AUD: On its back foot, but big picture still embedded in the middle of the range if we look at AUDUSD.
CAD: USDCAD getting bogged down as 1.2200 break failed on first try – still preferring an upside resolution to the recent range until proven otherwise, or if we see a weak batch of US data for May.
NZD: Back against the wall in AUDNZD and NZDUSD – but does the USD have enough fuel in the tank to take NZDUSD below the lows for the cycle? Looking lower there as long as NZ rates remain here below 3.5% for the 2-year NZ swap.
SEK: Trying to get more ambitious as EURSEK pressures lower – but we may need more inputs from Sweden to get out of this range.
NOK: More downside risks than upside risks from a Norwegian rates perspective, with oil as a wild card.
Economic Data Highlights
- Japan May preliminary Markit/JMM Manufacturing PMI out at 50.9 vs. 50.3 expected and 49.9 in Apr.
- China May preliminary HSBC Manufacturing PMI out at 49.1 vs. 49.3 expected and vs. 48.9 in Apr.
Upcoming Economic Calendar Highlights (all times GMT)
- Euro Zone May Preliminary Manufacturing and Services PMI (0800)
- UK Apr. Retail Sales (0830)
- Euro Zone ECB releases account of April 15 meeting (1130)
- US Weekly Initial Jobless Claims (1230)
- UK BoE’s Weale to speak (1315)
- US May preliminary Markit Manufacturing PMI (1345)
- US May Philadelphia Fed Survey (1400)
- US Apr. Existing Home Sales (1400)
- Euro Zone ECB President Draghi to Speak (1730)
- New Zealand May ANZ Consumer Confidence (0100)
- Japan Bank of Japan Policy Statement and Governor Kuroda press conference (0300)