Market Brief
Risk appetite returned in the Asian session as the hype over a potential June Fed rate hike calmed down. However, on the back of more hawkish FOMC meeting minutes, Fed members continued to provide a pro-hike message. New York Fed President William Dudley said yesterday: “the US economy could be strong enough to warrant an interest rate increase in June or July.” Richmond Fed President Jeffrey Lacker supported the healthy US story and stated that the argument for a rate hike was “strong”. However, Philadelphia Fed manufacturing survey and initial jobless claims were weaker than expected highlighting the choppy incoming economic data. The VIX index retraced from yesterday's high of 17.65 back to 16.33, while DX fell from 95.50 high to 95.28. Asian regional equity indices were higher across the board with the Hang Seng leading the way up 1.13%.
Crude oil firmed, around the $48.65 level, on concerns over Canadian wildfires and supply disturbances in Nigeria, providing commodity linked currencies with some breathing room from recent selling pressure. Yet, weakness in gold and copper prices suggested recovery will be short-lived. US front-end yields retreated from the recent highs as the 2-year yields declined 3bps to 0.88%. USD was weaker against G10 and EM currencies but volumes have been thin. With a near-empty Friday calendar directional breakout trading is unlikely. Despite the pullback in US yields, the JPY faced renewed selling as Kuroda provided the usual threats and raised expectations for policy divergence. USD/JPY ground higher from 109.85 to 110.26, traders are targeting the 55d MA resistance at 110.21.
Traders are hesitant return to EM currencies as politically negative stories and uncertainty surrounding the Fed policy path keep risk taking sidelined. This weekend’s G7 Finance Ministers and Central Bank Governors' Meeting in Sendai, Japan will focus on currency policy and Brexit. However, like countless such meetings before this we do not expect any solid initiatives to be taken. While the pre-meeting hype has been focused on potential Japan FX intervention and negative policy it is unlikely any decision will result in Japan not having the flexibility to defend its interest rate target. Elsewhere, the EgyptAir jet carrying 66 passengers and crew from Paris to Cairo is speculated to have been caused by a terrorist attack. Finally, this weekend Austria is expected to elect a Euro-sceptic president highlighting the relevance of other Anti-EU fires burning outside of the UK.
Canada will shift into the spotlight today as the G10 calendar is light. Traders will see retail sales, and inflation read. Overall, we expect weakness on both fronts. Perhaps the only saving grace for the CAD is the uptick in oil prices. A weak export environment, wildfire forced supply disruptions, Canadian style political scandals and a general sagging confidence over rebalancing efforts have put a dampener on the outlook. We remain bearish on CAD, focused on USD/CAD to extend bullish rally to 1.3160. In the US, markets will end the week with April existing homes sales which is anticipate that pace of acceleration will as marginal to 3.1% from 5.1%.
Currency Tech
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