Risk sentiment was broadly stable for most of the week, mainly due to Fed Chair Yellen dampening investors’ central bank rate expectations. With markets now pricing in considerably less than what the Fed projects, considerably weaker incoming data may be required in order to push investors’ Fed monetary policy expectations lower from here. As we do not anticipate such a development, it will largely depend on improving global growth prospects to drive sentiment further.
While this week’s business activity data out of China surprised on the upside, it may also lower expectations for more aggressive stimulus measures being imminent. At the same time, stabilizing conditions in China may be taken as an indication of Fed rate expectations bottoming out. It must be remembered that Yellen stressed muted external conditions as one reason to pursue a more cautious approach.
More unstable risk sentiment may increase downside risks to commodity currencies such as the AUD. While the RBA is unlikely to lower rates as soon as next week, central bank Governor Stevens may sound more cautious on the currency. Elsewhere, speculative long positioning is close to elevated territory. We went short AUD/USD via options.
In the Eurozone, ECB members have repeatedly indicated that lowering the deposit rate as a tool is largely exhausted. Considering that a lower deposit rate was key in denting the capital flow situation to the detriment of the single currency, such prospects may continue to lower selling interest in the currency.
What we’re watching:
USD – Next week’s FOMC minutes are unlikely to be perceived as more dovish than the March meeting press conference.
AUD – We do not expect the RBA to lower rates next week. However, it cannot be excluded that a more aggressive rhetoric with respect to the currency will be considered. Chinese data releases will be closely watched too.