Daily FX Wrap: More USD weakness led by the EUR rate, but JPY and the commodity currencies now gaining some ground. GBP on the back foot again as (hard) Brexit fears re-emerge.
We saw the USD index taking another significant leg lower, and today’s price action was largely a factor of rate differentials with Europe, which are narrowing as the market looks ahead to an eventual change on the ECB’s policy stance. This is now a familiar feature of the market – that of overpricing on rates and FX alike – but there have been enough inferences, alongside the data releases – which suggest a longer term base has been set.
EUR/USD is now looking to the first point of resistance at 1.1120-30 higher up, and if we do not test this in the North American session ahead, tomorrow’s EU wide inflation data may prove instrumental. If April matches the yoy rate at 1.9% from March, then we would expect this to maintain the uptrend now firmly in play, though we are looking a touch overextended as alluded to above.
US Treasuries have been pretty steady throughout Tuesday’s session however, and this has been reflected in a steady USD/JPY rate, which is buffered by demand ahead of 113.00 and pre 114.00 offers. Nothing on the US data schedule to look to tomorrow, but in the overnight session, Japanese industrial production and machinery orders provide some colour on the other side of the ‘equation’.
Another major data release in the UK however, in the form of the UK jobs report, which will add some further light on how to view Tuesday’s higher than expected inflation print. Wage growth looks to be a global concern for central banks, and more so in Britain as the EU exit adds further uncertainty. We saw Brexit jitters resurfacing after the European Court of Justice rule that all 28 member states will have to ratify the Singapore trade pact, and this now sets precedent for the UK negotiations ahead. Confident calls that a deal can be achieved inside a 2 year time frame will have been dampened.
EUR/GBP is where the market has primarily reflected renewed jitters, sending the cross rate back to 0.8600, and we suspect it will not be long before cable follows lower to test the 1.2830 level after the data spike up met very strong selling interest from 1.2950.
Focus also on the CAD, and NOK and MXN, as oil prices are looking buoyant again. It is clear that OPEC and the other major producers (notably Russian) are keen to arrest any sustained weakness, and with an extension to the output deal now looking imminent, the market is watching WTI ahead of USD50.00 with interest. That we have not tested this level is perhaps a little worrying, but the downside is well cushioned ahead of the API report tonight and the DoE’s tomorrow.
USD/CAD is still unable to break under 1.3600 however, despite numerous attempts to break below here. There looks to be pre-set intent on testing 1.3800-50 higher up, with other factors hanging over Canada. The NAFTA renegotiations will persistent weight until this is address, while the housing market is also under scrutiny along with the mortgage fiasco hitting the Home Capital Group. The banking sector along the BoC seem confident this is an isolated incident which can be ‘absorbed’, but contagion fears won’t go away. Stops seen through 1.3575-80 if we get there.
Housing is also a concern for the RBA, and to a lesser degree the RBNZ, but this is not enough to change policy stance in either case, despite a cautious outlook on the global economy. Both AUD and NZD are dancing to the tune of their major counterparts, and showings of modest upside potential vs the USD and JPY.
Late in the day we saw the Fonterra auction showing the dairy trade index gaining 3.2% while whole milk powder was up 1.3% vs a 2.0% fall expected. A limited reaction to the release, as traders put this in context with some of the double digit variation seen last year. NZD/USD is back around 0.6900, while the AUD/USD is acclimatising to 0.7400+ - for now.