Before the start of the trading week ahead, we have the second round of the French legislative elections, where Macron’s En Marche is fully expected to win a majority, with centrists the Modern party, in the National Assembly. As such, there has been, or will be little to detract from the EUR on the political front, but looking at the lead USD rate, we expect the next week will produce some sideways action as the greenback also recoups a little more ground post FOMC.
The overly dovish USD tone going into the Fed meeting saw some extended levels generated across the board, but notably so against the EUR which had already attempted a break above the 1.1280-1.1305 area a number of times. The strongest push was on the back of the soft inflation numbers and retail sales released just before the FOMC announcement, but the figure level held firm to precede the subsequent pullback. Into the 1.1110-60 zone we note fresh demand, eyeing an eventual signal that the ECB will start tapering their asset purchases.
This is on the premise that the gradual recovery in the Euro zone has fresh legs, and we get more on this from the French, German and EU wide PMIs on Friday next week. All the indices are well above the expansionary 50 mark, (only French manufacturing below 55.0), so any modest deviations will be discounted.
From the US side, the PMIs from Markit are also due out on Friday, but in light of what has led the latest USD recovery, perhaps Tuesday’s heavy schedule of Fed speakers including Evans, Rosengren, Fisher and Kaplan will impact in the meantime, with Mester speaking on Friday.
As a pure USD trade, USD/JPY levels inside 111.00-112.00 also suggest the market has tamed its dovish view on the rate path. The normalisation ‘process’ is seemingly back on track for this year at least, but beyond 2017, the market is clearly sceptical as the mid curve remains well off the highs seen a few months back. The key 10yr rate is only 6-7 bps off the 2017 lows seen midweek. Alongside this, BoJ policy is well anchored in QQE mode, but Japanese divestment flow is tepid at the present time with levels on Wall Street unnerving to say the least.
On the latter point alone, EUR/JPY and CAD/JPY may garner a little more attention over coming weeks, with the AUD and NZD not too far behind.
It is a big week for the UK, as Monday is when the Brexit talks are scheduled to begin. This is also the earliest the Conservatives and the DUP could strike a deal, but given Theresa May’s failed gamble to strengthen her mandate going into the negotiations, sentiment has warmed to the notion that this spells a greater likelihood of a ‘softer’ Brexit than PM May and minister Davis would have opted for. Nevertheless, irrespective of the approach taken by the UK contingent, there are plenty of twists and turns ahead, plenty of contentious sticking points - in the 2 years ahead, never mind next week – so it is no surprise to see GBP upside levels well contained, despite the hawkish leanings within the MPC revealed this week.
Cable remains a clear sell into (or before) the 1.2900-1.3100 zone, but given outright valuation levels (PPP), then we have to expect buyers coming in below 1.2400 if not a little higher. Technically, 0.9000 looks the obvious target for EUR/GBP, bolstered by the uncertainty factor, but given the drivers and prospective ranges for EUR/USD and cable ahead, we expect tight price action in the cross rate on the downside. 0.8625-50 and 0.8575-80 are levels worth noting, but looking out of reach on the immediate horizon.
For the antipodeans, both the RBA and RBNZ feature in next week’s proceedings, with the former delivering the minutes from the early June meeting, and offering little fresh insight as is usually the case. Governor Lowe is down to speak on Monday, and we may get some references to the employment report which has aided the AUD recovery along with the choppy recovery in metals as well as China concerns slipping into the background for now.
Gains expected in AUD/NZD more so than AUD/USD, as the wheels have come off the NZD recovery in a little. This may well prove temporary if the RBNZ backs up their unchanged rate call by a steady-to-positive outlook on the economy, looking past the Q1 GDP miss which still produced a 0.5% rise on the quarter (vs 0.7% consensus). Against this however, could be some potential comments on the exchange rate, but this looks to be more of a concern if or when we get to levels closer to 0.7500. The Fonterra dairy auctions are held this Tuesday coming.
Technically, we are still wary of the proximity to the weekly rising trend line below 1.0400 in the cross rate, with the move above 1.0500 this week showing limited traction. AUD/USD may well press for 0.7700 at some point, but the USD side of the equation will have more of a say now, as it will in NZD/USD, having fallen back off the 0.7320 highs in the aftermath of the Fed rate call and statement this week.
In Canada, CPI is the major data release of note, due out on Friday and largely expected to see little change as the exchange rate effects (CAD weakness) will be offset by the drop off in oil prices. The day before we get the April retail sales data, but in light of the change in BoC rhetoric, all releases will have to disappoint by some way to derail rate hike expectations now brought forward by the major domestic banks.
The fall in WTI and Brent will have less of an impact given the purported adjustment to prices in Canada, and given USD40.00 is a major support point in Light Texas, we expect to see any major push higher in USD/CAD to attract fresh selling interest ahead of the upper 1.3300’s initially, but pre-1.3600 will be very strong (resistance). Getting back there will take some doing if the price action of the past week or so is anything to go by.
The Norges bank meet on Thursday, and while growth rates have been hit and miss in recent quarters, and annualised rate has risen back to the mid 2.0%’s. The central bank mood has improved accordingly, but no major surprises expected here this time around.
Swedish growth rates are also translating into a rising annualised rate, a touch below that of Norway, but this is enough to be pushing the key NOK/SEK rate back in the direction of parity, though 1.0200-1.0100 is a major sticking point/area when looking at the weekly charts.
Finally, the Mexican rate decision is also due next week, with accelerating inflation levels showing no signs of slowing and leaving the prospect of another 25bp move as a wildcard call. In the past year, CPI has risen from just above 2.5% to over 6.0%, so the USD/MXN losses over late have been a welcome development. Key support seen around 17.2000 on the downside, so some way to go having broken under 18.0000 only this week.