FX Weekly Outlook
Rigid FX markets; USD losses modest after soft inflation and retail sales miss – data schedule light next week. Plenty of UK data, as inflation, jobs and consumer reports all due – GBP reluctant to give up ground.
In the US next week we are limited to some second-tier data to a larger degree, with the stand out release coming due on Tuesday in the form of industrial and manufacturing production. This will be accompanied by some housing data, and preceded by the NY manufacturing index. The Philly Fed is due on Thursday, while Friday is empty. Friday’s inflation numbers came a touch weaker than expected, while retail sales also missed, but in light of widespread expectations of a Jun Fed hike, negative USD reactions are limited in the meantime.
USD/JPY topped out ahead of 114.50 this week, but dip buyers have rate differentials onside, so the move into the lower 113.00’s was extremely labored, with support seen around 113.00 – if we get there! Industrial production numbers also out in Japan, but focus here will be on Thursday’s growth data, as Q1 GDP is expected to rise slightly to 0.4%, but capital expenditure seen falling by 0.4%.
A host of growth and inflation data reads out of the Euro zone to look to, and with anecdotal evidence suggesting the longer term view on the EUR has turned, we have the prospect of a return on 1.1000. That said, EU composite numbers are the second readings, and barring any revisions to the downside, the EUR/USD base from 1.0850-1.0750 will be tough to break in light of the US data today. German ZEW also due out on Tuesday, while Italian trade is also worth watching after some healthy PMI results recently. Late Tuesday, a report in the German press suggested the ECB are ready to signal a shift in policy mid-year, but Germany’s stance is well established.
In the UK, amid the Brexit to-and-fro with the EU, inflation is back on the agenda after this week’s longer term BoE forecasts were revised lower. CPI seen at 0.4% for Apr, unchanged from Mar, but this seen pushing the yearly rate from 2.3% to 2.6% as price increases hit. However, there is good inflation and bad, and this will be reflected in the jobs data on Wednesday which is swiftly followed up by retail sales on Thursday. The UK consumer is the lifeline of the economy given the potential drag from a possible (London) exclusion from the single market. Some of the retail ‘monitors’ (BRC and CBI) have recorded some healthy readings however, and after a soft Mar reading, it is unsurprising to see consensus looking for notable comeback in Apr.
Not that we are getting any meaningful pullback in GBP, as pundits call for a return to fair value levels and traders are all too quick to jump in on dips. Support in the 1.2830-50 area has been fighting the near term selling pressure in the wake of this week’s BoE disappointment, but given the strong resistance seen ahead of 1.3000, it is only a matter of time before the late comers to the party throw in the towel. Gone are the days of achieving medium term targets in a matter of weeks, so a more meaningful pullback in GBP looks to be on the cards.
Factors away from commodities for AUD traders to look to as we have the RBA minutes on Monday. The main takeaway from the May meeting is that the board is at a stalemate on rates, with confidence in growth and inflation tempered by domestic household debt to signal an on hold policy for now. Thursday’s employment report could show some moderation in jobs growth after the 60k+ rise in Mar, but is still expected to show gains – consensus +5k while rate sticks at 5.9%.
AUD has managed to hold pre 0.7300 support in the meantime, but this has come off the back of a revival of AUD/NZD, as well as Copper prices holding off range lows, where the lower limit at USD2.45 is intact for now.
In light of the RBNZ’s refusal to acknowledge the positive factors supporting the economy, the NZD came off hard this week and we sense upside pressures (from data) will be limited as a result. This will no doubt be welcomed by the central bank ever concerned with exchange rate levels in the current climate. Retail sales to kick off the week early Monday, and on Tuesday the Fonterra auctions will give fresh light on dairy prices which have risen steadily of late.
In Canada, while the growth and jobs data have tentatively shown encouraging signs, inflation has not so. Friday’s CPI read for Apr, alongside Mar retail sales will see if we are getting any pick up in asset prices, and given the prominent gains seen in house prices and supposed household indebtedness, we would have expected a little more follow through that we have seen. This does not bode well for the CAD, but have we seen much of the adjustment already? Plenty of calls for 1.4000 in the spot rate, but this will only fuel interest to fade gains, especially with oil prices stabilizing after the recent sell off.