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Its been a brutal day for risk as Dow dropped -500 points and Italian political drama upended the markets, but after vicious selloff markets are due for some reprieve. With Italian story now moving off to the sidelines as the country awaits new elections in a few months, the focus shifts to US data as the markets take a look at the first key report of the week -- the ADP employment release.
This week is unusual because all of the preliminary data actually follows the NFPs on Friday, so the ADP is the only clue to how strong the payrolls will be. If the job picture in the US continues to perform to expectation the 10Y yields should start to creep back towards 3.00% and USDJPY should follow in turn. The pair appears to have found some support in front of the 108.00 level and if it can hold the lows, a rally back towards 110.00 could be in store.
In a rather butchered syntax, the RBNZ came out on the wires stating that it currently had no plans for unconventional policy (ie QE) anytime in the foreseeable future. The comment was more telling for what it denied rather than what it stated s it revealed that RBNZ is clearly much more preoccupied with easing policy initiatives rather than having any plans to tighten.
On the other hand, BOC meets on May 30th and although the market is only assigning 27% probability to rate hike in May, the bank may offer forward guidance that is more hawkish. Taken together with promising signals on NAFTA deal from President Trump, the loonie looks like a relative bid against the kiwi which suggests that NZDCAD can be headed back towards .8800 in the next several days.
Today almost all the BoE members were cautious in their Parliamentary testimony. They all suggested that monetary policy will move towards normalization sooner rather than later. This indicates that the much expected BoE rate hikes will simply be postponed to end of summer rather than 2019.
UK data is the most important economic report in G-7 calendar this week and tomorrow’s UK CPI data, as well as Thursday’s Retail Sales, will go a long way to determining if cable can move through 1.3500 and stage a sustained rally.
In the meantime, the pair continues to hold around the 1.3400 having failed in its breakout of 1.3500. If the numbers miss their mark, the pair could be on its way towards 1.3300 by week’s end.
After a near 800 point decline from yearly highs, the euro appears ready for a bounce. The pair has suffered everything from concerns over the slowdown of growth in the region to the upstart government in Italy that seems hellbent on challenging the norms of sovereign debt to the ever-tense relationship with the Trump administration.
But after so much selling most of the bad news has already been priced in and the pair found support today ahead of the 1.1700 level and bounced impressively. Wednesday’s EZ Flash PMI’s could show that activity in the region has stabilized providing a fundamental catalyst for more short covering. Meanwhile, the hammer forming on today’s chart shows that buyers have regained control and could squeeze the pair higher as the week proceeds.
AUDNZD put in quite a run over the past week gaining nearly 200 pips during that time. The rally has been driven by dovish RBNZ stance which suggested that it may actually lower rates in the near future. Meanwhile, the RBA remains resolutely neutral and the eco data has been steady, indicating that after nearly two years of inaction the central bank may want to reconsider its posture.
Tonight’s AU employment data could provide a strong clue to the strength of AU economy. If labor conditions continue to tighten further the gap between AU and NZ yields on the long part of the curve will widen out further and the pair could push towards the key 110.00 barrier. However, if the numbers miss, so rebalancing is due and the pair could retrace back to 108.00 by end of the week.
Last week’s tepid US CPI readings and the weak NFP readings the week before that have cooled traders expectations of Fed rate hikes going forward with the market essentially pricing in the prospect of only 3 hikes this year.
Fed officials, however, continue to assume a hawkish stance with Cleveland President Mester reaffirming the view that inflation may go above the 2% range. So far the Fed analysis has been far too optimistic core CPI readings did push through the 2% ceiling last month – but only just – marking only the second time this year that the core readings have risen above the 2% level.
Part of the reason for muted inflation readings is the woefully slow gains in average hourly earnings. Given the tax cut, the stimulatory aspect of fiscal policy and the relative tightness of the labor market, economists expected nominal wages to rise between 3.5%-4.0% by now, yet the gains have only been 2.6% creating very little real wage growth for the US consumer.
Tomorrow’s US Retail Sales will provide the most important view of the state of US final demand. The market is anticipating a rebound in US Retail Sales of 0.5% from 0.2% the month prior. If Retail Sales improve USDJPY will make another run at 110.00, but if the number misses its mark once again and shows a paltry growth of 0.2% or worse, the Fed futures market will start to pare its bets regardless of what the Fed officials will say as evidence will continue to mount that case for further tightening is simply not there.
One of the strongest currencies over the past few days has been the loonie. It’s up more than 230 pips against the buck since the start of the week after having failed to take out the upside at 1.3000 level. Higher oil prices. strong funda data and creeping doubt that the Fed will not hike rates more than 2 more times this year have all helped the currency to rally over the past 48 hours.
If the labor data tomorrow surprises to the upside, the markets will begin to price the prospect of BOC rate hikes before the end of summer. Right now the BOC is the only G-7 central bank to seriously consider additional tightening and with the Canadian economy doing better than expected chances are good that BOC may resume its normalization policy soon.
With 1.3000 firmly rejected, the path of least resistance in the loonie is towards 1.2600 and a strong labor number tomorrow could send the pair in that direction before the week is over.
One the strongest, yet most ignored trends in the FX market over the past few months has been the one-way rise is USDCHF. Although the pair is overbought registering 13 out of the last 15 up days, it shows no signs of a slowdown as the slow and steady dollar rise continues.
This week the FX market will focus on US inflation data which is expected to bounce, given the sharp rise in gasoline prices. If the numbers meet or beat the forecast, the buck will see more strength as the week progresses. USDCHF now faces resistance at the 1.0050 level, but if it can bust through that ceiling the pair could stretch all the way to 1.0200 before finding sellers again.
As the S&P broke its 200-day moving average EURJPY was dragged lower as risk-off flows dominated the day. Could this move persist? Quite possibly as US data continues to disappoint with latest ISM Non-Manufacturing coming in weak. With employment subcomponent dropping by 3 points, chances that NFP tomorrow will miss their mark as well are quite good. All of this has cast a pall over equities which are disappointed by subpar US growth and are starting to price in a slowdown in earnings.
Meanwhile, the unwind in USDJPY and euro’s relative weakness could continue to weigh on EURJPY which is trading at one month lows and could probe the key 130.00 figure if the job numbers disappoint.
Despite less than stellar US data, USDJPY shrugged off concerns over slowdown and plowed ahead as the bulls have 110.00 firmly in view. Tomorrow the market will get a look at ADP and FOMC statement and as long as jobs print at 175K or better and the Fed reaffirms its hawkish stance the markets are likely to test the ket resistance within the next few days.
Although US economy shows some signs of a slowdown, it remains well in expansionary territory and its monetary policy continues to be the most restrictive in the G-11 universe and that above all else is keeping USDJPY propped up for the time being.