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Boris and Kathy Forex Weekly 29/5/2017

Posted on: 29 May 2017 , by: Boris & Kathy , category: Market Review

FX Weekly with Boris and Kathy

We are coming off the heels of an interesting week for the U.S. dollar which ended the week stronger versus the British pound, weaker versus the New Zealand dollar and basically unchanged against other major currencies. 

This divergence can be explained by the market’s fading confidence in the Federal Reserve. Fed Fund future are pricing in 100% chance of a June hike but data and the FOMC minutes suggest otherwise so investors are waiting for a reason to swing one way or the other. CAD and NZD outperformed on local news whereas EUR and GBP were hit by growing uncertainty in inflation and/or the economy in Europe. Looking ahead Friday’s non-farm payrolls report will be the true test for the dollar.

Spot Returns Month to Date 29/5/17

US DOLLAR

Data Review

  • Manufacturing PMI 52.5 vs. 53.0 Expected
  • Services PMI 54.0 vs. 53.2 Expected
  • Composite PMI 53.9 vs. 53.2 Prior
  • New Home Sales -11.4% vs. -1.8% Expected
  • House Price index 0.6% vs. 0.5% Expected
  • Existing Home Sales -2.3% vs. -1.1% Expected
  • FOMC Minutes Indicates Rate Hike Might Come Soon
  • Advance Goods Trade Balance -$67.6b vs. -65.5b Expected
  • Wholesale Inventories -0.3% vs. 0.2% Expected
  • Initial Jobless Claims 234k vs. 238k Expected
  • Continuing Claims 1923k vs. 1925k Expected
  • GDP (Annualized) 1.2% vs. 0.9% Expected
  • Personal Consumption 0.6% vs. 0.4% Expected
  • Core Personal Consumption Expenditure 2.1% vs. 2.0% Expected
  • Durable Goods Orders -0.7% vs. -1.5% Expected
  • U. of Mich. Confidence 97.1 vs. 97.5 Expected
  • U. of Mich. Current Conditions 111.7 vs. 112.7 Prior
  • U. of Mich. Expectations 87.7 vs. 88.1 Prior

Data Preview

  • Personal Income, Spending and PCE Deflator- Potential for upside surprise given wages and retail sales up
  • Conference Board Consumer Confidence and Expectation- Potential for upside surprise given stronger Umich index
  • Chicago PMI and Pending Home Sales- Surprise drop in Empire but rise in Philly
  • US Fed Beige Book Release- Could be more cautious given developments in the economy.
  • Challenger Job Cuts and Non-Farm Productivity- Leading indicators for labor data are market moving but hard to predict
  • Manufacturing PMI and ISM Manufacturing- Will update after Chicago but Empire down, Philly up
  • Non-Farm Payrolls- This non-farm payrolls report will be very market moving and economists are looking for softer numbers

Key Levels - USD/JPY

  • Support 110.00
  • Resistance 112.00

The mighty buck lost its lustre after Federal Reserve minutes, which cast doubt on the central bank’s hawkishness. The problem was U.S. data and the FOMC minutes which failed to bolster the market’s confidence in a June hike. Although Bloomberg have Fed Fund futures showing a 100% chance of tightening next month new and existing home sales tumbled in the month of April, the trade deficit widened and jobless claims increased. Most importantly, according to the Fed minutes, U.S. policymakers are worried about the slow progress on inflation with some preferring to wait for evidence that the slowdown is transitory before taking action. So even if the Fed hikes next month, they’ll probably indicate that they are one and done. The inconsistency in data and market expectations makes this week’s event risks particularly important.

In many ways the dollar lives or dies by this month’s non-farm payrolls this month. If the jobs report is good which means non-farm payrolls increase, the unemployment rate holds steady and average hourly earnings rise at last month’s pace or better, the uncertainty about the Fed’s hawkishness will fade quickly, leading to a strong dollar recovery. However if any part of this Friday’s report disappoints, investors will start to unwind their long dollar trades, or worse start shorting dollars ahead of the June FOMC meeting. The Beige Book report is due for release on Wednesday and it will provide some clues on how the labour market is doing but the real test for the greenback will be NFPs as the outcome could set the tone for how the dollar trades for the next few weeks. Support in USD/JPY is at 110.30 and even if it rallies, it needs to clear 112.15 to remove the pair’s negative bias. Monday is a holiday in the U.S. so expect quieter trade.


BRITISH POUND

Data Review

  • Public Sector Net Borrowing 9.6b vs. 8.0b Expected
  • PSNB Ex Banking Groups 10.4b vs. 8.8b Expected
  • CBI Retailing Reported Sales 2 vs. 10 Expected
  • CBI Total Dist. Reported Sales 18 vs. 31 Expected
  • GDP (QoQ) 0.2% vs. 0.3% Expected
  • Private Consumption 0.3% vs. 0.3% Expected
  • Government Spending 0.1% vs. 0.4% Expected

Data Preview

  • Manufacturing PMI- Potential for upside surprise given rise in CBI index

Key Levels - GBP/USD

  • Support 1.2700
  • Resistance 1.3000

Lastly sterling was the week’s worst performing currency. The terrible tragedy in Manchester combined with concern about Brexit negotiations prevented the GBP/USD from breaking above 1.30. The currency pair rose above this level on numerous occasions only to be met by heavy selling. First quarter GDP growth was revised lower (which is rare for the U.K.) and loans for house purchases eased. While this is significant, the market is still more concerned about the country’s escalated terror alert level and the tough negotiations with the E.U. Last week started with talk that the UK could walk away from Brexit negotiations if it is forced to pay their massive exit bill of as much as $100 Billion. At the same time the EU refuses to back down from their hard negotiating stance making the path forward difficult to perceive. Prime Minister May called for elections in June and her popularity has been negatively affected by some of the recent events in the country. GBP/USD is now trading below the 20-day SMA and likely to drop to 1.2700.


EURO

Data Review

  • GE GDP 0.6% vs. 0.6% Expected
  • GE Manufacturing PMI 59.4 vs. 58 Expected
  • GE Services PMI 55.2 vs. 55.5 Expected
  • GE Composite PMI 57.3 vs. 56.6 Expected
  • EZ Manufacturing PMI 57.0 vs. 56.5 Expected
  • EZ Services PMI 56.2 vs.56.4 Expected
  • EZ Composite PMI 56.8 vs. 56.7 Expected
  • GE IFO Business Climate 114.6 vs. 113.1 Expected
  • GE IFO Expectations 106.5 vs. 105.4 Expected
  • GE IFO Current Assessment 123.2 vs. 121.0 Expected
  • GE GfK Consumer Confidence Survey 10.4 vs. 10.2 Expected

Data Preview

  • EZ Economic Confidence Report- Potential for upside surprise given ZEW, GfK and IFO report increased
  • GE CPI- Potential for downside surprise given Inflation likely be softer given strong EUR and lower oil in late April
  • GE Unemployment Change, EZ Unemployment Rate and CPI- Potential for upside surprise given PMIs cite job growth as second fastest in 6 years but CPI may be lower
  • GE and EZ Manufacturing PMI Revisions- Revisions are hard to predict but market moving
  • EZ PPI- Potential for downside surprise given softer April CPI

Key Levels - EUR/USD

  • Support 1.1000
  • Resistance 1.1200

Five weeks have passed since EUR/USD gapped up from 1.0730 to 1.0880. There is a saying that gaps are meant to be filled and after such a long period of time, traders are still itching to drive the pair lower. After racing above 1.12, the currency pair ended the week below this key level. The near term political risks have faded and the latest economic reports were positive for the euro - German investor confidence rose strongly in the month of May, the Eurozone’s trade surplus hit a 3 month high and there were no revisions to the Eurozone’s Q1 GDP and French CPI reports. Even ECB President Draghi acknowledged the euro-area recovery as resilient and increasingly broad based. But EUR/USD has been unable to extend its gains for 2 main reasons - the first is slower inflation growth (prices are already rising at a more gradual rate and the rise in the currency puts further pressure on inflation). The second are the diverging views of the ECB and Federal Reserve. Mario Draghi made it clear that now is not the time to talk taper whereas practically every U.S. policymaker who spoke this month (aside from Kashkari) believes that further policy normalization is necessary. Let’s not forget that the Fed is the only major central bank talking about tightening and could increase interest rates by another 50bp this year. Of course, Friday’s U.S. job report could affect the market’s expectations and if the data is weak it would be wildly positive for the euro. If they are good, we could see EUR/USD head for 1.10. Eurozone inflation, confidence and German labour data are due for release – softer price pressures would reinforce the recent pullback in the euro. 


AUD, NZD, CAD

Data Review

Australia

  • No Data

New Zealand

  • Trade Balance 578m vs. 267m Expected
  • Exports 4.75b vs. 4.40b Expected
  • Imports 4.17b vs. 4.10b Expected

Canada

  • Wholesale Sales 0.9% vs. 1.0% Expected
  • Bank of Canada Keeps Rates Steady at 0.50% 

Data Preview

Australia

  • CH Manufacturing and Non-Manufacturing PMI- Chinese data is market moving but hard to predict
  • PMI Manufacturing and Retail Sales- Potential for upside surprise given sharp rise in March and April sales index
  • CH Caixin PMI Manufacturing- Chinese data is hard to predict but growth likely to have slowed

New Zealand

  • No Data

Canada

  • GDP- Potential for downside surprise given significantly Weaker trade in Q1 but better March
  • International Merchandise Trade- Potential for upside surprise given consistent rise in IVEY PMI

Key Levels

  • Support AUD .7350 NZD .6900 CAD 1.3400
  • Resistance AUD .7500 NZD .7100 CAD 1.3600

The Australian dollar also struggled this past week, bucking the trend of strength of the other commodity currencies. The move was driven partly by U.S. dollar strength but largely because of rating agency action. The downward course of the currency was set by S&P’s decision to lower the credit scores of nearly a dozen financial institutions at the start of the week. The losses were exacerbated by Moody’s downgrade of China and lower leading indicators. We know that the RBA is concerned about the economy and the property market is becoming a growing problem in Australia as domestic and external (Chinese) demand begins to ease. Chinese growth in general is a concern and it has a direct impact on Australia. This week’s retail sales and manufacturing PMI numbers will play a central role in stemming the slide in the currency and reversing some of the divergences. Given the sharp rise in the sales component of the performance of services index we believe that spending rebounded in April after falling in March. The levels to watch for AUD/USD are 74 cents on the downside and 0.7520 on the upside. 

In contrast, the Canadian and New Zealand dollars performed extremely well versus the greenback and the Australian dollar. Both currencies rose strongly against the U.S. dollar this past week with the loonie soaring after the Bank of Canada and kiwi jumping on positive fundamental developments. These currencies appear poised for more gains after key levels breaks. For USD/CAD, the move below 1.35 opens the door to a deeper slide below 1.34. For NZD/USD, the break above 0.7050 puts the pair on track to test 71 cents. The number to watch this week for Canada is GDP. If growth slowed in March or in the first quarter we will see a move back above 1.35. However if growth accelerates, the downside target could be hit. Although the Bank of Canada recognized the improvements in the economy this past week and their views sent the loonie sharply higher, they are still very concerned about growth and inflation as excess capacity and uncertainties hamper economic activity. Some of these worries could be a result of weaker GDP growth in the first 3 months of the year. OPEC extended its production cuts for another 6 months which caused oil and CAD to fall but crude reversed its losses on Friday, helping the Canadian dollar recover.

The New Zealand economy on the other hand continues to recover as indicated by last week’s strong trade surplus and increased milk payout forecast from Fronterra. The price of milk is extremely important because its New Zealand’s number one export. In fact exports rose by the most in 2 years according to the latest report driving the surplus to its highest level since March 2015. What made the report particularly positive was the fact that dairy was not the only sector that saw gains, exports of log and wine also increased significantly which should reduce the central bank’s concerns about the impact of a strong currency. Investors were also satisfied with the government’s latest budget. Looking ahead there are no major New Zealand economic reports on the calendar this week outside of the RBNZ’s Financial Stability Report. We expect NZD to continue to outperform.


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