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Boris and Kathy Forex Weekly 5/6/2017

Posted on: 05 June 2017 , by: Boris & Kathy , category: Market Review

FX Weekly with Boris and Kathy

The surprisingly soft non-farm payrolls report on Friday sent the U.S. dollar tumbling against all of the major currencies but even with the decline, the greenback did not end the week universally lower.

The greenback lost ground versus the euro, Japanese yen, Swiss franc, British pound and New Zealand dollar but saw gains versus the Australian and Canadian dollars. We expect continued inconsistency in the performance of the dollar in the coming week as non-U.S. centric developments such as rate decisions and an election in the U.K. drive currencies. 

Spot Returns Month to Date 5/6/17

US DOLLAR

Data Review

  • Change in Non-Farm Payrolls 138k vs. 182k Expected
  • Unemployment Rate 4.3% vs. 4.4% Expected
  • Average Hourly Earnings 0.2% vs. 0.2% Expected
  • Trade Balance $-47.6b vs. $46.1b Expected
  • Personal Income 0.4% vs. 0.4% Expected
  • Personal Spending 0.4% vs. 0.4% Expected
  • PCE Deflator 0.2% vs. 0.2% Expected
  • PCE Core 0.2% vs. 0.1% Expected
  • Consumer Confidence 117.9 vs. 119.5 Expected
  • Chicago PMI 55.2 vs. 57.0 Expected
  • Pending Home Sales -1.3% vs. 0.5% Expected
  • Beige Book indicates Rate Rise Coming Soon
  • Challenger Job Cuts 71.4% vs. -42.9% Prior
  • ADP Employment Change 253k vs. 180k Expected
  • Manufacturing PMI 52.7 vs. 52.5 Expected
  • ISM Manufacturing 54.9 vs. 54.8 Expected
  • Construction Spending -1.4% vs. 0.5% Expected

Data Preview

  • ISM Non Manufacturing Report, Durable Goods and Factory Orders- Drop in NFP’s offset by sharp rise in ISM Manufacturing index so it will be interesting to see how service sector activity fares. 

Key Levels - USD/JPY

  • Support 110.00
  • Resistance 112.00

Friday’s non-farm payroll report sealed the fate for the U.S. dollar. As hiring and wages eased in the month of May, investors scaled back their expectations for a Federal Reserve rate hike this month. Fed fund futures are no longer pricing in a 100% chance of a hike in June and the odds of 2 more hikes this year have fallen below 50%. The next 2 weeks is the “quiet period” before the FOMC meeting, so there won’t be any comments from U.S. policymakers to bolster those expectations. For this reason, we expect the U.S. dollar to underperform over the next 8 days ahead of the June 14th FOMC meeting. U.S. data hasn’t been great and even if the Fed hikes they won’t provide any strong guidance on future tightening, which would be disappointing to dollar bulls. Yet U.S. policymakers haven’t said anything to cast doubt on the market’s rate hike expectations and for this reason we believe they will follow through with a quarter point increase this month. But the hike won’t help the dollar unless the Fed suggests that more tightening is on the way which is unlikely given the lack of progress on tax cuts and fiscal spending – 2 things that are crucial to ongoing optimism from the Fed. With no major U.S. economic reports scheduled for release this week, traders should look for the U.S. dollar to underperform with USD/JPY likely to fall below 110. 


BRITISH POUND

Data Review

  • GfK Consumer Confidence Survey -5 vs. -8 Expected
  • BRC Shop Price Index -0.4% vs. -0.3% Expected
  • Manufacturing PMI 56.7 vs. 56.5 Expected

Data Preview

  • June 8 UK Election
  • Services and Composite PMI- Potential for downside surprise given drop in PMI Mfg. but rise in GfK
  • Trade Balance, Industrial and Manufacturing Production- Potential for downside surprise given drop in PMI manufacturing index

Key Levels - GBP/USD

  • Support 1.2700
  • Resistance 1.3000

Politics has and will continue to play a big role in the performance of sterling in the coming week. Although GBP/USD ended the week slightly higher than where it started because of the softer U.S. labour market report, it did not enjoy the same gains as it peers because of election uncertainty. Prime Minister May’s party now leads the opposition party by only 5 points down from 15 two weeks ago. What once appeared to be a sure win could turn into a victory by only a small margin, or worse, a surprise loss. The June 8 election is supposed to be a tactic that would increase her negotiating hand but a failure to win with a strong majority would weaken her stance as Brexit talks begin. Although U.K. PMI numbers are scheduled for release along with industrial production and the trade balance politics are likely to play a larger role in the currency’s performance than economics. If the day to day polls leading up to Thursday’s vote show a shrinking majority for PM May, GBP/USD will fall. However if her party climbs in the polls near the end, GBP will recover smartly – either way it will be a big week for the British pound. 


EURO

Data Review

  • EZ Economic Confidence 109.2 vs. 110 Expected
  • EZ Business Climate Confidence 0.90 vs. 1.11 Expected
  • EZ Industrial Confidence 2.8 vs. 3.1 Expected
  • EZ Services Confidence 13.0 vs. 14.1 Expected
  • EZ Consumer Confidence -3.3 vs. -3.3 Expected
  • GE CPI -0.2% vs. -0.1% Expected
  • GE Retail Sales -0.2% vs. 0.4% Expected
  • GE Unemployment Change -9k vs. -15k Expected
  • GE Unemployment Claim Rate 5.7% vs. 5.7% Expected
  • EZ Unemployment Rate 9.3% vs. 9.4% Expected
  • EZ CPI Estimate (YoY) 1.4% vs. 1.5% Expected
  • EZ CPI Core (YoY) 1.0% vs. 1.0% Expected
  • GE Manufacturing PMI 59.5 vs. 59.4 Expected
  • EZ Manufacturing PMI 57 vs. 57 Expected
  • EZ PPI 0.0% vs. 0.2% Expected

Data Preview

  • ECB Rate Decision- Draghi will have to balance improvements in growth with decline in inflation
  • GE and EZ Composite and Services PMI, EZ Retail Sales- Revisions are hard to predict but can be market moving
  • EZ GDP- Potential for upside surprise given rise in GE and FR GDP
  • GE Industrial Production- Will update after factory orders. Rise in PMI Mfg.
  • GE Trade and Current Account Balance- Will Update after GE trade balance and industrial production

Key Levels - EUR/USD

  • Support 1.1100
  • Resistance 1.1300

The euro hit a 6 month high despite weaker than expected Eurozone data. According to the latest reports, economic confidence in the Eurozone, inflation and retail sales in Germany declined over the past month, a sign of the pressure created by a stronger euro. Since the last European Central Bank meeting late April, the EUR/USD rose more than 4 cents which is over 3.9%. For an export dependent economy like the Eurozone and a central bank that is worried about low inflation, the stronger currency can be a major deterrent to future economic activity. However since the last meeting, we’ve seen widespread improvements in the Eurozone economy. Aside from the latest decline in retail sales and German consumer price growth, Eurozone consumer spending is up, labour market conditions improved with economic activity accelerating across the board. Even ECB President Draghi acknowledged the improvements in the economy although he was adamant about the need for accommodative policy. So it will be interesting to see which way he leans because the next round of data could be much weaker given the rise in the currency.

Eurozone Economy - Central Bank Meeting


AUD, NZD, CAD

Data Review

Australia

  • Building Approvals 4.4% vs. 3.0% Expected
  • CH Manufacturing PMI 51.2 vs. 51.0 Expected
  • CH Non-Manufacturing PMI 54.5 vs. 54.0 Prior
  • AiG Manufacturing PMI 54.8 vs. 59.2 Prior
  • Retail Sales 1.0% vs. 0.3% Expected
  • CH Caixin PMI Manufacturing 49.6 vs. 50.1 Expected

New Zealand

  • Building Permits -7.6% vs. -1.2% Prior
  • ANZ Business Confidence 14.9 vs. 11.0 Prior

Canada

  • Current Account Balance -$14.05b vs. -$12.0b Expected
  • GDP 0.5% vs. 0.2% Expected
  • Quarterly GDP Annualized 3.7% vs. 4.2% Expected
  • Manufacturing PMI 55.1 vs. 55.9 Prior
  • International Merchandise Trade -0.37b vs. -0.02b

Data Preview

Australia

  • RBA Cash Rate Target- We expect more caution from RBA
  • AiG Services PMI- Potential for downside surprise given Sharp drop in PMI Mfg.
  • CH Caixin PMI Composite and Services PMI- We could see more weakness in Chinese economy
  • GDP- Potential for upside surprise given stronger trade and retail sales in Q1
  • Trade Balance- Potential for downside surprise given sharp drop in PMI Mfg
  • CH Trade Balance- We could see more weakness in Chinese economy

New Zealand

  • No Data

Canada

  • IVEY PMI- IVEY hard to predict but should be weaker
  • Employment Report- Will Update after IVEY PMI

Key Levels

  • Support AUD .7350 NZD .7000 CAD 1.3400
  • Resistance AUD .7500 NZD. 7200 CAD 1.3600

Speaking of central bank meetings, the Reserve Bank of Australia and European Central Bank have monetary policy announcements.  The RBA meets first so we’ll start with that, as it will be an exceptionally busy week for AUD/USD traders. Aside from RBA, Q1 GDP, the trade balance and PMI services are also due for release along with China’s trade balance and Caixin PMI reports. When the RBA last met, they failed to acknowledge the improvements in the economy and instead said its forecasts for Australia’s economy has not changed much, causing the Australian dollar to spiral lower. Over the past month, labour market conditions and inflation weakened slightly while manufacturing and trade conditions deteriorated due to the slower Chinese export growth. Stocks, bonds and commodity prices also declined. Improvements were seen in retail sales, the housing market and business confidence but that won’t be enough for the RBA to turn positive. So while AUD could hold its own versus the USD, it is likely to underperform other major currencies such as EUR and NZD. AUD/NZD in particular has been very weak and unless the RBA is surprisingly hawkish, the downtrend should remain intact.

AU Economy - Changes Since Last RBA

The New Zealand dollar on the other hand closed in on a 3 month high thanks to the ongoing improvements in New Zealand’s economy. Increases in the terms of trade and activity indices helped to bolster business confidence in the month of May. Comments from RBNZ Governor Wheeler this past week were relatively benign with the central bank head noting that house price growth has slowed and the risks to the financial system have fallen. With no major New Zealand economic reports scheduled for release this week beyond another dairy auction, the New Zealand dollar which is aiming for 72 cents should outperform its peers. USD/CAD rallied every day last week despite stronger GDP growth. Canada’s economy grew by 0.5% in March, which was over 2x faster than forecast, bringing the year over year rate to 3.2% from 2.9%. The problem was that Q1 GDP growth accelerated less than anticipated and the current account deficit widened. Most importantly oil prices fell sharply after rejecting an attempt to rise back above $50 a barrel. Looking ahead, it will be another busy week for the loonie with IVEY PMI and employment report scheduled for release. Job growth was soft in April so a recovery could be seen in May. USD/CAD has major resistance between 1.3550 and 1.36 so oil probably needs to hit $45 a barrel for the pair to break above these levels. 


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