FX Week Ahead: Is It 'End Of Days' For The Greenback?
Rajan Dhall | Jul 16, 2017 05:29
Coming off the back of another bad week for the USD, we look to a barren period for the data schedule in the US, so markets will have to determine whether to extend this weakness based on the evidence so far. Friday's hit on US rates was more a function of the softer retail sales data than the inflation read, where the core year on year was unchanged at 1.7% as forecast. However, with seasonal factors supportive of a pick up in consumer spending in June, there was little improvement on the weak May readings in retail, and USD sellers were back in with force. The greenback ended the week on its lows across the board, but this was tempered to a degree against the JPY and CHF.
Even though the JPY is still seen to be a little undervalued at current levels vs the USD, the consistent BoJ policy to keep the key 10yr JGB rate near/at zero is underpinning the spot rate to a degree, but this also depends on whether the global risk tone can be maintained. Despite the backdrop of tensions over North Korea, as well as the ever present risk of president Trump sparking a trade war (with anyone), equities continue to grind higher with their Teflon (Kevlar) coated armour, so the carry trades will naturally follow. On this note, watch out for the China GDP numbers Sunday night and any material drop from the annualised growth rate of 6.9% from Q1 - Q2 forecast at 6.8% and risk sentiment would easily stomach that.
Japan are off on Monday - for Ocean Day - but on Wednesday the BoJ meeting is again set to maintain their accommodative stance, just as they publicly communicate on a near weekly basis over the news wires - so nothing new here.
The BoJ outlook should show some improvement however, in line with the modest upgrade to their growth forecasts, but JPY divestment and outflow is expected to continue so cross JPY should attract more of the trading next week. Initially, USD/JPY may test 112.00 again as Asia react to Friday's numbers, but strong demand is noted at this level, if not a little lower into the mid 111.00's.
There are however, other areas where USD bears are likely to feel just as comfortable, but not without some noteworthy event risk ahead. EUR/USD has been the primary route up until last week, where we saw limits reached into 1.1500. We failed to touch this level after a number of attempts, but dips remain shallow as the positioning for QE tapering later this year remains aggressive. More insider/source stories this week anticipated the ECB meeting in September to be the catalyst, but we have to negotiate Thursday's meeting first. President Draghi and his colleagues are keen to fend off any excessive market reactions, but we have already seen German 10yr hitting 60bps this week, and while this has not been fully reflected in EUR/USD price action, EUR/CHF has offered less resistance on the upside. Pre 1.1100 may offer some resistance, but 1.1125-35 is the next top of note - last seen in May last year. If the market refocuses on EUR/USD again, we sense a tough grind higher, but a move into the 1.1500-1.1600 range nevertheless. This still looks an overstretch in the time frame achieved, but we doubt traders will be deterred from bidding into 1.1300 again, unless EU CPI on Monday slips.
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EUR/GBP has taken some of the slack however, but this is all down to renewed GBP strength. The focus in the next 5 days will be on whether cable can build on the gains seen through 1.3000. This is all based on the political mess which has detracted from the hard stance espoused by Theresa May, as her snap election result has backfired hugely - and lifted GBP! Who knew!!! There are still plenty of twists and turns to negotiate, and even though some of the Sterling undervaluation is justified, the reasons for the latest moves will be questioned at these levels.
A softer Brexit is still presumptuous at this stage, and with London as a financial sector set to lose out to some degree (euro swaps clearing) , there will be an impact on the UK economy. Over the weekend, ex PM Blair has been 'sounding out' possible sentiment on an EU turnaround, but both Labour and Tory ministers have swiftly responded, with usual mantra the leave means leave. It looks inevitable, but a softer approach will help. EU talks said to start this week, and we have the exit payment to negotiate on first - this will give EUR/GBP a bid on its own (and some), once it is decided upon!
Currency jitters are likely to return soon as a result, but how soon? Cable sees strong resistance from 1.3145 to 1.3190, while EUR/GBP sees demand into 0.8700, if not the mid 0.8600's. On the data front, UK inflation is due out on Tuesday, where the headline rate is expected to stay at 2.9%. It is for this reason that certain members at the MPC have turned hawkish, so Gilts will react accordingly. Retail sales on Thursday will be just as influential, with forecasters looking for a rebound from the heavy drop seen in May.
Good times for the CAD at the moment, and this is all on the recognition of the healthy data some of us have been pointing to when USD/CAD was pushing through 1.3600 (ahem). I remember at the time, calls for 1.4000 when we cleared 1.3500 initially, and how the mood has changed. More room for the CAD to appreciate for sure, and perhaps to 1.2200-1.2000 towards the end of the year, but that is some 3-5 months away, so perhaps some consolidation first. NAFTA renegotiations hang over Canada as they do over Mexico, but the risks are greater for Mexico as the Canadian benefits have matched those of the US.
On the domestic front, the strong data of late has been tempered by inflation, and we get the latest readings which could tame the CAD rally. 1.2825-30 and 1.2950-1.3000 are the initial upside areas where USD/CAD sellers will look to join in on this party, and based on the mood in the USD, we have to wonder if we will even seen these levels before we test 1.2500!
AUD/USD ended the week on a very strong note, pushing up into and through most of the 0.7750-0.7850 target range. The upper end is the top of a major breakout point, and this could underline a stronger base in the 0.7200-0.7300 area lower down, but we expect a move on 0.8000 higher up - which is not outside the realms of possibility - will have the RBA getting hot under the collar again. Exchange rate levels threaten imbalances to exports and growth, and along with the RBNZ, prompt verbal intervention when nearing these levels, with 0.7500 in NZD/USD likely set to do the same. The latter somewhat unconvincingly worked through orders in the 0.7330-50 zone last week but failed to hold above here, so perhaps traders are anticipating central bank speak a little earlier.
In Australia, we have the June employment report midweek to look to, with the RBA meeting minutes offering little more than we already know due to the detailed statement under a fortnight ago. Monday night offers up the NZ inflation data, while on Tuesday we have the global dairy auctions (Fonterra).
All very quiet in the Scandies, but gains in the NOK and SEK vs the USD have taken us to and through some key levels, and say more about the fate of the greenback than anything else.
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