Last week I asked whether it was end of days for the USD, based largely on the fading set of US economic data, which in fairness happens in times of a 'gradual' recovery: going through the familiar series of peaks and troughs. Some may have an issue with the term 'recovery' in the face of unprecedented cheap money that central banks are only now planning to rein in, but we can apply this to a number of major economies, so for the purposes of determining exchange rates (fair value) levels, we will even out the playing field a little.
Looking at some of the price action, we have broken out of some key levels and areas, so in this respect, 'end of days' means an end to the uptrend which has seen the euro rate pushing back through 1.1500, while the commodity currencies also look to have set a longer term low in place. What is doesn't mean - necessarily - is that the USD is going to implode, though the past week may have seemed that way.
Matters relating to a certain President D Trump have clearly accentuated the weakness - and we won't go into this - much said already - but this looks to have been the dominant factor. Next week however, this may, or may not be highlighted by how the market takes to the FOMC announcement on Wednesday, which will see Fed Funds unchanged, but keen focus on the statement (only, no press conference) which accompanies this. Indeed, some are ruling out another rate move from the Fed this year, but there are plenty of twists and turns ahead, as well as a 'normalisation process' which has been 'designed' to curb market excesses of the past, though has had minimal impact on the equity market.
The Fed chair has consistently highlighted valuation levels in stocks, so only a major drop off in the data, is expected to dissuade the Fed from their gradual rate path adjustments, though the familiar dissenters have been unnerved by some of the readings, not least of all inflation and sluggish wage pick up.
No major data releases until Friday however, when when get the preliminary GDP stats for Q2. Growth rate expectations have been fluctuating in the mid 2.0%'s where consensus is still for a 2.4% print. Manufacturing and services PMIs are out on Monday as well as existing home sales, while durable goods orders fall on Thursday.
USDJPY Daily
Back to currencies, and against the tide of USD sales, USD/JPY losses have been relatively tame. Wall Street has been making fresh record highs, so hampering JPY upside here is the ongoing divestment out of Japan despite the green shoots of recovery in the domestic economy. This prompts many to look for higher levels in the cross JPY rates, and we will not preclude the spot rate yet, with yield differentials where they are and unlikely to tighten up as the BoJ maintain yield control measures. Inflation targets are still a way off and the central bank has extended the period in which they expect them to be achieved.
Given the turmoil at the White House alone, days of old would have seen USD/JPY crushed, so we have to acknowledge the resilience we are seeing at moment. That said, it can only be tested so far. A move through 111.00 is little to get excited about, but sub 110.00 could see some of the heavy JPY shorts - CFTC reporting another increase last week - turn tail.
Out of Japan next week, the inflation data on Friday wil again confirm the mountain to climb before we reach 2.0%, but the impressive unemployment rate of 3.1% expected to remain pretty much unchanged (worth a mention!).
EURUSD Daily
As mentioned above, EUR/USD has powered higher in the midst of USD weakness, with the market carried away by the prospects of APP tapering this year. President Draghi and most of the ECB (at the meeting last week), have done their utmost to rein in this latest round of exuberant positioning, which has pushed EUR/USD through 1.1600 and close to 1.1700 as of late trade Friday. Too far, too fast? Well naturally the ECB think so, but given some of the upside projections for 1.2000 by end the year - even 1.2500! - the rate of gains (versus time) look unsustainable at the very least. Yields have fared more favourably however, with core EU rates pulling back (German 10yr back to 50bps vs near 65bps in the previous week), but this is largely a function of the broader bid in global fixed income.
EUR strength will at some point impact on exports, whilst also dampening inflation to a modest degree, but until the data really starts to reflect this, any pullbacks in the EUR will be corrective, so on the downside, the low 1.1500's will likely prove the first point of support based on the congestion seen here on the way up. EUR/CHF has also pushed into the mid 1.1000's to eye a move on 1.1100, but we are struggling here a little. Above the figure lie the highs seen in early summer last year, but gains have been tempered by the USD aspect which has seen the CHF spot rate dip under 0.9500.
Amid the mix of PMI data over the week, we have some harmonised inflation numbers of note, while in Germany, the Ifo survey on Tuesday is standout release.
GBPUSD Daily
The data highlight of the week in the UK is the Q2 GDP number on Wednesday, but despite retail sales holding up (according to last Thursday's data), growth figures are expected to ease off from 2.0% in Q1 to 1.7% on a yearly basis. Rate hike expectations have eased off a little in the wake of the softer inflation read last week, but with less slack in wage growth than expected, steady growth could maintain the balance of MPC hawks sticking to their calls for a 25bp hike.
This has given Cable the support to maintain the upside pressure on 1.3000. Above here, the move through 1.3100 has been short-lived on each occasion with key levels at 1.3145 and 1.3185-90 intact. The strong bid in EUR/GBP has also played its part, but 0.9000 is a strong level, which if breached won't necessarily lead to any runaway moves to the upside. The perception of a soft Brexit may be misplaced at the present time, especially with last week's talks highlighting the discord on EU citizens in the UK and the exit bill, but Theresa May's weakened hand (whether you believe this or not) has worked in favour for the pound, so the market is looking at 'fair value' again.
USDCAD Weekly
The CAD has also 'finally' realised 'fairer' value levels, and as I stated last week, the recognition (and by this I meant the BoC response and rate hike - apologies for not being more explicit) of the improving growth and labour stats has sent the spot rate down to a little shy of 1.2500. It is hard to see us avoiding a push below here next week, but in the short space of time, we have come a very long way and a correction here is long overdue.
On Friday we saw the market reacting to the stronger retail sales figures for May, but given the BoC's assertions that the policy change was effected based on the data from May, this is priced in. There was scant regard for inflation slipping to 1.0%, but we expect this will impact at some stage. House prices have also come off significantly in the last few months, and this will also test gov Poloz's view that the economy can handle the latest tightening. How far we correct depends on the USD again, but a pronounced move will come up against the strongest resistance in the 1.2950-1.3000 area.
On the downside, 1.2000-1.2200 is a key target zone, 1.1800 or so beyond that, and these are not outside the realms of reality into the latter part of the year if economic expansion continues and oil prices can stabilise (a big if). The economy has adjusted to the lower price environment, but we expect a WTI move back towards $40.0, which will prove unsettling again (to put it mildly). GDP numbers for May are due at the end of the week, and are expected to show a modest 0.2% rise on the month.
AUDUSD Daily
It has been a good week for the AUD, where a key breakout vs the USD through 0.7835-50 is one such level which may have highlighted a major top in the greenback - pre 0.6800 in early 2016. For all the worries over commodity prices as well as housing concerns back home, AUD has pushed higher against a number of its counterparts, but the spot rate clearly hit a wall ahead of 0.8000, so some form of pullback here may see the above (breakout) level tested the other way. With inflation the bane of all major economies, the Q2 reading on Tuesday could see one or other of these limits tested, but we have already seen its limits reached against its NZD counterpart, which has retraced sharply after testing up to 1.0850. Back in the mid 1.0600's, 1.0500 is the first support point from here, and we are still undecided as to whether the key 1.0370-50 base tested a few weeks back is a major platform.
NZDUSD Daily
This naturally, will depend on whether NZD/USD can continue its seemingly confident ascent, benefiting from continued risk appetite. Last week, the Finance Ministry said they were unperturbed by recent currency gains, but the RBNZ may have a different view, and through 0.7500 we expect some subtle words of caution, as along with the RBA, they remind the markets that exchange rate levels are key to balanced growth. Trade data here will add fresh light on this - also due on Tuesday, so any divergence in the respective data reads could see an active session for AUD/NZD. NZD/USD hit 0.7460 on Friday, but printing above the figure level would see us back to levels not seen since May last year, and potentially marking the 0.6800 low from May this year as a key base well above the Aug 2015 low at 0.6227.
NOKSEK Daily
Another relatively quiet week for the Scandies, but PMI data also due out midweek. Strong gains seen in the manufacturing components of late, notably in Sweden where the index is comfortably through 60.0.
Focus on NOK/SEK for now ahead of 1.0300-50, which is proving a tough obstacle, andoOil prices again could dictate after Brent failed into $50.00 on Thursday, shedding $2.00 by the close of trade Friday. Rate differentials prove supportive in the meantime, as do the comparative outlooks by the respective central banks. The Norges bank is a little more optimistic given rising capacity utilisation, but this is a tight trade here with component spot and euro rates moving largely in tandem as the base currencies dictate.
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