Macro: Sandcastle economics
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USD fades despite strong data
John Hardy
Chief Macro Strategist
There was nothing amiss in the US data on Friday, and yet the big dollar was unable to renew its recent rally as strong risk appetite and a recovering euro worked against the currency’s favour. The recent deceleration in Fed rate expectations has been driven by the market setting its teeth into what “symmetrical” response to US inflation data means – the general idea being that inflation can continue to heat up with little anticipation of the Fed reacting for some time. As well, the flattening US yield curve is a major obstacle for the greenback, as it is also a distraction for many Fed members concerned with its implications.
The G7 meeting over the weekend in Canada was marked by a robust protest against Trump’s protectionist policies, with particularly loud and compelling objections delivered by Canada’s Prime Minister Trudeau, who tore into Trump’s use of national security as the basis for steel and aluminum tariffs. In other trade news, the latest round of US/China talks have ended with little apparent progress as China is reluctant to make commitments as long as the US is dangling tariff threats in the background.
This morning sees the release of Turkey’s May CPI data, providing a notable test of EM sentiment broadly and for TRY specifically as the weakest link among major EM currencies, though a disruptive strike in Brazil and the escalating sense of political chaos amid the long wait for elections in October has seen the real moving to the bottom of the performance rankings in recent weeks, as we point out in our latest EM FX Weekly released Friday.
Chart: AUDUSD
The currency with the heaviest event risk calendar this week among G10 currencies is the Aussie, with the Reserve Bank of Australia meeting up already tonight. The market seems to be trying to put back on the “central bank convergence” hat at the moment, assuming that a more restrained Fed might allow central bank expectations elsewhere to begin to close the gap. Still, RBA expectations have effectively gone nowhere in 2018 and it would take something rather emphatic from Lowe and company to provide a major support from a rate outlook perspective. The market is not pricing in reasonable odds of an RBA rate hike move until early 2019.
The G-10 rundown
USD – the USD rally is on ice for the moment particularly versus more risk correlated currencies. Given the reaction function to solid US data on Friday, the USD may be rangebound to weak until next week’s FOMC meeting if risk appetite remains relatively stable.
EUR – the euro is in recovery mode and has plenty of room to consolidate given the extensive damage done on most euro charts. EURJPY is already bumping into a key level soon if 129.00 is achieved, while the first bigger EURUSD retracement doesn’t come in until just above 1.1900.
JPY – the JPY is weakening the most as global rates rise on fading EU existential pain and as risk appetite – at least in the major equity markets – recovers. A key hurdle to further JPY weakness is already coming into view in the 110.00-25 area in USDJPY.
GBP – sterling is staging a minor recovery within a constricting EURGBP range – the recent euro swoon with no notable volatility in EURGBP shows how vulnerable sterling remains without more clarity on Brexit or a pick-up in the UK economy and the Bank of England rate outlook.
CHF – the recent CHF strength is easing as the worst of the EU existential fears fade, though the recent sell-off has done structural damage to the upside prospects. The first major resistance at the 200-day moving average is now above 1.1650.
AUD – as noted above, the Aussie volatility looks high beta to the next moves in risk appetite and the Australia-specific even risks through the Wednesday GDP data, with AUDUSD staring down very pivotal levels soon if it continues to rally.
CAD – USDCAD is finding resistance in the 1.3000 area so far and the lid may be on for now if US rate expectations remain flat for now and risk appetite can stage a comeback. The chart situation looks tense in the bigger picture due to the shrinking range.
NZD – AUDNZD is in an interesting charge back higher ahead of tonight’s RBA meeting. We are kiwi bears, but it's hard to take a fresh look at NZDUSD shorts here unless risk appetite fades or the entire US yield curve begins to lift again.
SEK – SEK should outperform the euro if the EU existential threat continues to fade in the near term. As Sweden gears up for elections in early September, could the weak krona prove a popular issue? Swedish tourists this summer will not enjoy their foreign holiday bills.
NOK – if risk appetite and oil can maintain altitude and the EU existential threats ease a bit further here, it is difficult to understand why EURNOK can’t explore the next range lower on the chart towards 9.25.
Upcoming Economic Calendar Highlights (all times GMT)
0700 – Turkey May CPI
0830 – UK May Construction PMI
0900 – Euro zone Apr. PPI
1130 – ECB’s Nowotny to speak
1400 – US Apr. Factory Orders
1400 – US Final Durable Goods Orders
2230 – Australia May AiG Services Index
0430 – Australia RBA Cash Target
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