Chief Macro Strategist
Summary: Commodities have generally beat a path back higher this week, and most commodity-linked currencies have responded with a break higher. Even the ruble is back on the recover path despite US sanctions. If commodities and pro-cyclical currencies post a solid close today to end the week on a strong note for the reflationary theme, we could be set for a further significant upswing in everything from G-10 smalls to select EM currencies.
FX Trading focus: Weekly perspective important on today’s close for USD and pro-cyclical FX
A key takeaway this week has been that overwhelmingly strong US data was apparently well priced in before the fact. Yesterday’s batch of numbers were strong across the board, and bordered on the absurd in the case of the US Retail Sales rising nearly 10% month-on-month for the headline, as well as jobless claims dropping sharply below 600k, the lowest post-pandemic outbreak weekly number by a long shot. And yet treasuries rallied and the US dollar is posting a generally weak performance for the week, suggesting that the strength in the data was well priced in before the fact. The pessimistic interpretation on top of this is that the market is concerned that incoming data beyond the next few months could show a sharp deceleration as the stimulus effect fades, while the more neutral read here is that the Fed is going to look through this kind of data regardless of its strength in the near term and that the US stimulus and any new consumption increase from pent-up savings being drawn down will mean a further aggravation of the USD-negative twin deficits, while the treasury doesn’t needing to worry about funding itself until much later this year (due to the massive reserves built up last year that it is currently drawing on).
If we manage to stick the close this week, we will look for further outperformance from the G10 smalls next week (AUD, CAD, NZD, NOK and SEK). And select EM currencies. And if the general mood stays positive, a pair like EURUSD could just barge right through 1.2000 and make a bid sooner rather than later for the 1.2350 top.
One dark cloud in the back-ground is that we are set for a global new daily case count record for Covid in coming days, focus on India, Brazil, Turkey and Philippines for how and when these countries are getting ahead of the curve and whether any new variants are on the loose. This can yet derail commodity sentiment if the trend isn’t reversed soon.
Chart: EURGBP
EURGBP continues to unwind the gains for sterling since the beginning of the year as European sentiment has picked up sharply and the premium on sterling for its vaccine roll-out is fading. In fact, our FX Board (see below) rates sterling most negative currently. For EURGBP, between here and the ultimate resistance at perhaps 0.8870-0.8900 the pair needs to find resistance to prove the point that we will continue to reprice GBP higher now that the lay of the land is largely known for the post-Brexit environment.
Odds and ends
TRY maintains calm after Turkish Central Bank meeting. Initially on the rate decision announcement yesterday, the removal of the prior statement’s mention of continued rate hikes saw the lira weaker, but the currency stabilized quickly and returned to thetop of the recent range just ahead of the 8.00 level in USDTRY. While there is no doubt that the new central bank chief will take every opportunity to cut rates if conditions allow, the statement is perhaps also reassuring enough to encourage the idea that the new leadership isn’t set to immediately cut rates as it wants to keep the policy rate above the rate of inflation (hear that, Federal Reserve?). Given a recent calming in Turkish credit spreads and a massively supportive backdrop (recently weaker USD, another drop in US long treasury yields yesterday). I would be surprised if the lira can wring much upside in the medium term beyond what it has already achieved in recent weeks as international investors will continue to discount the currency, knowing that easing will always be the default option as soon as the window opens. Still, relative macro stability could mean it slightly outperforms on carry if Turkey’s new exploding Covid wave is reversed and the export and tourism markets can respond.
Poland CPI, a reminder of negative real rates that hurt? The zloty (PLN) has enjoyed a period of strength in sympathy with the recovery in euro sentiment as is often the case as Poland’s economy is profoundly reliant on Europe. This after EURPLN recently teased the highs for the cycle. But note the very significantly negative real rates investors suffer in country where the core CPI had rebounded to 3.7% already last month and posted a 3.9% reading for March today, while the Bank of Poland maintains a 0.10% policy rate. In coming months, we are looking at worse than -400bps of negative real yields. The PLN can only fly so high.
Next week’s calendar highlights – next week offers a few event risks worth highlighting as the US calendar goes much quieter (and this week proved the point anyway that even significant upside beats on nearly everything are being aggressively looked through). Among these are a PBOC meeting on Tuesday, Bank of Canada meeting on Wednesday, ECB meeting Thursday and Russian central bank meeting Friday (another rate hike expected – with a smart rally in RUB today an impressive show of strength given US sanctions). On the geopolitical front, note that US President Biden is meeting Japanese prime minister Suga today – the first meeting with a head of state since he became president. Watch out for statement on the Taiwan strait and China and any response.
Table: FX Board of G-10+CNH trend evolution and strength
The recent strength in the G10 smalls (slight exception for CAD) is the most noteworthy new development as growth hopes pick up for the rest of DMs as well and key cyclical commodity prices have heated up again this week after a period of fairly shallow consolidation. Spot gold is at pivotal levels as well that are likely more linked with real yields (the lower the better for precious metals) than the direction in commodities.
Table: The individual FX Board trend readings
Little to note today relative to yesterday, save for the fact that the support at the margin for the JPY from lower nominal and real yields is seeing the oldest surviving trend – CADJPY – about to roll over, although other JPY crosses remain in an uptrend – mostly Europe-linked ones.
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