Risk appetite improved somewhat yesterday, perhaps due to US President Trump softening his rhetoric around the US-China trade saga. In the FX world, SEK was the biggest gainer following Sweden’s better-than-expected inflation data for April, while GBP was the main loser, staying under selling interest due to the increased uncertainty surrounding the UK political landscape. The Aussie was also among the losers, with its traders waiting for Australia’s jobs data, due out during the Asian morning Thursday. Ahead of that though, the spotlight is likely to turn to Canada’s inflation prints for April.
The dollar traded higher against most of the other G10 currencies on Tuesday and during the Asian morning Wednesday. It gained the most against GBP, AUD and EUR in that order, while it lost some ground versus SEK and CAD. The greenback traded virtually unchanged against NOK.
Although not clear by the performance in the FX world, risk appetite improved somewhat yesterday, and this was evident by the performance in the equity markets. Most major EU and US indices closed in positive territory, with Asian bourses following suit today.
Perhaps this was due to US President Trump softening his rhetoric around the US-China trade saga, or it was just the result of some short covering after the latest tumble. Yesterday, the US President said that talks between the world’s two largest economies have not collapsed and referred to the escalating trade dispute as “a little squabble”. That said, our view has not changed. It remains the same as yesterday. With the US still willing to tariff all the remaining Chinese imports, and China announcing higher tariffs on US goods from June 1st, it's hard to say that the worst is behind us. We would like to see more concrete “truce” signals before we get confident on further recovery in the broader risk sentiment.
Back to the currencies, the Swedish Krona was yesterday’s main gainer, rallying after the better-than-expected Swedish inflation data for April. The CPI rate rose to +2.1% yoy from +1.9% as was expected, but the CPIF metric increased to +2.0% yoy from +1.8%, exceeding the +1.9% forecast. More importantly, the core CPIF rate, which excludes the volatile items of energy, ticked up to +1.6% yoy from +1.5%.
At their latest gathering, Riksbank policymakers pushed back the timing of when they expect interest rates to rise again, noting that “The repo rate is expected to be raised again towards the end of the year or at the beginning of next year”. Thus, judging by the market response, yesterday’s inflation data may have raised speculation that the end of the year may be more likely than the beginning of the next. However, we prefer not to rush into conclusions based on this data set. The next Riksbank meeting is scheduled for July 2nd, and up until then we will have the May inflation data in hand in order to examine whether the world’s oldest central bank could hike this year, or not.
The pound was the main loser, with Cable hitting its lowest since April 26th. Yesterday, the only economic release we got from the UK was the employment data for March, but the currency reacted very little at the time of the release. Just for the record, the unemployment rate ticked down to a 45-year low of 3.8% from 3.9%, but wages slowed. Average weekly earnings including bonuses decelerated to +3.2% yoy from 3.5%, missing estimates of a smaller slowdown, to +3.4%, while the excluding bonuses rate ticked down to +3.3% yoy, in line with the forecast.
It seems that GBP-traders keep their gaze locked on the political landscape, with all the uncertainty surrounding the UK’s future relationship with the EU prompting them to sell even more. Talks between the government and the opposition Labour Party continue to lead nowhere, with PM May repeatedly ruling out a permanent customs union with the EU, and several Labour members arguing that any potential deal should be put into a second referendum, something the government opposes. Yesterday, May’s spokesman said that she is now planning to put forward another deal-vote in Parliament in the week beginning on June 3rd, but having the abovementioned in mind, we see the case of any deal passing through as a hard task. Conservative hardliners are all but certain to reject anything including Labour’s demand for a customs union, while Labour MPs are unlikely to agree on a deal that is not accompanied by a second referendum.
From the beginning of this month, GBP/CHF has been on a steep slide lower, trading below its tentative short-term downside resistance line drawn from the high of May 3rd. Yesterday and on the day before that, the pair found good support near the 1.3010 hurdle and now keeps on balancing slightly above it. Even though GBP/CHF is still looking weak from the short-term perspective, it is already quite oversold. That said, we will stay put for now and wait for a clear break of one of our key levels, before examining any further directional move.
If the rate continues with the overall decline and drops below the 1.3010 barrier, this would confirm a forthcoming lower low and send the pair to the 1.2990 zone, for a quick test. That zone held the rate from sliding further on April 5th. If this time the 1.2990 hurdle is not able to withstand the bear-pressure, a break lower could send the pair towards the strong 1.2920 obstacle, marked by the lows of March 21st and 29th.
On the other hand, a break above the 1.3066 barrier, marked by the high of yesterday, could invite more bulls into the action. Such a move may result in a larger correction to the upside for GBP/CHF. We will then target the 1.3105 hurdle, which is the low of May 12th, a break of which could send the rate further up. The pair might end up touching the aforementioned downside line, or slightly above it, the 1.3158 level, which is the highest point of May 13th.
The Aussie was the second loser in line, staying under selling interest ahead of Australia’s employment data for April, due out tonight. Strangely, the currency reacted very little to China’s disappointing industrial production, retail sales and fixed asset investment data for April, that was out during the Asian morning today. Maybe, this was due to the increased selling activity ahead of the data. Even China’s Shanghai Composite ignored the data, with investors staying more focused on headlines surrounding the US-China trade sequel. Australia’s wage price index was also out, with the yoy rate staying unchanged at +2.3%.
Now, back to tonight’s employment data, the forecasts suggest that the unemployment rate held steady at 5.0% and that the employment changed slowed to 15.2k from 25.7k in March. At its latest meeting, the RBA decided to keep interest rates unchanged at +1.50%, despite some speculation for a rate cut. According to the ASX 30-day interbank cash rate futures implied yield curve, investors now expect a cut in August. In our view, a slowdown in jobs growth by itself is unlikely to prompt them to bring that timing forth, to the upcoming meeting in June, especially with wage growth staying at its strongest level since 2015. We would like to see job losses and a notable rebound in the unemployment rate before we start examining whether officials could be tempted to hit the cut button when they meet next.
Passing the ball to the Loonie, today, its traders are likely to lock their gaze on Canada’s CPIs for April. Expectations are for the headline rate to have ticked up to +2.0% yoy from +1.9%, while the core one is anticipated to have risen to +1.8% yoy from +1.6%. Coming on top of the astonishing employment report for the month, which revealed record job gains, accelerating inflation could be encouraging news for BoC policymakers and may prompt them to adopt a more sanguine stance when they meet next, on May 29th. However, we believe that it is too early for them to start thinking about rate increases again. After all, they abandoned their hiking bias just at the previous meeting. We believe that they may prefer to wait for more evidence of improvement before they turn their eyes to the hike button.
AUD/CAD continues to drift lower, trading below its short-term downside resistance line taken from the high of April 18th. It also looks like the pair is on its way to test the 0.9315 barrier, which was seen acting as a strong support at the end of February. Even if we see a rebound from that support area, as long as the rate remains below that downside line, we will remain slightly bearish over the short-term outlook.
As mentioned above, AUD/CAD could travel a bit lower to test the 0.9315 support zone, marked by the lows of February 21st and March 1st. If the rate stalls around there, or even rebounds, the pair might re-visit the 0.9347 area, which is yesterday’s low. However, as long as it continues to sit below the aforementioned downside resistance line, we will remain sceptical over larger extensions to the upside. This is when the bears could take control of the steering wheel again and push the pair back down, aiming for the 0.9315 obstacle, a break of which might lead the rate towards the 0.9295 level, marked by the intraday swing low of October 31st.
Alternatively, in order to examining a trend reversal to the upside, we would need to see a break of the above-mentioned downside line and a push above the 0.9395 barrier, marked near the low of May 9th. This way, more buyers could see this as a good opportunity to step in and drive AUD/CAD towards the 0.9430 obstacle, a break of which might lead the pair higher, potentially testing the 0.9457 level. That level marks the high of May 8th.
During the European day, the 2nd estimate of Eurozone’s GDP for Q1 is coming out. Expectations are for the release to confirm the 1st estimate and reveal that the Euro-area economy expanded 0.4% qoq from +0.2%.
Later in the day, the US retail sales and industrial production, both for April, are due to be released. Both headline and core sales are expected to have slowed to +0.2% mom and +0.7% mom, from +1.2%, while industrial production is expected to have stagnated after sliding 0.1% in March.
With regards to the energy market, we get the EIA (Energy Information Administration) weekly report on crude inventories for the week ended on May 10th. The forecast is for a 0.80mn barrels decrease, after the 3.96mn slide reported for the week before. That said, yesterday, the API report revealed a 8.60mn barrels jump and thus, we see the risks surrounding the EIA forecast as tilted to the upside. The IEA (International Energy Agency) monthly oil market report is also due to be released.
We also have four speakers on the agenda: Fed Board Governor Randal Quarles, Richmond Fed President Thomas Barkin, ECB Chief Economist Peter Praet and ECB Executive Board member Benoit Coeure.
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