The dollar traded higher against all but two of its G10 peers, despite the slower than expected US CPIs for May. Combined with the fact that the broader market sentiment remained subdued after Trump’s remarks that he is the one holding up a deal with China, this suggests that investors still see the greenback as a safe haven. The Aussie was the main loser, coming under selling interest after Australia’s employment report kept the door wide open for another RBA rate decrease soon.
The dollar traded higher against all but two of the other G10 currencies on Wednesday and during the Asian morning Thursday. It underperformed slightly against JPY, while it was found virtually unchanged against NZD. The main losers were AUD, NOK and EUR in that order.
Yesterday, the main release we got from the US was the CPIs for May. The headline rate declined to +1.8% yoy from 2.0%, missing estimates of +1.9%. The core one ticked down to +2.0% yoy instead of staying unchanged at +2.1%. Following the disappointing NFPs last Friday, the more-than-expected slowdown in inflation may have prompted investors to increase somewhat their already elevated bets with regards to lower US interest rates by the end of this year. Indeed, according to the Fed funds futures, a 25bps rate decrease is now fully priced in for August, while another is still almost fully factored in for November.
The dollar slid somewhat at the time of the release but was quick to recover and outperform almost all its major counterparts. It seems that the slowdown in both the headline and core PPIs the day before has prepared investors for a miss in both the CPI rates, while a general risk-off mood may have been the catalyst behind the greenback’s quick recovery as it is probably still seen as a safe haven.
The risk-off trading activity also led to a strengthening of the yen, and a slide in global equity indices. Major EU and US indices closed in the red, while in Asia today, Japan’s Nikkei closed 0.57% down, though China’s Shanghai Composite was 0.05% up. It appears after the US-Mexico deal, focus has turned back on the US-China sequel. Yesterday, we noted that risk appetite has already softened from Tuesday perhaps due to remarks by US President Trump that he is the one holding up a deal with China and unless China goes back to the deal that was previously on the table, he is not interested in moving ahead.
Now the big question is which will be the main driver for market sentiment from now onwards? The elevated bets over lower Fed rates, or concerns over the US-China trade relationship? Initially, and as we head into next week’s FOMC meeting, it could be the first. Thus, we see a decent chance for equities to rebound somewhat again, and for the dollar to come under some selling interest. Nevertheless, after the gathering, investors may lock their gaze on the US-China saga and the G20 summit scheduled for the end of the month, given that Trump has threatened to immediately impose tariffs on the remaining imports from China if China’s President Xi Jinping does not attend the summit.
Passing the ball to the pound, the British currency got a boost during the European morning after the frontrunning candidate for replacing Theresa May, Boris Johnson, said that he is not aiming for a no-deal Brexit. That said, sterling came under selling interest hours later, after the Labour’s motion that intended to give lawmakers parliamentary control on June 25th in order to introduce legislation and prevent a no-deal outcome, was voted down. As for our view, it has not changed. We still believe that the likelihood of a no-deal Brexit remains decent. Yes, Boris Johnson said that he is not aiming for such an outcome, but he did not rule it out either. His stance is that the UK must leave the EU on October 31st no matter what, and with the EU not willing to renegotiate, the default option for exiting then remains a disorderly divorce.
From the beginning of May, USD/CHF has been drifting lower, trading below its short-term downside resistance line taken from the high of May 7th. But recently, the pair started moving sideways, roughly between the 0.9860 and 0.9960 levels. If the rate struggles to push above the upper side of that small range, this could attract the sellers back into the game and USD/CHF may slide towards slightly lower areas. This is why we will stay somewhat bearish for now.
A drop below the 0.9935 hurdle could increase the pair’s chances of making its way a bit lower, where the next potential support zone might be seen near the 0.9903 obstacle, which is yesterday’s low. The rate may bounce back up from there, but if it continues to trade below the upper side of the aforementioned range, at 0.9960, the bears could take advantage of the slightly-higher rate and drive USD/CHF back down. If the 0.9903 hurdle gets bypassed, the next potential target for the sellers could be the 0.9885 zone, or even the 0.9860 level, which is the lower side of the previously-discussed range.
In order to shift our attention more to the upside, ideally, we would need to see a clear break above the aforementioned downside line and a push above the psychological 1.0000 barrier, marked near the high of June 3rd. This way, the pair could change the course of its short-term trend and move in the northern direction, where the rate could test the 1.0033 obstacle, marked by the lows of May 27th and 28th. If the buying doesn’t end there, a break of that obstacle may lead the pair to the 1.0065 area, which is the intraday swing high of May 31st.
Among the G10 currencies, the main loser was the Aussie. Apart from a general risk-off trading, which usually results in AUD selling, Australia’s employment report for May added extra pressure to the currency. At first glance, the report did not appear that bad. It showed that the economy gained more jobs than in May, while the forecast was for a slowdown. The unemployment rate remained unchanged at 5.2%, instead of ticking down to 5.1% as the forecast suggested, but the participation rate rose as well, which perhaps means that more people are encouraged to actively start looking for a job, and that’s why the unemployment rate did not decline.
However, looking into the details, we see that most of the new jobs were part-time. Alongside the fact that the unemployment rate did not came closer to the 4.5% level, which the RBA believes is needed for reviving inflation pressures, this suggests a not-so-robust labor market and keeps the door open for another RBA cut in the upcoming gatherings. That’s why investors may have sold the Aussie at the time of the release.
According to the ASX 30-day interbank cash rate futures implied yield curve, another quarter-point rate decrease is now more-than-fully priced in for August, while there is a 75% probability for that to happen in July. Focus for AUD-traders may start slowly turning to the minutes of the latest RBA meeting, which are scheduled to be released next Tuesday. We believe that market participants will dig into the minutes to find out how willing officials were to proceed with further rate reductions, just after hitting the cut button. If the minutes show that officials have discussed more cuts, even ahead of the GDP and employment data, the probability for a July move could rise further.
During the Asian morning today, the Australian dollar took a hit against all of its major counterparts. AUD/JPY broke below its key support area, at 74.95, marked by the low of June 3rd, this way clearing the path for itself to move further down. The pair is also trading below its short-term downside resistance line drawn from the high of May 20th. We will stay somewhat bearish for now and continue targeting slightly lower support zones.
As mentioned above, given that the 74.95 hurdle is now broken, such a move confirms a forthcoming lower low and the pair could easily slide further down towards its next possible support, at 74.30, which marks the closing and the opening levels of January 2nd and 3rd respectively. The rate could bounce back up from there, but if it fails to move back above the 74.95 barrier, this may result in another leg of selling, which could push AUD/JPY below the 74.30 obstacle. If that happens, the pair could continue drifting south and test the 73.95 area, marked by the low of January 3rd.
Alternatively, in order to shift our short-term view to a more positive one, we will wait until we see a clear break of the aforementioned downside line and a move above the 76.00 mark, which is the high of June 9th. Such progress could make more bulls excited again, potentially allowing them to ride AUD/JPY towards higher areas, like the 76.40 hurdle, marked by the high of May 20th. If that area is still no match for the buyers, a break of it could send the rate traveling all the way to the 77.10 level, which is the high of May 10th.
During the European day, the SNB decides on interest rates. At their latest gathering, Swiss policymakers kept interest rates unchanged at -0.75%, sticking to their guns that they will remain active in the foreign exchange market as necessary, and noting that the franc is still highly valued. They also revised further down their inflation projections. They expected the Swiss CPI rate to be at +1.5% yoy in Q4 2021, well below their 2% target, and this is conditional upon interest rates staying at current levels for the whole forecast horizon.
Latest data showed that the Swiss economy accelerated to +0.6% qoq in Q1 from +0.3% in the last three months of 2018, but the CPI slowed further, to +0.6% yoy from +0.7%. Thus, with inflation well below the Bank’s objective, and the Swiss franc strengthening notable lately due to the increased tensions between China and the US, we believe that officials will keep their stance unchanged. On May 10th, SNB Chairman Thomas Jordan said that the Bank needs to stick to its current policy framework of negative rates and foreign exchange interventions to protect the country’s economy, which adds more credence to our view.
With regards to the European data, we get Germany’s final CPI for May and Eurozone’s industrial production for April. As usual, the final German prints are expected to confirm their preliminary estimates, while Eurozone’s IP is anticipated to have declined for the third consecutive month, and at a faster pace than in March (-0.4% mom from -0.3%). In the US, we have the initial jobless claims for the week ended on June 7th.
As for tonight, during the Asian morning Friday, China’s fixed asset investment, industrial production and retail sales, all for May are scheduled to be released. Fixed asset investment is anticipated to have grown +6.1% yoy, the same pace as in April, while both IP and retail sales are expected to have accelerated, to +5.5% yoy and +8.2% yoy, from +5.4% and 7.2% respectively.
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