The week in FX: are we getting back to the macro?
A renewed focus on macroeconomics looked promising after Emmanuel Macron’s election victory, says Nordine Naam, Senior Forex Analyst at Natixis, but with a fresh scandal incoming from the White House seemingly everyday, things might not be so straightforward…
The US dollar recovered over the course of last week following Emmanuel Macron’s victory and a series of statements by Federal Open Market Committee (FOMC) members calling for further monetary normalisation. The euro was profitable which, in turn, proved favourable to the greenback. Of course, now that political risks have dissipated, the market’s focus should shift back to macroeconomic fundamentals – particularly changes in the monetary policies of the world’s leading central banks.
Given the solidity of the latest macroeconomic indicators – notably US employment figures – several FOMC members have made the case once again for raising the Fed Funds rate three times over the coming year. Such statements are clearly an attempt to prepare the market for a 25bp hike when the FOMC meets on 14 June, the probability now being priced at 100%. On the other hand, the Fed Funds curve remains excessively flat further out until end-2018, as just three hikes are priced in when our own expectations are for five.
In the short term, the US dollar will continue to firm as we move nearer the next FOMC meeting. In the interval, the market will focus on macroeconomic indicators – notably retail sales, housing starts, industrial production and the Philly Fed index, and also speeches by FOMC members.
Meanwhile, the market will also closely follow the news of the sacking of James Comey, FBI Director. With the inquiry over Trump’s relations with Russia incomplete, the Democrats are pressing for the appointment of a special prosecutor – however, the Republicans are stonewalling. Indeed, this latest affair – and the potential it has to further strain relations within Congress – risks further delaying the announcement of economic stimulus measures for the year. Indeed, Congress is likely to take an even harder line on any proposed spending hikes. All in all, we see the DXY dollar index recovering back above 100 in coming weeks.
EUR: EUR/USD to extend correction towards 1.06
After rebounding to 1.1023, the EUR/USD went back on the retreat to 1.084 in the face of a stronger US dollar. This was partly due to profit-taking on strategies playing a technical rebound of the euro. As indicated last week, there are few factors susceptible of stoking an extension of the euro’s rebound. Short euro positions were all squared last week, which means that the market has reverted to being neutral on the single currency. For the EUR/USD to rise higher, the market would have needed to turn buyer, bearing in mind much of its rebound in recent weeks was fuelled by the squaring of short positions. As of yet, there are few reasons for turning buyer of the euro. Addressing the Dutch Parliament, Mario Draghi repeated that “underlying inflation pressures continue to remain subdued and have yet to show a convincing upward trend’.
This suggests that the European Central Bank (ECB) is in no hurry to raise key monetary policy rates, which is already what is being priced by the market over the next year. However, at the monetary policy meeting on 8 June, the ECB could adopt a more neutral tone, its way of preparing the market for the September announcement of a QE recalibration in H1 2018. Once again, this sequence is already fully priced into the euro. Under these conditions, the EUR/USD will probably consolidate further by mid-June, mainly in the face of a stronger dollar, bolstered by the divergence in the monetary policies of the ECB and the Fed. The EUR/USD is likely to go on and test 1.06 in coming weeks.
GBP: EUR/GBP heading towards 0.8325
While there were rumours that two Monetary Policy Committee (MPC) members would vote for an interest rate hike, this proved unfounded. There was no change from the previous meeting, with the Committee voting by a 7-1 majority to keep the bank rate on hold. This clearly disappointed the market, in turn weighing on sterling, despite the Bank of England (BoE) hinting that a monetary tightening could occur earlier than expected if the Brexit effects prove limited.
However, the latest figures have revealed a sharp slowdown in industrial production. After growing by almost 4.3% year-on-year (YoY) in December, industrial production declined by 0.5% month-on-month (MoM) in March. This week, watch out for consumer prices (expected to show an increase of 2.6% in April), retail sales and the labour force survey. In this context, the EUR/GBP could recover temporarily towards 0.8325 if these publications are good.
JPY: USD/JPY heading towards 115
The USD/JPY briefly recovered back above 114 before correcting at the end of last week, tracking the performance of US equity markets and the downturn in US long interest rates. Even so, we remain positive on the USD/JPY given that the greenback is set to firm in the short term and that Japan’s monetary policy will be accommodating for a prolonged period. We expect the USD/JPY to recover back above 115 in coming weeks.
CHF: EUR/CHF stable between 1.08 and 1.10
Like the yen, the Swiss franc corrected in the wake of Emmanuel Macron’s victory – causing the European political risk to subside. The EUR/CHF recovered back above 1.09, setting a high at 1.095. This rebound is likely to be limited in that the euro will remain weak over the short to medium term, with the ECB being in no hurry to raise interest rates given that inflation is holding on low.
Furthermore, the Swiss franc continues to be bolstered by a current account surplus of almost 10% of GDP, which is not being offset by massive capital outflows. On the contrary, sight deposits at banks still tower on high by past standards. Finally, global risks still lurk, notably because Italy is heading for general elections in February 2018. All in all, we remain cautious on the EUR/CHF, which could end up pulling back towards 1.08, even though in the short term the pair could test 1.11.
NZD: NZD/USD heading towards 0.667
Against all expectations, the Reserve Bank of New Zealand (RBNZ) proved dovish at its recent monetary policy meeting.
It stated it was likely to maintain the monetary status quo for a prolonged period given that inflation remains weak. Prudential measures to rein in the property market are starting to have an effect on home sales, which declined by 31% YoY in April. This in turn led to a decline in expectations of an interest rate hike by the central bank, which weighed on the New Zealand dollar. Given the direction taken generally by commodity prices and the firmness of the US dollar, the NZD/USD still has some downside potential towards 0.667.
AUD: AUD/USD heading towards 0.729
The news flow is turning increasingly downbeat in Australia, with a series of negative macroeconomic indicators.
Retail sales were down once again in March, while building permits fell by 13.4% MoM and by almost 20% YoY. At the same time, iron ore prices have continued to slide to now $60/t in reaction to the stock overhang at global level. Under these conditions, we remain bearish on the AUD/USD towards 0.729, particularly if the minutes of the last Reserve Bank of Australia (RBA) meeting reveal the central bank is cautious over macroeconomic risks, notably those shrouding the property market.
NOK/SEK: set to test 1.0520
With daily indicators upbeat, weekly volatility has stabilised and the weekly stochastic has turned around.
Indeed, the risk of a new pullback below the long-term support at 1.0267 (monthly Bollinger moving average) is more remote. Under these conditions watch out for rebounds towards 1.04-1.0416 (9-week moving average). A breakout above these resistance levels would enable the pair to eye 1.0477 (50-week moving average) before 1.0520 (monthly Bollinger moving average). Longer term, a breakout above this last level would open the way towards 1.0644-1.0666 (weekly parabolic) before 1.0773- 1.0790 (upper band of weekly Bollinger). Supports are located around 1.0248-1.0267, around 1.0190-1.02, at 1.0142 and around 1.0080-1.01.