- Market lacks conviction as event risks loom
- Unexpectedly large drop in Chinese exports
- Market is split on New Zealand rate cut outlook
Reasons to be fearful – Brexit and FOMC. Images: iStock
By John J Hardy
The lack of follow on action from Friday’s weak US jobs report outside of USD/risk trades shows a lack of conviction and reactive posture ahead of the next event risks, including a Federal Open Market Committee meeting that is unlikely to bring any surprises (an expressed desire to hike and as hawkish a stance as the current S&P500 level allows, but a clear data dependency). The bigger event risk is the UK referendum on June 23, which may be keeping considerable capital on the sidelines, both in currency and risk- terms.
Chinese trade data showed a fall in exports that was larger than expected, though imports beat forecasts, confirming that domestic demand has increased as China has gone down the stimulus route again earlier this year.
Hillary Clinton has claimed the Democratic nomination overnight on the strength of her victory in New Jersey with this result sending her delegate count over the required margin, though the California results are unclear as of this writing and are Bernie Sanders' last hope (in my view) for arguing for a brokered convention and contesting Clinton’s candidacy – we should know within hours whether Clinton has the all clear for a run into November. Yesterday, Donald Trump gave a speech read from a teleprompter as he attempts a transition to a take on a more “presidential” style and the first polls to emerge post-Brexit on Clinton vs. Trump for the November 8 election are likely to begin impacting financial markets as we all ponder what a Trump presidency might mean.
The kiwi is squeezing higher into the Reserve Bank of New Zealand meeting tonight – Thursday in NZ driven by fears (on the bears’ part) that the current global environment of strong risk appetite, rising oil prices, strong domestic housing prices, and a rebounding China may stay the RBNZ’s hand for now. In any case, the market is split on the prospects of a rate cut and the reaction potential is very much two-way over the meeting. We still suspect that the kiwi, even in the event the RBNZ fails to cut, is getting to the painfully expensive end of its potential versus both the USD and AUD.
NZDUSD is squeezing higher ahead of the RBNZ meeting, which could fall either way, though I would expect a no-cut to include a rather dovish forward guidance and a cut to include a wait-and-see before preannouncing more spin, somewhat softening the impact of the decision. The 0.7000 area may fail to hold again on an RBNZ pass, but the action above that level may not tarry for long.
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The G10 rundown – express edition
USD – the high beta pairs remain USD/risky currencies and hard to see the move extending for long if US data continues to worsen, but that will take some time to establish.
EUR – See no upside breakout potential in EURUSD ahead of Brexit vote, may stay rangebound there and the euro is generally merely reactive to developments elsewhere (softer versus the risky currencies in risk on and stronger in risk-off.)
JPY – yen strength sits awkwardly with recent global risk-on move, and longer term, market pondering BoJ and Abe’s next moves as QQE seen as broken-and-can’t-be-fixed. USDJPY assumed caught in a range for now.
GBP – Waiting for the referendum vote and fallout either way.
CHF – not sure what has driven recent strength, may be Brexit speculation – signs of bigger SNB intervention in swelling of sight deposits for May.
AUD – reaching most of near term potential after last week’s RBA – expecting AUDUSD rally to fade somewhere from here to 0.7570.
NZD – large reactive potential around the RBNZ meeting, most likely somewhat larger potential to the downside as the RBNZ won’t want to aggravate its recent strength and may look to choose words carefully.
SEK – less interest in in SEK than the other smaller currencies in this environment due to its very negative rate but EURSEK may negatively correlate with risk appetite.
NOK – yesterday’s regional network report was relatively positive and the oil price has pushed higher still. Given the collapse in NOK relative to the USD since 2014, the NOK-oil price is only down about a third from the average during the 2012-14 time frame. Pressure on EURNOK could pick up if we see a 9.15 break.
Upcoming Economic Calendar Highlights (all times GMT)
- UK Apr. Manufacturing Production (0830)
- Canada May Housing Starts (1215)
- New Zealand RBNZ Official Cash Rate (2100)
– Edited by Clare MacCarthy
John J Hardy is head of FX strategy at Saxo Bank