By John J Hardy
The euro has been firmer since yesterday’s story on dissension within the ranks at the European Central Bank, as apparently some members feel the market is mispricing the likelihood of its first rate hike – currently expected in late 2019. It’s hard to see how this story has any legs, with euro direction for now more likely coming in reaction to developments elsewhere – for example from Japan as discussed below, or more important from the US through tomorrow’s data and tonight’s Federal Open Market Committee minutes. Technically, we’re not far from at least a tactical capitulation if the EURUSD pair closes the week above the 1.1700-25 area.
Overnight, the JPY was weaker overnight after a paper
delivered by the Bank of Japan’s Masai defended the need to continue easing to bring about 2% inflation, a goal that will take some time and now one that faces added risks from global trade policy tensions. USDJPY has been caught in a nervous range, and traditionally is the most sensitive to shifts in US rates on economic data – we’ll have a better read on tomorrow’s closing levels.
The FOMC minutes are unlikely to produce notable shocks. Those looking for dovish developments are placing most of their hopes on a growing chorus of Fed members fretting about the flattening yield curve, and at the margin any perceived risks to the economy from US trade policies, but we suspect that the Fed is set to continue hiking for now until incoming data points to a need to do otherwise. The market has only priced 65% odds of a September hike and less than 50/50 odds that we see two hikes through the December FOMC meeting. The Fed is forecasting three hikes for 2019 while the market is second guessing most of that. The July 17 Powell testimony is our next important Fed event risk.
The boost to the euro from yesterday’s ECB story combined with fresh doubts that the Bank of Japan will ever reach for policy restraint driving a EURJPY rally. But any more sustained JPY downside would seem to need a sharper rise in yields, which would in turn likely require strong US data as US bond markets set the tone globally. For now, on a technical basis we’ll watch EURJPY’s attempt to return to the 130.00 area while noting that we actually prefer the pair lower on a fundamental basis.
The G-10 rundown
USD – nothing going for the US dollar at the moment, with the rally taking a breather on China’s tapping the breaks on further yuan devaluation. Incoming data could prove more influential than the FOMC minutes tonight.
EUR – the ECB story yesterday on hawkish dissent within the ECB’s ranks is trying to sprout legs as Germany’s May Factory Orders bounces back strongly from a string of weak readings. The euro strength most pronounced in EURJPY after overnight JPY developments. For EURUSD, the key local hurdle is 1.1700-25 and the incoming US event risks through tomorrow’s session.
JPY – the market surprisingly reactive this morning to BoJ board member Masai’s comments and perhaps a paper she delivered overnight which strongly highlights concerns on US trade policy and its ramifications. More JPY volatility needs external stimuli like shifts in US yields or fresh risk off (that 200-day moving average in the S&P 500 looming not far away).
GBP – sterling holding its breath ahead of this weekends attempt by the Tories to put together a united front on how to approach Brexit from here as the clock winds down. EURGBP is playing cat and mouse with its 200-day moving average.
CHF – EURCHF trying to clear 1.1600 this morning and could have a go at the 200-day moving average up ahead of 1.1700, but hard to build confidence in a major rally unless EU existential threats – Italy – are reset back to the levels in March/April.
AUD – the Aussie got a lifeline from China’s change of direction on the CNY but further upside potential looks limited in our view as we focus on downside risks for AUDUSD barring negative US data surprises.
CAD – USDCAD is staring down the important pivot zone that is unfortunately wide, stretching all the way to 1.3000 before we know if the bull move is faltering (arguably, we’d have to get all the way back to 1.2800 for a structural failure…). Next key step for CAD is next week’s Bank of Canada meeting, which is seen very likely to produce a hike and where guidance will be the focus.
NZD - the kiwi pushing back against the AUD and AUDNZD needs to pull itself together soon – perhaps before 1.0800 to avoid the impression of – once again – nothing doing in AUDNZD. NZDUSD is also running out of room – perhaps to 0.6800-50 to the upside if we’re to keep the downside momentum intact.
SEK – more incoming data this morning could provide a further boost for SEK if positive. The Riksbank meeting has changed the plot for SEK and the next key levels in EURSEK are the June 10.09 area low and then the 200-day moving average currently around 10.04.
NOK – the NOKSEK chart looks ugly after this recent reversal for more downside potential and EURNOK a study in paint drying. Next event risk for NOK next Tuesday’s June CPI release. The low core CPI readings preventing the market from working any strong policy adjustment angle from Norges Bank.
Upcoming Economic Calendar Highlights (all times GMT)
1000 – UK BoE Governor Carney to speak
1115 – ECB’s Weidmann, Mersch, Nowotny, Nouy to speak
1215 – US Jun. ADP Employment Change
1230 – US Weekly Initial Jobless Claims
1400 – US Jun. ISM Non-manufacturing
1500 – US Weekly DoE Crude Oil/Product Inventories
1800 – US FOMC Meeting Minutes