Trade war threat in spotlight as markets sanguine
Last week marked the largest setback in the US Dollar’s march higher from mid-April lows to an 11-month high. The benchmark currency swung higher amid worries about political instability in Italy and Spain only to seesaw in the opposite direction midweek as risk appetite recovered. Rome took a step back from the brink and Spain seemed to manage a relatively orderly removal of long-serving Prime Minister Mariano Rajoy.
The markets were also surprisingly sanguine about a US decision to allow steel and aluminum tariff exemptions for Canada, Mexico and the EU to lapse. The target countries — all of them staunch US allies — swiftly announced retaliatory measures. Perhaps investors saw the move as a characteristic attempt by President Trump to throw his weight around in a negotiation, and thus as inherently temporary.
The week ahead ought to demonstrate whether this rosy interpretation will hold up. A lull in top-tier economic data flow will put trade talks front and center. Commerce Secretary Wilbur Ross will travel to China, Japan’s Prime Minister Shinzo Abe will visit the White House, and G7 leaders will gather for a summit in Canada. A gathering of the group’s finance ministers last week was reportedly a tense affair.
This promises to tie price action to incoming headline flow as traders weigh up soundbites to gauge whether Trump’s aggressive posture will make for settlement or escalation. A sense of the latter is likely to sour sentiment and bolster haven demand for the greenback. The currency may see near-term losses if the former is the case, but these might be short-lived as the risk-on puts Fed rate hike prospects back in focus.
The Japanese Yen came into this week riding a wave of risk aversion, showing strength against most major currencies in a theme that had started to show more prominently last week. When the US-North Korea summit was called off, and as trade tensions with China started to get back in the headlines, a spate of Yen-strength developed that ran into this week’s open. And when this was coupled with another fresh bout of political risk out of Europe, that theme of risk aversion caught another gust of wind, and the Yen continued to drivehigher. In USD/JPY, this helped to set a fresh May low just ahead of the end of the month, and the prospect of bearish continuation in the pair was starting to look more attractive.
But the final three days of this week saw the world take a step back from the ledges of risk aversion, and Yenweakness started to come-back, helping to wash away those earlier-week losses. At this point, many Yen-pairs are displaying Doji formations on the weekly chart, indicating how we may be sitting ahead of a longer-term bounce after last week’s sell-off.
The sell-off in Sterling pairs over the last 4-6 weeks is seemingly coming to an end with recent data and surveys pointing to potentially stronger growth in the second-quarter of the year after a tepid first-quarter. This week’s EC Economic Sentiment survey for the UK rose to 107.4 in May from 105.5 in April with the consumer confidence indicator rising to a nine-month high of -3.0 against a prior month’s reading of -5.9. In addition, today’s Markit UK Manufacturing PMI rose to 54.4, exceeding expectations of 53.5 and last month’s reading of 53.9. While these two indicators do not on their own point to stronger growth, combined with slightly better-thanexpected retail sales numbers and a robust jobs market, the weather-related weakness in Q1 should be a thing of the past.
While we have changed our outlook to bullish from neutral, traders will need to look at a variety of Sterling pairs to try and find the right trade for them. The US dollar remains strong and was given another uplift Friday on better-thanexpected jobs and wages data, while the Canadian dollar recently got an uplift from mildly-hawkish BoC rhetoric at this week’s central bank rate decision before falling back on disappointing Q1 GDP numbers. Other pairs that traders should study include GBPJPY and GBPNZD.
The Australian Dollar market can look forward to two major domestic economic news points in the coming week.
Investors will get a look at official Gross Domestic Product data on Wednesday. This should have picked up from the fourth quarter’s 0.4% on-quarter rise, economists reckon, with those at Westpac now looking for a punchy 0.9% gain. Admittedly, the previous set of numbers shouldn’t prove too hard to beat but, if bullish forecasts are met, then the Australian Dollar can probably expect a little support, simply on the basis that its home economy is growing faster than most comparable peers.
However, investors will also hear this week from the Reserve Bank of Australia. It will set monetary policy on Tuesday and no change is expected to the all-time low official cash rate. It is all-but certain to remain at 1.50% for a new record of 20 straight months. Indeed, rate futures markets don’t fully price-in a rise of any sort until late 2019.
The problem, and it’s an old one now, is that Australian economy is not doing terribly badly, but wages and inflation remain stickily low, binding the RBA’s hands.
While this gloomy interest-rate differential backdrop is unlikely to alter in the coming week, the Australian Dollar did put in a measure of outperformance in the past month. It has risen against things like the generally beleaguered British Pound but also against the US Dollar, albeit to a modest extent.
If the growth data exceed expectations, or even fail to disappoint, then this bullish momentum could yet be sustained.
So it’s a cautiously bullish call this week, but keep an eye on the US numbers too. Even with plentiful Australian events on the data schedule, the US Dollar is likely to drive AUD/USD in the end.
Gold prices are trading back below the $1300 handle as fresh developments coming out of the US economy boost bets for higher interest rates, and market participants may continue to shun the precious metal as the Federal Reserve appears to be on course to normalize monetary policy throughout the secondhalf of the year.
With limited US data prints on tap for the week ahead, gold prices may face range-bound conditions especially as the Federal Open Market Committee (FOMC) enters its quiet period ahead of the June 13 interest rate decision, but the material shift in market behavior may continue to take shape over the nearterm as the central bank is widely expected to deliver a 25bp rate-hike later this month.
As a result, gold prices remain vulnerable ahead of the quarterly meeting as Chairman Jerome Powell & Co. plan to phase out the forward-guidance for monetary policy, and the updated projections from Fed officials may produce fresh headwinds for bullion if the central bank shows a greater willingness to extend the hiking cycle.
On Friday, we had the release of the May jobs report, with Non-farm Payrolls coming in at +223k, above the +190k consensus estimate. The unemployment rate ticked down to 3.8% from 3.9%, while wage inflation via average hourly earnings edged higher to 2.7% from the prior month’s reading of 2.6%. The S&P 500 futures kneejerked lower initially on the upbeat report, but recovered and extended gains throughout the day.
Looking ahead to next week the calendar is light in terms of ‘high’ impact data releases outside of the release of ISM Non-Manufacturing data due out on Tuesday. The S&P 500 took a hit on Tuesday and tested the trend-line running lower off the record high with success. There is room for the market to trade higher if it can maintain last week’s low at 267.6, but it may chop around more before doing so; 274.2 is the breakout level to watch. A choppy trend higher may be under way since April, but still remains fragile with momentum generally lacking and a broader topping scenario still on the table.
The last few weeks have not been as kind to Brent & WTI crude bulls. A confluence of factors that limit the premium that had been witnessed in the futures market includes likely increase of supply from OPEC and their allies, rising US Rig counts that has led to higher US production and record US exports.
Traders have best seen the increase in production by witnessing the widening spread between WTI-Brent. The spread has widened to the most since 2015. However, it is hard to argue that the economy is about to move into a production-led or consumption-led drop. The consumption per the ISM data on Friday was incredibly strong despite higher input prices and at the same time US consumer confidence remains robust.