ECB, US GDP top action-packed calendar
The US Dollar has launched a spirited recovery, producing the largest upswing in nearly three months last week. The move was encouragingly rooted in old-fashioned macro fundamentals rather than fickle geopolitical trends, which have become increasingly influential over currency market price action since the beginning of the year.
A combatively hawkish speech from Fed Governor Lael Brainard — previously one of the most dovish members of the US central bank’s policy-setting apparatus — appeared to inspire sharp upshift in tightening bets. The 2018-2019 rate path implied in Fed Funds futures steepened and the spread between 10-and 2-year US Treasury yields saw the largest two-day gain since early February.
Ms Brainard invoked looming “cyclical pressures” — implying a pickup in the pace of inflation — and warned that they would amplified by expansionary fiscal policy. She also cited stretched asset prices and business leverage levels, urging against complacency in the face of growing vulnerabilities. A survey of businesses from the Philadelphia Fed reinforced the point, showing firming realized and expected price pressure.
First-quarter US GDP data headlines the calendar in the week ahead. It is expected to show the annualized growth rate slowed from 2.9 to 2 percent as 2018 got underway. Leading PMI survey data suggests otherwise however, pointing to a pickup in manufacturing- and service-sector activity in the 12 months to March compared with the preceding quarter. An upside surprise may lift the greenback further.
Politics will remain an everpresent danger however. President Donald Trump has scheduled separate meetings with French President Emanuel Macron and German Chancellor Angela Merkel, with the recent US tariff hike and currency manipulation claims likely to feature prominently. Mexico is also set to hold its first presidential debate, which might carry important implications for NAFTA renegotiation efforts.
We remain neutral on GBP in the short-term but believe that the longterm uptrend in Sterling remains in place and offers potential dip buying opportunities. Strong wages and jobs data point to a potential build-up of domestic inflation, which will take over from imported inflation which is tailing off due to the strength of the pound. While expectations of a May rate hike have fallen from a peak around 80% to a current level of 55%, pushing GBP lower, BoE governor Carney said yesterday on rates that he didn’t want to get ‘too focused on the precise timing, it is more about the general path’.
Speaking on Friday BoE hawk Michael Saunders said that the economic slowdown seen in Q1 is questionable and probably temporary, adding that the economy does not need as much stimulus as before.
Ahead next week, the first look at UK Q1 GDP which is expected to slip lower from last month’s 0.4% to 0.3% due to weather-related disruptions, while the annual rate is expected unchanged at 1.4%. Brexit talk is also likely to re-surface after reports that the EU have rejected UK plans for solving the Irish border problem, a situation that would leave UK Prime Minister battling those within her party who want to stay in the Customs Union and those who don’t.
Aversion
This week saw a continuation of Yen-weakness as the currency continues to step back from the ledge of risk aversion. The first quarter of this year saw considerable Yenstrength, and this was driven by a couple of factors. Global risk aversion began to heat up in February, and this certainly helped to drive Yen-strength as safe-haven flows sought out more secure harbors. But also of issue was a continued rise in Japanese inflation, as December produced a 33-month high, followed by a 34-month high in January and another increase in February. By the time we got February inflation data, Japan was seeing price growth faster than what we were seeing in Europe, bringing with it the very requisite question as to when the BoJ might look to start planning their exit from stimulus.
At the bank’s March rate decision, the BoJ continued to strike a dovish tone. BoJ Governor, Haruhiko Kuroda, also openly voiced concern about a strong Yen negatively impacting the Japanese economy, in both consumption and capital expenditures. And earlier this week,
we got a piece of data that may help to support those dovish drives as Japanese inflation receded back towards one-percent after the rather aggressive jump from the prior two months.
The Australian Dollar was on its way to finish another week higher against its US counterpart. It did show some temporary weakness on softer Chinese industrial production figures and a rather disappointing local jobs report. However, it recovered in both instances in the aftermath. It wasn’t until closer towards the end of the week when things went south.
A pickup in hawkish Fed rate hike expectations, which were fueled by comments from Lael Brainard, boosted the US Dollar and the 10-year government bond yield rose to a 2-month high. The appeal of these assets relatively speaking hurt stocks as the S&P 500 declined about 0.6%. The sentiment-linked Aussie Dollar fell to its lowest point against its US cousin since April 10th.
Perhaps this speaks to what the currency is more interested in, and brings us to what next week has to offer. The Reserve Bank of Australia
is at the moment in no rush to adjust monetary policy. In fact, RBA’s minutes from their April rate decision reiterated this. Taking that into consideration, this may have been why there was a lack of follow-through from the Australian Dollar to last week’s Chinese and local economic statistics.
But there is one kind of data that may have a more pronounced effect on the Aussie. On Tuesday, we will get Australia’s first quarter inflation report. There, the headline rate is expected to rise to +2.0% y/y from 1.9% in the fourth quarter. Such an outcome would mean price growth in the lower boundaries of the RBA’s 2 — 3 percent target. Data out of the country has been crossing the wires below economists’ expectations as of late. If a similar situation reduces the urgency for the RBA to consider hiking, then the Aussie Dollar could fall.
Since both the Australian Dollar and its US counterpart have relatively higher yields in the FX majors spectrum, a loss of interest in the latter bodes well for the former and vice versa. For the greenback, on Friday we will get the first estimate of US first quarter GDP. With Mrs
Brainard and the beige book painting a rosy picture of the outlook, softer growth figures could hurt the greenback and boost the Aussie. This may be the case, like with Australian data, US ones have also been tending to underperform.
Last but not least, keep an eye out for risk trends. As we saw last week, the Australian Dollar is quite vulnerable. Even more so than to economic data potentially. Catalysts that may stoke volatility on this front include more US earnings (Amazon.com, Microsoft, Facebook) and trade developments. A wildcard could come from the Hong Kong Monetary Authority(HKMA). Last week, stocks rose despite their sudden action to defend their currency peg, the Australian Dollar rallied. With that in mind and taking into account these considerations, the Australian Dollar fundamental forecast will have to be neutral.
A grab bag of bullish developments met Crude traders last week. While the bear’s focus has undoubtedly been on rising production, reports surfaced that bottlenecks in the Permian basin are developing as the demand is higher than the supply, which is validated by the future’s spreads.
On Friday morning, Trump took to Twitter to blame OPEC for, “artificially Very High” oil prices to which they rightly responded has restored the industry in the US. The comments come ironically, as Trump looks to impose sanctions on Iran, OPEC’s 3rd largest oil producer that could wreak commodity havoc in a similar vein as his sanctions on Russian oligarchs did on the Aluminum market that has risen over 24% since the sanctions were announced on April 6.
Demand
Additionally, the API monthly report showed that US petroleum demand in March was at its highest level in over a decade rising from 20m b/d in March 2017 to 20.6m b/d last month. Bullish signals look to be proliferating, and price pullbacks remain shallow making it hard to fade this multi-faceted uptrend in Brent and WTI. Goldman Sachs chimed in saying that global oil demand data so far in 2018 has come in line with their optimistic expectations, with 1Q18 likely to post the strongest YoY growth since 4Q10 at 2.55 million b/d.
Still no sign a breakout for Gold with prices inching lower by 0.5% for the week, marking the 1st weekly decline since late March. Renewed buying for the DXY as US treasury yields pick and easing geopolitical tensions see the precious metal failing to hold above $1350 yet again in what has been another range bound week.
The recovery in the USD-index has begun to pick up the pace, testing the psychological 90.00 level amid the rise in US treasury yields with the 10Y hitting highs of 2.94%, subsequently denting the appeal of the non-interest yielding bullion. The continued rise in global commodity price index (led by oil and aluminum), alongside rising price pressures (Philly Fed prices paid highest since 2011) in the US economy have thus raised inflation expectations, consequently steepening the priced-in Federal Reserve rate hike view. According to the latest CME Fed Watch, markets are pricing in a near 44% chance of a further 3 rate hikes by the end of the year.
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