Markets have opened the week with a more stable tone, with little in the way of major data releases, as they wait for this week’s main event, the Fed meeting on Thursday. Expectations are for a rate hike of 0.25%, but concentration will be on the accompanying rhetoric and if there is a pointer to another one or two rate increases later in the year. An indication of two further rate hikes would put the market on the back foot as while another hike is also widely expected a second hike is not currently priced-in and increased probability of such an event would likely see a jump in USD values. The fallout from the UK continues with the Conservative government looking at six-and-sevens as it struggles to create some order from the political chaos.
The GBP continues to remain under pressure amid concerns that the government’s weakened position will leave it in a poor negotiating position for Brexit talks, which start next Monday. Also not helping were comments from Moody’s rating agency that the election outcome would complicate and most likely delay Brexit negotiations. The drama that is the Trump Presidency continues to roll on with lots of headlines, but little real work being done to implement policy to underpin the advancing of the US economy. Also of note is the increasing tension over the Qatar / Saudi split and subsequent Qatar boycott by several Middle Eastern states. This has had little effect on financial markets at this stage but any escalation has potential to cause market dislocation, a watching brief for the moment.
Quiet start to the week for the Australian dollar due to the holiday on Monday. After a high of 0.7565 is marginally lower now at 0.7557 but looks comfortable sitting above the 0.7500 level. This week will see Consumer confidence data tomorrow and May employment figures on Thursday which are expected to be AUD supportive. Steel prices have started to trend higher which should be reflected in the iron ore prices which would also help underpin the AUD. Solid support at the 0.7500 level which if broken would open the way for an extension to 0.7400, but we favour a range bound AUD between 0.7530-0.7585 ahead of Thursday’s Fed meeting.
The New Zealand Dollar continues to appreciate against the major currencies. With the greenback still under pressure the NZD has risen to just shy of a 4 month high trading currently around 0.7220 levels. A 0.25% rate hike is expected Thursday by the Federal Reserve and the markets have largely price this in already. Attention will be on the Fed’s comments going forward with further hikes on the horizon, With GDP data constantly being revised lower we may not see any rate excitement until 2018. Locally we have quarterly GDP data published Thursday morning with figures expected to be around 0.7% growth, if this figure is positive we may see further upside for the NZD, the next resistance level is 0.7250 and 0.7400 with support seen around 0.7050
Plenty of political news, with the fallout from the Comey testimony continuing and speculation as to what will come out of the Attorney General Jeff Sessions appearance before the Senate Intelligence Committee tonight. It is unlikely that Sessions will divulge any explosive new details, especially since the attorney general could assert executive privilege regarding any questions about conversations with President Trump. Markets are still more interested in Thursday’s FOMC statement and how soon/whether the Trump administration’s taxation and infrastructure agenda can get back on track.
On Wednesday the May CPI report will be released. Iit is expected to remain pretty much unchanged for May with the year-on-year decreasing to 1.9%, which although marginally weaker than expected the overall economic growth outlook remains positive and the recent soft inflation prints should not deter Fed officials from raising rates at the Thursday meeting.
The fallout continues after the shambolic election result (for the Conservatives that is…!) and Prime Minister May continues to try and form a government. The GBP as expected dropped sharply last week as soon as exit polls showed that a “hung” parliament was possible, it hit a low of 1.2633 against the USD last week, is now marginally better currently at 1.2665 but the tone remains negative and we expect this to last until a more certain political outcome is evident but this could take most of this week. The final outcome of the UK general election turned out to be that the Conservatives won 318 seats, Labour 262, the SNP 35, the Lib Dems 12 and the DUP 10. Given that none of the parties won more than 326 seats, indicating a Hung Parliament. The Conservatives lost their majority, now having even less seats than they had before the election. Conversely, the Labour Party saw an increase of around 30 seats, Labour’s dominance in the House of Commons is now expanded. Latest surveys suggest business sentiment has weakened in reaction to the election and consumer spending appears to be weakening in response to rising inflation and low wage growth; according to IHS/Visa, consumer spending fell an annual 0.8% in May, the first drop since late 2013. This is putting pressure on the PM to mitigate her “hard Brexit” approach but given her tenuous hold on power, she may have little choice. Over the next two days we have UK employment and inflation data along with May retail sales on Thursday which will provide a snapshot of how the underlying fundamentals are tracking. There is also a Bank of England meeting on Thursday. Given that the BoE is dealing with rising inflation rates and, although they are unlikely to lift rates, there could be some relatively hawkish rhetoric following the event. Look for the GBP to suffer some bouts of volatility. Support is at 1.2630 a break of which would target 1.2550, resistance at 1.2705 unlikely to threatened over the next few days.
Quiet offshore trading as markets watch political developments ahead of the Central bank meetings later in the week. Overnight comments from ECB officials suggested the central bank is in data watch mode – “we are very much data-driven. We’ll discuss tapering whenever we’ll see the economic situation and the prospects of inflation ripe for discussion”. Political news centred mainly around the British election and consequent ramifications for the Brexit negotiations, but also of note was a very strong showing in the French elections for Macron’s La Republique En Marche party which won a huge majority in the French Parliament’s first round of voting, expected to get between 415-455 seats out of 577, a majority which will give him the mandate to force through change in the French economy. The EUR/USD remains lacklustre around the 1.1200 level with Investors looking at tomorrow’s ZEW Survey results for some short-term trading direction. Economic Sentiment from Germany and the EU and the Current Situation surveys are all expected to show improvements in June, Thursday will see data for industrial production released. Better than expected readings could allow the EUR to recover some of the losses it recorded against the USD on Thursday but it may have a difficult time gathering a sustainable momentum ahead of the Fed statement. Currently the EUR/USD is around 1.1194 and unless support at 1.1080 is broken, downside looks limited, resistance is at 1.1210 then 1.1250. We expect a 1.1170-1.1210 range ahead of the US FOMC statement Thursday.
The Japanese yen was unharmed Friday after Comey testified in front of congress, the occasion turned out to be a non-event for markets. JPY posted small gains Monday against the greenback trading around the 110.00 area with producer Price Index figures published bang on expectation of 2.1%. Later in the day Japan releases the Business Survey Manufacturing Index which is a leading indicator of optimism. The economy has posted growth in the last 5 quarters, this is the first time this has happened in over a decade as Japan benefit from a strong Manufacturing sector. JPY awaits the fed announcement Thursday for further direction, we may see USD strength towards week end, we would expect support of 108.25 to be safe for now.
The Canadian Dollar made a good start to the week against the greenback pushing through 1.3400 soon after the open. Oil inventories have improved this week after supply limits last week from Saudi Arabia took crude to new lows with expectations that levels would drop by 3.1M Barrels but instead increased by 3.3M barrels . Back at 46.10 this morning has put the US Dollar under pressure, the CAD on the verge of breaking new support of 1.3250 if we see Oil prices improve further. The Bank of Canada is expected to hike rates sometime towards the end of the year as the governor of the BOC said as growth continues we can expect further consideration as to whether monetary policy stimulus is still required.
• Australian Trade Balance 0.56b vs 1.91b expected
• ECB leaves interest rates unchanged
• UK Manufacturing Production 0.2% vs 0.8% expected
• Canadian Employment Change 54.5k vs 11.5k expected
• Canadian Unemployment Rate 6.6% as expected