Geopolitical distractions and a key week ahead for USD.

Looking ahead
Below I will preview the six G10 central banks, each with its own plot twist. But first, the key event risk highlights for next week below. I would pull out the US Retail Sales (Tuesday) and UK CPI (Wednesday) as potentially quite pivotal for market reactions in addition to the central bank meetings.

• Mon: US Jun. Empire Manufacturing, US 20-year Treasury Auction
• Tue: Japan Bank of Japan meeting, Germany Jun. ZEW Survey, US May Retail Sales, US May Industrial Production, US Jun. NAHB Housing Market Index
• Wed: UK May CPI, US May Housing Starts & Building Permits, US Weekly Jobless Claims, US FOMC Meeting
• Thu: Australia May Employment Data, Switzerland SNB Meeting, Norway Norges Bank Meeting, UK Bank of England Meeting, US Markets Closed!
• Fri: Japan May National CPI, UK May Retail Sales, US Jun. Philly Fed

Central Bank previews:

Bank of Japan (Tuesday). With a bit over 10 basis points of tightening priced into the forward curve for the rest of the year, this meeting may prove low on drama. The BoJ can’t forecast much when it doesn’t know the shape of the US-Japan trade deal and Japan’s team may be dragging out negotiations there to avoid political damage at the July upper house elections (no date yet declared, some see July 13 as most likely date). Some sources in the Japanese press suggest that the BoJ may up their inflation concerns, but with the BoJ clearly running a financial repression policy (keeping policy well below inflation to cap the size of the overall public debt load in real terms), at the margin the policy that matters is the pace of the BoJ’s bond purchases. Have a strong feeling that the JPY could be a very different place later this year, but timing a yen rally has been completely impossible of late and pain trade relative to positioning is clearly a weaker JPY.

Sweden Riksbank (Wednesday) – the timing of the “final” rate cut for this cycle is the only thing up for debate – this time or next time, with more leaning for “this time”. Not much drama for SEK, where the outlook is more caught up in European growth picking up again on Germany’s fiscal expansion and defense priorities.

US FOMC Meeting. (Wednesday) – the key here is whether the FOMC opens up room for a July move (currently only priced at 20-25% likely) by hinting at concern on the US labor market and other data. If so, as the market will quickly price in a full 25 basis point move that could balloon quickly to 50 basis points if we continue to see weak claims data and especially an ugly June jobs report. This would allow the Fed to appear data dependent while removing the political heat from Trump and his latest name-calling.

Switzerland SNB (Thursday). The SNB is priced to chop rates into negative territory this year – but do they do it all in one go or cut to 0.00% with another cut later? Switzerland is an outlier with its spotless national balance sheet and massive external surpluses despite a very strong currency (go to Zurich and buy fast food and translate it back into your home currency – it’s incredible). A 50-bp cut is the interesting scenario for market reactivity.

Norway Norges Bank (Thursday) The Norges Bank is seen likely waiting until September to next cut rates as it sports the highest policy rate among G10 central banks, but could hint that an August cut is more likely.

UK Bank of England (Thursday). Theoretically we shouldn’t have much drama as the BoE has promised a “gradual and careful” easing path and we had two-way dissension at the May meeting, when the rate was cut 25 bps. The August meeting is not priced for a full 25 bps cut and the market is leaning a bit already for dovish guidance after recent softer inflation and especially the softer payrolls data, but the interest twist, as noted above, is the fresh UK May CPI print the day before the meeting.

FX Board of G10 and CNH trend evolution and strength.
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CHF coming out sharply stronger on the geopolitical angle – but if risk sentiment comes back next week and encourages carry trading again, will be interesting to see how the market treats the SNB taking the rate to zero…or beyond. The US dollar is weak, but the price action since late yesterday is confounding – note USJDPY chopping around once again.

Table: NEW FX Board Trend Scoreboard for individual pairs.

The geopolitically inspired risk-off and gold rally pushed EURCHF back well below 0.9400, leaving trend traders in limbo there. The euro rally and sterling sell-off has seen EURGBP flip to a positive trend – needs to hold above the 0.8450-0.8500 zone now.