Head of FX Strategy, Saxo Bank Group
Summary: The EU parliamentary elections saw a notable advance for the eurosceptic populists, if one that was distinctly underwhelming relative to the noise heading into the elections. The euro has barely noticed either way, outside of a bounce in EURCHF. This week’s data highlight is Friday’s US April PCE Inflation release.
The elections at the weekend felt like a repeat of the 2017 cycle of Italian and French elections, where the drumbeat of fear that the populist right was set to take power proved overdone. It’s just that this time, there was almost no market anticipation around the outcome. The populist right parties did dramatically improve their overall result relative to 2019. The ENF coalition of parties that includes Salvini’s Lega surged from 37 to 58 seats, and the EFD coalition that includes the UK’s Brexit party rose from 41 to 56, but the hard left’s anti-EU coalition weakened to 38 from 52.
While headlines intoned that the two main centrist parties result fell below 50%, this wasn’t entirely about a race to extremes. The four main pro-EU coalitions (Centre-right EPP, Liberal ALDE, Green EFA and Centre-Left, Social Democratic S&D) saw their representation fall only slightly from 523 seats in 2014 to an estimated 506 this time, according to BBC estimates this morning. This was hardly a populist earthquake and weakens their hand. Even in the UK, where the Brexit party received 39% of the vote, the turnout was a very low 37%, so the strength of the hard Brexit mandate remains questionable. This is likely the driver of sterling gapping to the upside after the election results.
Trump in Japan
US president Trump’s tour of Japan has seen a diplomatic tone from the US side thus far, and Japan has made a commitment to purchase a staggering 105 F-35 fighters despite a recent F-35 crash in Japan blamed on manufacturing defects – an obvious attempt to sway the relationship. The JPY will continue to key off risk appetite and the direction of bond yields as Trump said he was looking to August for a potential trade deal with Japan, a timing that is Abe-friendly, given the elections in Japan scheduled for July.
A quiet start to the week
Not looking for fireworks to start the week with the US out on a national holiday and a banking holiday in the UK. The week’s two event risks on the economic calendar are the Bank of Canada meeting on Wednesday and the latest PCE inflation release (for April) on Friday.
Perhaps more important is the general direction of risk sentiment – especially the market’s most aggressive moving part recently – US treasuries, where yields have dropped sharply all along the curve on the anticipation of both Fed easing and safe haven demand. That of course has been driven by US-China trade war concerns and signs of a weakening US and even global economy. The question now is whether the market has taken things too far, if we have a look at positioning and sentiment. The Macro Tourist (a.k.a. Kevin Muir) does just that in a great post on why the pain trade may be the downside for treasuries for a while. If so, look out below for the Japanese yen and perhaps Swiss franc.
USDJPY looks relatively elevated, given that US yields all along the curve pushed to new lows for the cycle last week. The outlook in limbo here as we await either a full meltdown below 109.00 (likely requiring significant further risk-off and safe haven seeking in bonds of an even more urgent nature) or a reversal back higher – starting with a move above the recent 110.67 pivot – if it proves that bond bulls are over-extended in looking for ever lower yields – especially at the long end of the curve.
The G10 rundown
USD – the greenback on its backfoot to start the week after last week’s preliminary Markit PMI survey for May. Trading ranges too compressed to draw conclusions here.
EUR – the euro avoided capitulating lower on new cycle lows for the fourth time last week – but rallies have also lacked strength and we need a positive catalyst (most likely fiscal stimulus) for the euro to rise with any conviction.
JPY – as noted above, if the markets have long US treasuries wrong here, the JPY crosses could be in for quite a reversal – watching whether the new lows in US yields hold as the chief coincident indicator here.
GBP – sterling trading a notch firmer as the market brushes off the Brexit party’s result. Any sterling rally here could prove rather modest until we get a better sense of who will replace May and whether we risk a new UK election.
CHF – the franc back a bit weaker on the EU parliamentary election results – may be a tradeable bounce in EURCHF here, but the 1.1200 to 1.1500 range is coming up on its 10-month anniversary. A bond market sell-off likely needed to inject energy in any franc sell-off.
AUD – AUD bears in disarray tactically after latest rally. The parabolic rise in Chinese iron ore prices is no help either, nor is heavy speculative short-AUD positioning. The squeeze risk is prominent if the AUDUSD price action can’t remain below 0.7000.
CAD – Bank of Canada meeting set for this Wednesday – USDCAD has suffered one of its most indecisive episodes in a tight range recently – need the price action above 1.3500 or below 1.3300 to make any sort of breakout argument.
NZD – two-year AU vs. NZ rates near their lowest for the cycle but AUDNZD has stayed within the range – looking for a catalyst to drive price action below 1.0500 or above 1.0700 again.
SEK – the EU elections lift some of the EU uncertainty and are nominally SEK positive as well, but we need positive catalysts – hopeful economic data, anticipation of a switch to easier fiscal policy in either Sweden or the EU, to drive a notable SEK rally. Watching 10.65-60 in EURSEK.
NOK – the krone has absorbed the latest steep oil sell-off very well and EURNOK looks ready to challenge downside pivots here – starting with the 9.70 area.
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