Head of FX Strategy
Summary: The mood soured overnight on weak Chinese April PMIs and a miss on Google’s ad revenue growth, sending the JPY higher and Antipodeans lower. The US dollar is flat after its recent surge, eyeing the FOMC and whether the Fed is set to tilt guidance more in favour of cutting rates.
In Asian FX, the USDCNY rose slightly, and the Asian exporters were generally offered, led by an explosion lower in the KRW, where USDKRW has broken above a significant chart level around 1,145.
Adding to the weaker sentiment overnight from Chinese surveys, Google reported a much slower pace of ad revenue growth than expected, and shares were hit for steep losses in aftermarket trading after closing at a record high yesterday. In FX, the weaker risk sentiment generally weighed on the G10 smalls and boosted the yen, though the trading ranges were well short of dramatic.
Anticipation of the Federal Open Market Committee meeting tomorrow is hardly at a fever pitch, but the Fed’s ongoing shift to a more accommodative stance is a key driver across markets and the meeting, even if it fails to produce any notable change in the statement and guidance, is a critical event risk as it tests the market’s conviction. Two things I find of interest: first, the USD failed to sustain a fall after the very dovish March FOMC meeting and even managed to surge last week despite the general anticipation that the Fed is moving toward more accommodation – this suggests that a more dovish than expected meeting tomorrow isn’t necessarily a USD negative beyond a kneejerk reaction.
Why is that? The answer may be that difficult-to-measure (and understand) liquidity issues are at the heart of what is driving the USD direction here more than traditional rate spreads considerations, etc. Second, who is to say that the Fed isn’t already behind the curve – after all, policy acts with a nine-12 month lag, so the economy is still feeling the effect of the Fed’s tightening through December 2018 and will be doing so for as much as another six months or so. Over that same timeframe, the sugar rush of the Trump tax cuts will also wear off. This is the 2007 analogue (read: a brief rally as the Fed is seen cutting rates, just as was the case after they did so in September 2007 before understanding the scale of the financial crisis) rather than the 1998 melt-up parallel.
• Long USD via GBPUSD, AUDUSD shorts and USDCAD longs.
• Testing long JPY waters with AUDJPY shorts as long as it's below 79.00.
• Long EURSEK as long as it remains above 10.58.
USDJPY is pushing lower on the weaker sentiment overnight, a theme that may extend if risk sentiment worsens from here and US long yields dip further. This partially confirms the recent bearish reversal, though nothing starts to break down more profoundly until/unless we start working down through the sub-111.00 prior pivot lows, which also coincide with the Ichimoku daily cloud level.
USD – FOMC meeting tomorrow the next test for whether the USD can break free to the upside – getting more separation from 1.1200 in EURUSD, for example, and punching well below 0.7000. If not, a ranging waiting game until at least the other side of the eventual US-China trade negotiations outcome is the risk.
EUR – EURUSD creeping uncomfortably higher after the break of the pivotal 1.1200 level that is the line in the sand there. Prefer it to break than hold, and we should establish where we are by the close of the week.
JPY – interesting strength overnight confirming the recent USDJPY reversal after it tried above 112.00 – if risk sentiment remains soft beyond the overnight reaction to Chinese data, the JPY could perform its usual “safe haven” role (reversal of carry trades).
GBP – sterling struggling for attention – more likely to suffer neglect than find a positive catalyst. Bank of England on Thursday... could the BoE surprise on the dovish side?
CHF – EURCHF managed to retake 1.1400 before the weaker risk sentiment this morning. The local focus for support looks like the 200-day moving average around 1.1350
AUD – surprised we didn’t see a sharper sell-off on the news overnight. Some pent-up energy in AUDUSD here once we get to the other side of the FOMC?
CAD – USDCAD holding up well and we continue to look higher, especially if risk sentiment continues to weaken. February GDP data up today.
NZD – NZDUSD bears will stake their outlook on the price action remaining below the 200-day moving average around 0.6725 – Q1 employment data up tonight.
SEK – the krona seeing its weakest close for the year yesterday versus the euro – default expectation is for higher EURSEK for a test and possibly beyond of 10.72 unless something dramatic changes for the better in the EU outlook.
NOK – the ongoing squeeze risk on NOK longs could worsen if the FOMC fails to encourage risk sentiment and oil prices suffer a further retreat.
Upcoming Economic Calendar Highlights (all times GMT)
• 09:00 – Euro Zone Mar. Unemployment Rate
• 09:00 – Euro Zone Q1 GDP
• 10:00 – Italy Q1 GDP
• 12:00 – Germany Flash Apr. CPI
• 12:00 – South Africa Budget
• 12:30 – Canada Feb. GDP
• 13:45 – US Apr. Chicago PMI
• 14:00 – US Apr. Consumer Confidence
• 15:00 – Canada Bank of Canada Poloz to Speak
• 22:45 – New Zealand Q1 Employment Change