Head of FX Strategy
Summary: Geopolitical headlines and anticipation of a more dovish Fed have driven a spike higher in gold and a further mild bid for the Japanese yen, but volatility continues to underwhelm, even if that could change as soon as at next Wednesday’s FOMC meeting.
China moved its data releases to much later in the day and they have just been released this morning and show that Industrial Production in May missed expectations at 5.0% year-on-year (vs. 5.4% expected) growth, while May Retail Sales rose 8.6% vs. 8.1% expected. Regarding the latter figure, I’m a bit curious what Chinese consumers were buying to take overall spending to that level when car sales dropped 16.4% year-on-year in May.
Boris Johnson took 114 of the 330 possible votes in the Tory leadership candidate selection process, so far ahead of the nearest competition (Jeremy Hunt at 43) that there is talk of the centrist candidates pooling their resources to counter his ascendancy. In the end Tory party voters will decide once the two candidates are identified by the end of next week. We see very strong odds that Boris Johnson will be the next UK prime minister and that is also now the consensus and sterling seems to be taking it into stride. Look for a piece from me later today on the outlook for Brexit from here.
FX remains in a low volatility rut even as gold is making a bid to rise above the long-term overhead resistance that stretches at least to $1,375 (vs. $1,357 as I am writing). The key test for the sustainability of that move is whether the Fed is ready to confirm and even outperform the market’s dovish expectations at coming meetings.
Strong 10-year and 30-year Treasury auctions over the last couple of days have driven US yields lower and kept the yen solidly bid here – with gold playing a supporting role there as an apparent safe haven defense against both negative yields as bond yields drop globally, against the risk of weak asset markets if the cycle is slowing, and against the risk that central banks pull out all the stops to bring back inflation.
In an interview on Bloomberg, famed investor Paul Tudor Jones said he expected gold to rise aggressively. For those of us trading FX lately, we’re envious of the move and wonder if its too much to ask that something start moving aggressively in the major currencies as well. On that note, the next best two events that could spark volatility across asset classes are next Wednesday’s Federal Open Market Committee meeting and the run-up to and outcome of the G20 meeting June 28-29.
Staying long USD vs. AUD, NZD and/or GBP, with tightened stops below the recent highs in AUDUSD, NZDUSD, GBPUSD.
The Russian ruble has enjoyed strength (consider the carry on top of the recent exchange rate stability) and has slipped back towards the assumed “floor” around 64 where Russia is happy to accumulate foreign currencies rather than allowing the ruble to strengthen. The consensus is for a 25 basis point cut from the Russian central bank and guidance will be key here – but developments in oil and emerging market spreads, which have improved again from a recent spike, will rule the day.
USD – there is no directional signal here as we await next Wednesday’s FOMC.
EUR – the euro backed off recent broad strength yesterday, but has not stumbled further today. Looks passive for now as we await interesting political developments next week (choice of next EU Commission President).
JPY – absorbing safe haven flows, but will need to see US long yields continuing lower to support that development.
GBP – relative stability as we watch for signaling from Boris Johnson and whether his path to assume leadership remains clear – and eventually how the EU side responds to his attempt to restart talks. We’re constructive on the longer term outlook for sterling if the narrative shifts to a “Managed Brexit” from a “No Deal” Brexit risk.
CHF – The Swiss National Bank's’s raised inflation forecasts for this year and through 2021 and lack of stiffer language on intervention to keep a ceiling on the CHF suggests an open path to 1.1000 in EURCHF if lower yields and safe haven seeking continue.
AUD – Aussie remains weak on the rate outlook, though we have conflicting signals here as iron ore continues to shoot the lights out and the mining giant BHP Billiton is trading at an almost eight-year high.
CAD – the momentum seeping out of the recent sell-off in USDCAD but a lot of work to do to get a full reversal – may need a data catalyst or two – for example, a CPI miss next week or fresh lows in oil prices despite the tankers incident.
NZD – next test for the NZD in the crosses in next week’s tardy GDP release for Q1 GDP.
SEK – the Swedish May CPI release came in hot – at 2.1% YoY at the core vs. 1.9% expected (1.7% ex. Energy). Let’s see if this is enough to drive a fresh test of the 10.60 area in EURSEK.
NOK – struggling to find a pulse despite the gyrations in oil – all about next week Norges Bank meeting and the guidance on rates after an assumed 25 bp hike as the Norges Bank remains the lone hiker.
Upcoming Economic Calendar Highlights (all times GMT)
1030 – Russia Key Rate Announcement
1200 – Russia Central Bank Presser
1230 – US May Retail Sales
1300 – Canada May Existing Home Sales
1315 – US May Manufacturing Production
1400 – US Jun. Flash University of Michigan Confidence