Market closer to pricing in two Fed cuts this year

Forex 6 minutes to read

John Hardy

Head of FX Strategy

Summary:  Financial markets saw some relief on news that President Trump may delay the looming auto tariff decision for now, but fresh worries emerged overnight on the fraught US-China relationship as the US moves against Huawei.


The market put a positive face on things yesterday after the Trump administration announced a decision to delay auto tariffs for up to six months that would avoid an immediate further spike in trade hostilities, especially with the EU and Japan. The auto tariff issue is very thorny from the US perspective, as the auto parts supply chain is so globalized that it’s virtually impossible to establish tariffs that will only target foreign suppliers, given that US automakers source parts from abroad. The Mexican peso was one of the primary benefactors of this announcement.

Overnight, risk appetite, especially in Asia, soured as the Trump administration moved against China’s Huawei. The company was added to the US Bureau of Industry and Security’s “Entity List”, which will make it far more difficult for the company to source components from US suppliers. This is a considerable escalation that strikes at the heart of the “technology transfer” and national security angles that will make it difficult for the US and China to agree on any deeper trade deal.

The Australian dollar is modestly lower overnight after a mixed jobs report that was largely read as sufficiently weak to up the odds of an impending Reserve Bank of Australia cut. While the headline payrolls figure was positive, all of the gain was in part-time employment. As well, the unemployment rate jumped to 5.2% from 5.0%, even if some of that rise was for the “good reason” that the participation rate increased 0.1%.

Sterling has headed lower still this morning as UK Prime Minister Theresa May is expected to recycle her Brexit deal for an early June vote that few see has any chance of passing. Cross party talks continue to go nowhere. It is likely May will have to bow out after a failed vote and the long-term situation remains as uncertain as ever. Sterling could continue to suffer with an uncertain global market backdrop.

Ugly US data out of the US yesterday, with core Retail Sales actually dropping month-on-month (the recent few months have shown considerable volatility, but US consumption growth has clearly slowed this year). Industrial production was also very weak with an ugly, -0.5% month-on-month drop that takes the year-on-year rate to near 1%. US Treasury yields are slipping ever lower, with the 10-year benchmark approaching its cycle low and two-year rates already there as the market is beginning to price in two Fed rate cuts by the end of the year.

Chart: GBPUSD

Sterling is under significant pressure and could explore the full range in GBPUSD toward the 1.2500 area on the other side of another failed vote in early June after slipping below the 1.2900 area.
Source: Saxo Bank
The G10 rundown

USD – the greenback is the neutral currency around which everything seems to move lately – JPY getting more support when risk appetite declines and (some of) the risky currencies on the same. The stability in much of EM is beginning to strain belief as credit spreads are starting to head the wrong way.

EUR – political focus is mounting as the EU parliamentary elections approach (May 23-26) with Italy’s Salvini’s recent defiant rhetoric likely an attempt to sway the results. Given the lack of love within the governing coalition here, fresh developments likely await there in coming weeks.

JPY – the yen is trading up and down with every bump and swoon in risk sentiment, with support for the currency also found in the safe-haven seeking in sovereign bonds.

GBP – sterling breaking lower and has some room to move further against both the euro and USD ahead of a likely early June vote that sets the next round of political developments in motion.

CHF – dual focus here on general risk sentiment, but possibly also on Brexit and EU existential woes. Next interesting test beyond Italy’s yield spreads to the core yields, over the EU parliamentary election results. 

AUD – The Aussie finding no support on the jobs data overnight, and a strong election outcome  or labour unlikely to bring fresh support, though we wonder how much the  currency can move lower versus the USD as long as USDCNY remains capped.

CAD – strong global oil markets providing a modicum of support for CAD, which refused to go over the edge to the downside versus the USD, even as the CPI for April came in a bit lower than expected (at 2.0% versus 2.1% expected) at the “Trim Core”.

NZD – watching for AUDNZD support at some point to prove the point that the chart has structurally turned. AU yield drop will have a very difficult time outpacing NZ yields.

SEK – SEK gets a boost on the lower of the US-EU trade tension temperature, perhaps, but recent SEK bump a mere consolidation as long as EURSEK remains above 9.60-65.

NOK – NOK getting a boost from the strength in oil prices and improved mood in Europe after the Trump administration punted on auto tariffs.

Upcoming Economic Calendar Highlights (all times GMT)

• 0900 – Euro Zone Mar. Trade Balance
• 1100 – Sweden Riksbank’s Ingves Speech
• 1230 – Canada Mar. Manufacturing Sales
• 1230 – US Apr. Housing Starts / Building Permits
• 1230 – US May Philly Fed Survey
• 1230 – US Weekly Initial Jobless Claims
• 1430 – US Weekly Natural Gas Storage
• 1605 – US Fed’s Kashkari (Non-voter) to Speak
• 1615 – US Fed’s Brainard (Voter to Speak)
• 1800 – Mexico Rate Announcement
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