Weekly FX Outlook: Slow start on North America builds up to the key employment report(s) on Friday. Still seeing tough times for the USD.
Next week starts off on a quiet note with US Independence Day on Tuesday preceded by a half day holiday on Monday along with Canada day north of the border. As we head into the latter part of the week, the US employment report comes into focus, and trade should start to liven up again in the USD.
This comes off the back of some anaemic US numbers at the end of this week, but the Q1 GDP data was revised higher, while personal income for May was a little higher than expected, so this offers some very modest hope on wage growth ahead. Against this real personal consumption was softer than expected, as was the headline PCE rate.
US Treasury yields however looked to have picked up regardless, but this could be part of the broader upturn seen in the Euro, UK and Canadian curves, which have outperformed to send the respective currencies to better levels against the greenback. As such, we view the USD losses as a little overstretched at the lows seen this week, and we could see some moderation through next week.
Despite holiday thinned trade to start off with, the lead up to Friday’s numbers starts off with the ISM manufacturing index on Monday where the employment index will be keenly eyed, the FOMC minutes on Wednesday evening (preceded by Factory orders), with ADPs, non manufacturing ISM and the trade balance on Thursday.
JPY price action against the USD has been decidedly mute given appeal of the EUR and GBP this week. Our initial resistance point at 113.00 has contained the rise this week, but in retrospect, was unlikely to be tested hard given the backdrop of USD vs risk. As such, EUR/JPY and GBP/JPY gains have grabbed the headline, but we may start to see some moderation here also. The Tankan survey on Sunday night will only have a modest effect on the JPY either way, but we continue to look for an undercurrent of improving sentiment among Japanese corporates as stimulus measures remain in play.
In Europe, market drivers will come from the EU wide PMIs, as we struggle to see how the ECB minutes can add any more to the hawkish mood which continues to see EUR/USD eyeing 1.1500-1.1600, EUR/JPY 130.00+ and EUR/GBP back towards the resistance zone into 0.8900. EUR/CHF is now eyeing 1.1000, but sluggish trade here highlights the greater focus elsewhere.
In the UK, manufacturing, construction and services PMIs follow over Monday, Tuesday and Wednesday, and will need to provide some impressive results if the BoE’s change in policy tack is to be believed. Cable is still probing the upside but has run into good selling interest above 1.3000, and has held off the mid May highs in this week’s run up. With Brexit in the background, and for some time to come, fading strength at these levels should and will be expected. EUR/GBP looks destined to higher levels given the levels we have mentioned and what may unfurl thereafter, but as noted above, the initial resistance zone ahead of 0.8900 is providing plenty of congestion, and we can expect more of the same if not more into 0.9000. Industrial and manufacturing production comes out alongside trade on Friday.
The main event in Australia is the RBA meeting, but no changes are expected, and the recent talk has been positive, so we can expect more of the same Tuesday. The AIG manufacturing index is out on Monday, but trade data on Thursday will be just as influential. AUD still looks primed to test the 0.7750-7850 zone north of where we traded to this week, but so close to these levels, sellers are coming in.
In NZ, the latest Global Dairy auctions are due on Thursday, but there is little else to derail the positive outlook on the economy. As such, we expect to see NZD/USD continue to work on the resistance in the 0.7330-50 area, but once through 0.7400 and certainly nearer 0.7500, central bank jawboning should be expected.
For the CAD, trade data on Thursday will be of limited interest unless we see the balance deviate materially from flat. This is more so the case given the unemployment report due out on Friday, and until then we see limited downside after the strong gains this week. 1.2920-50 is the initial area of support south of market, but if breached, 1.2800-1.2750 is where we expect to end up in this latest cycle.
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