Weekly FX Wrap: All eyes on Sunday’s French election result, but little evidence of defensive positioning in the EUR. GBP continues to fly the flag, batting off the negative mood over the latest Brexit exchanges. Commodities in focus, but tentative signs of some near term relief.CAD overstretched. US jobs report mixed at best.

The week after the US non-farm payrolls is usually a quiet affair, but by the time the Asian session Sunday is up and running, we should have a good idea of the outright winner of this weekend’s French election. Given the extremist stance of Macron’s opponent, who still has carries a near 40% vote according to the polls, the markets are pretty comfortable with his lead, and this has been telling in the lack of defensive pre-weekend positioning in the EUR.

Should this confidence be vindicated in the result, then we would assume the lead spot rate would make easy work of the 1.1000 level, which was/is still vulnerable into the weekend. We saw the 1.0950 top removed on Thursday on the back of the stronger EU wide stats, which sees the periphery showing some encouraging signs according to the Italian PMIs and Spanish employment numbers in particular. Anecdotal evidence shows hedge funds are looking a little more favourably on the Euro zone, with inflation also on the rise again, but in the interests of moderation (not an easy one for the current market make-up), we would expect 1.1100-1.1200 would be cause for a pause unless US Treasury yields take off.

There was little evidence of this after Friday’s Apr US jobs report, with the headline rise of 211k offset by the revision lower to Mar. Wage growth, as ever in focus, but coming in line with the +0.3% expected, Mar was also revised lower to contained the immediate excitement. We continue to monitor productivity, which fell 0.6% in Q1 and has been consistently highlighted by Fed chair Yellen. Taking this into account, USD bulls are surely getting frustrated, and are, or should be looking past 2017 which is still in the balance for 1 or 2 rate hikes – June or otherwise.

Next week’s US data is stacked up on Friday, comprising of Apr CPI and retail sales. In Europe, we have a series of industrial production releases through the week, with German GDP on Friday, and seen rising 0.7% over Q1.

USD/JPY in the meantime, is also ‘riding’ on hopes of a stronger revival in the reflation trade, and at circa 112.00-50, looks a little elevated in the 108.00-115.00 range, but having rejected 113.00. BoJ’s Kuroda has struck a more optimistic tone as he pointed to a narrowing output gap, as well as tightening labour market which should push wages higher. This saw a minor blip lower, but with no changes in the pipeline on yield control, this pair remains a pure USD trade for now.

In the UK, the Brexit joust with Europe is well under way. However, rising valuations on the exit payment this week passed with limited damage on the Pound, though Theresa May’s exclusion from EU meetings from hereon out prompted a mini sell off which was swiftly reversed. We hear greater numbers of fund managers showing increased confidence in the economy outside of the EU, with dips in Cable of late noticeably shallower. 1.2800 looks to be the latest base in formation, while in EUR/GBP, sellers above 0.8500 will have been a little more confident – certainly this side of the weekend.

Away from all things Brexit, we look to Super Thursday, with the Quarterly Inflation report keenly eyed. The consensus is still for the MPC to stand pat on rates, and this is light of some members leaning towards lone hawk Forbes. The meeting minutes will tell us more. We should expect some volatility around BoE governor’s press conference, as we anticipate questioning on the timing of the next rate move (higher), but those arguing to temper an inflation overshoot should take into account the recent GBP gains, albeit still undervalued on WPI.

Weakness in the commodity markets have had a pronounced impact on AUD and CAD. Copper prices have been on the slide to pull the former below 0.7400, but through the figure level, there looks to be limited momentum. This aligns with the support coming in on the underlying, as Copper grapples with range lows in the USD2.50-2.45 area. The RBA statement this week made it clear that interest rates are on hold with the mix of concerns offering limited scope either way, and household debt is firmly on the radar as well as global demand in general. Retail sales and housing/building stats next week are unlikely to be game changers – all eyes fixed on metals.

Oil markets are clearly taking a dim view, as the sell off this week saw WTI falling to levels just under USD44.00 before stabilising, with momentum generated from the Brent snap through USD50.00 which saw USD47.00 breached. Both grades have since recovered by USD1.5-2.0 or so, while OPEC continue to talk up hopes of an extension to the production cuts into H1.

USD/CAD has been on a one way ramp which saw us getting to within touching distance of 1.3800 after the latest leg down to Oil. NAFTA worries have receded a little, but will continue to weigh. On the domestic data front, we saw a very modest rise in Apr jobs, and all in part time, but the unemployment rate eased back to 6.5%. Even so, the CAD is overstretched and undervalued vs the USD, and our highlighted resistance zone at 1.3800-50 remains intact – for now. The BoC quarterly review is due out on Monday, and given their perennial cautiousness, will make for some interesting reading given the (net) encouraging data run of late, barring sluggish inflation.

The RBNZ (Wednesday) may give some support to the ailing NZD, which has been hit in tandem with the leading risk currencies, but has outperformed its counterpart across the waters. The cross rate eyes sub 1.0700 again, but we noted strong demand in the mid 1.0600’s last month which may dissuade aggressive sales from here. Against this however, we have seen Q1 employment gaining by a larger than expected 1.2%, while dairy prices are holding up, so governor Wheeler has cause for optimism.

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Dollar Index Daily

21 is below the 55 indicating a bearish market. Price broke slightly below support at the bottom of the range at MM2 with further support eyed at market and MS1.

Dollar Index H4

Our 21 is below our 55 indicating a bearish market with price having come off the 21 EMA on Friday and closing at last week's bearish target of WM1. The support at the bottom of the previous range is now resistance with support eyed at 98.00 and 97.50. The recent rhetoric from the FOMC and the 78.5% chance of a rate hike coming up in June tells me that no smart money investor is currently selling USDollar and that the current drop is due to profit taking. That means Bulls are going to get back in support and so I continue to keep a close eye on Dxy for confirmed bullish setups.

US10Y Daily

For most of last week price and market ranged with price breaking slightly below our support at the bottom of the range after the NFP report on Friday.

US10Y H4

Market and price continued to range after price broke support at the bottom of the previous range with the bottom of the previous range holding as resistance and our weekly bearish target holding as support. Despite the US10Y moving sideways, the Yen has continued to remain weak due to risk on trading which can be observed by the current rally in NK225 and S&P500.

Nikkei Daily

Price is currently at the top of the range with our monthly target just above current price. This level has provided strong resistance since December '16.

S&P 500 Daily

Price ranged for most of last week though we saw a break higher after NFP with resistance eyed at market and MR1. I would keep an eye on the NK225, S&P500 and the Vix. As long as our Vix remains low and our NK225 and S&P500 don't show indications of the market becoming bearish, risk on will continue and Yen will remain weak. If we start seeing stocks coming down from resistance, our Vix moving up and our US10Y moving higher that would result in yen strength. Of course one would pay attention to price action on the Yen pairs and ensure that selling a bullish market would only be done after a confirmation of reversal. Until then continue to buy higher lows.

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