GBP – Trying to stay off its backfoot
Will sterling continue to wilt further? Today it is seeing buying as risk trends are positive and the dollar is souring a bit, but indeed this could be the case as the market grows anxious over EU negotiations and sentiment sours. Like the Brexit storyline prior to the beginning of negotiations there is a great deal of uncertainty ahead. The prevailing expectation at the June BoE meeting is an announcement to increase it's bond purchasing program by up to £200 bn. GBP/EUR remains in the middle of a nearly four-year range, making it a 50/50 proposition as to whether it will test 1.05 or 1.21 first. Eventually, the range will give-way to a trend, but until then we remain skeptical of intermediate-term price fluctuations.
USD – Range-break coming?
Fed Chair Powell said last week that negative rates were not on the table, and that while the outlook for the economy is still dire, he said the Fed has an assortment of other tools they can use to combat the downturn. The dollar appears poised to rally, but signalling is still mixed as the market tries to sort it all out. We lean towards the upside if for no other reason than it’s the safest place to be. We continue to be keen observers of the highly stressed EM space – a resurgence of USD against the likes of MXN, ZAR, CNH, BRL, RUB, TRY, and others will put additional stress on an already stressed out dollar-dependent world. We see a broad sell-off in EMs as leading a sell-off against DM currencies, namely the troubled euro and Canadian dollar. The US Dollar Index (DXY) is caught in a tight range that like all ranges will end with a breakout that could soon have either side of the Q1 gyration tested quickly. A top-side breakout will of course bolster our dollar bullish view, while a downside breakout will require a reevaluation should it gain traction.
Dollar (DXY) range in focus
EUR – The eur-woe not showing much fight
EUR/USD continues to impressively do nothing and given the technical threshold it sits on we view that as a bad thing. On a weekly basis we have been discussing the 35-year trend-line (if you construct EUR/USD with its constituents pre-Euro). Breaking the March low at 1.0635 is seen as kicking off another major down-move. Europe was already in a state of fragility prior to the novel coronavirus. Turning to the economic calendar, this week we have Eurozone inflation data due out on Wednesday and Markit services and manufacturing data on Friday expected to uptick.
CAD – Oil problem not going away
Overall, the Canadian economy seems highly unlikely to escape the pull of extremely cheap oil for a prolonged period, which appears the likely case even if it is rallying from historically low levels. In the short-term we have seen the Canadian currency respond to the fluctuations in oil in a less correlated manner than one might expect, but this is a big-picture problem so we aren’t concerning ourselves with what happens this week or this month. If the dollar is to rise up it will almost certainly do-so to a large extent against CAD, perhaps to a magnitude that only trails EUR in the DM dimension. The 2002 highs in USD/CAD over the 1.60 mark look at risk later this year, early next.
AUD – Recession is a new thing
The Australian economy falling into a recession is a new thing for the RBA - as it hasn’t happened in three decades. How will they respond? Things are bad to very bad, and a further response to the virus could be in store. The unemployment rate last week clocked in at 6.2% but the RBA is not expecting a peak until around 10%. The rebound out of March was initially fierce but has lost momentum in recent trade. The 0.6700 level is seen as a spot of potentially maximum gain in the near-term, perhaps even long-term this will turn out to be a major spot. The economic calendar offers limited data points to work with this week.
JPY – Avoidable for now
If there is one currency that gives us headaches, it is the Japanese yen. It gets pulled in both directions by the risk trade and dollar response, which at times pulls on each other. In the end, we feel a big USD/JPY rally could be in store on the back of pure dollar strength, but when will that become clear we don’t know. There will be time to react should this be the case. On the data front there is limited points of interest, inflation data on Friday is expected to come in weak, or weaker than usual we should say.
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