Forex Weekly Review and Outlook
Attention Turning to Central Banks after Dollar Made No Progress
Dollar failed to ride on stronger than expected Non-Farm Payroll and ISM Manufacturing index and ended nearly flat against majors. Commodity currencies were the start performer last week with Canadian scoring another multi-decade high against dollar and commodity yen crosses making new highs. The Japanese yen was particularly pressured across the board but even in such case, USD/JPY and EUR/JPY were just slightly up as focus lied elsewhere. Markets were left wondering what would it take for the greenback to make some progress but with attention turning to four central banks meeting this week, including ECB, BoE, RBA and RBNZ, the markets could continue to frustrate dollar traders.
Dollar traders were disappointed after the highly anticipated events of last week triggered just some volatility but no break out. Just like the accompanying statement, there was nothing new from the minutes of the May 9 FOMC meeting where the Fed's view on growth and inflation were basically unchanged. Failure of core inflation to moderate remains the member's predominant concern. After all, even though the Fed will likely be on hold for a considerable period of time, there is little chance a a rate cut in the near future and that provided some support to the dollar.
Non-farm payroll rose more than expected by 157k in May, comparing to expectation of 130k and was an impressive rebound from Apr's downwardly revised 80k. Unemployment rate was steady at 4.5%. Average hourly earnings rose 0.3% mom and average weekly hours also rose 0.3% too. ISM manufacturing index beat expectation by rising to 55 comparing to consensus of 54. Chicago PMI also surprised on the upside by reaching 61.7 versus expectation of 54. These data are reconfirming the view that businesses are starting to regain some momentum in Q2, that would likely continue to the rest of the year even though growth may still be below potential for some time.
While the above data eased some concerns of the Fed on growth, the Apr PCE data provided more comfort to Fed members on inflation. PCE deflator slowed from 2.3% yoy to 2.2%. Most importantly, core PCE deflator, the Fed's preferred measure of inflation, moderated further from 2.1% to 2.0% yoy, matching the 2% level that's widely regarded as the top of the Fed’s comfort zone for the first time in 13 months and being the lowest since Mar 06. Personal income unexpectedly dropped -0.1% in Apr even though consumption rose 0.5%. So after all, improving inflation could ease some of Fed's predominant concern and give them more room to shift focus to growth but improving economic health is also easing some of the need and urgency to cut rates. That left the Fed firmly in a wait-and-see position.
US Q1 GDP was revised lower than expected from 1.3% to 0.6%, versus consensus of 0.8%, primarily due to smaller inventory accumulation and greater imports. That was the lowest GDP growth in 4 years. Meanwhile, Fed's preferred inflation gauge, core PCE deflator, rose at 2.2% yoy, same as previously estimated. Markets only had brief impact on these old data. Both Conference Board and University of Michigan consumer confidence were above expectation.
Data from Eurozone were solid. German CPI stayed at 1.9 % yoy and unemployment rate stayed at 9.2% in May. Eurozone CPI stayed at 1.9% yoy and unemployment rate dipped slightly to 7.1%. Manufacturing PMI in both Eurozone and Germany were solid at 55.0 and 56.1, though retreating slightly from Apr. Q1 GDP in Eurozone was revised slightly lower from 3.3% yoy to 3.0%. Eurozone M3 money supply growth finally moderated and slowed to 10.4% in Apr. ECB officials continued to sound hawkish and implied that the tightening is not over after the expected June hike this week.
Yen was supported by some risk aversion buying after at the start of the week and after a string of solid data. In particular, household spending rose strongly by 1.1% in Apr while unemployment rate dropped to 3.8%, 9 year low. Corporate Service Price index rose more than expected by 1.1%. Retail sales was up 0.4% mom. However, yen was again pressured after carry trade was back in play.
Gfk consumer confidence in UK improved from -6 to -2 in May. Nationwide house price slowed slightly to 0.5%. But Manufacturing PMI beat expectation by rising to 54.9. After all, the Sterling was relatively more resilient due to carry trade and speculation of a surprise from BoE this week.
The Swiss Franc received little support even though Q1 GDP grew more than expected by 2.4% yoy.
BoC kept rate unchanged at 4.25% as widely expected. In the press release, BoC made specific mention of the continued high inflation say "both total CPI inflation, at 2.2 per cent, and core inflation, at 2.5 per cent, were above expectations," and would average 2.2% for Q2. Growth is expected to be 3.5% this year, " a full percentage point higher than was estimated in the MPR." With increased risk that future inflation will persist above the 2% target, "some increase in the target for the overnight rate may be required in the near term to bring inflation back to the target.". This is taken to be a step to set the stage for a July hike. Also, Q1 GDP rose stronger than expected at an annualized qoq rate of 3.7% versus expectation of 3.5%, comparing to prior upwardly revised 1.5%. The Lonnie continued recent strength and surged to another multi decade high against dollar.
The Aussie was supported by carry trade despite disappointing retail sales while the Kiwi was boosted by speculation of a rate hike from RBNZ this week