Forex Major Currencies Outlook (June 7 – June 11)

USD 

ISM manufacturing PMI for May came in at 61.2 vs 60.9 as expected. The reading is still well in expansion with new orders continuing their rise and coming in at 67 vs 64.3 the previous month. The employment component fell to almost 50 due to labour shortage. Component shortages were reported by almost all of manufacturing sectors and they are restraining recovery. ISM services PMI came in at 64 vs 63.2 as expected and up from 62.7 in April. A new record high for the reading as production, new orders and new export orders all improved. Order backlog also improved indicating strong demand. Low points of the reading are drop in employment component and rise in prices paid component (over 80). Supplier delivery times rose over 70 indicating supply congestions. 

Fed announced that it plans to wind down on their pandemic induced Corporate Credit Facility. Their holdings are small, around $5bn in bonds and $8.6bn in ETFs, especially compared to Fed’s total balance sheet where assets are standing at $7.9 trillion, however this could be the potential sign of incoming tapering. They may opt to take things slowly and gradually, to ease the investors and avoid unwelcome market movements. 

NFP for May missed expectations for the second month in a row. Headline number came in at 559k vs 675k as expected. The unemployment rate dropped to 5.8% from 6.1% in April, but the drop was achieved on the back of falling participation rate which came in at 61.6%. The underemployment rate dropped to 10.2% from 10.4% the previous month. Fed’s focus has shifted solely to employment numbers and although this reading has some positives they will not feel pressured to taper soon. Wages showed a small increase, 0.5% m/m and 2% y/y. Continuous rise in wages should lead to sustained inflation pressures.

This week we will have inflation data. With reopening of the economy, combined with base effects from last year some analysts see headline number rising to 4.7% y/y with core printing 3.2% y/y. 

Important news for USD: 

Thursday:

• CPI 

EUR 

Preliminary inflation data for May saw reading come in at 2% y/y, up from 1.6% y/y in April. Rise in energy prices is the dominant factor in headline reading. Core reading came in at 0.9% y/y, up from 0.7% y/y the previous month, but still below 1%. That fact should keep ECB calm and allow them to characterize the rise in headline number as “transitory”. Final manufacturing PMI was upgraded to 63.1 from 62.8 as preliminary reported on the back of improvements in both German and French readings. Services and composite slightly improved to 55.2 and 57.1 respectively, staying well into the expansion territory, with German and French reading being unchanged. Another set of positive data raising expectations for Q2 GDP. 

This week we will have final Q1 GDP estimate and ECB meeting. There will be no changes in the rate and we expect members to leave out talk about slowdown in PEPP as to prevent bond yields from rising. Rising yields could potentially weaken the recovery in the Eurozone. ECB will publish new staff projections. 

Important news for EUR: 

Tuesday:

• GDP

Thursday:

• ECB Interest Rate Decision 

GBP 

Services were revised up to 62.9 from 61.8 as preliminary reported and pulled with them composite also to 62.9 from 62 as preliminary reported. With reopening and loosening of restrictions employment conditions improved significantly. ONS notes that, as of mid-May, only 8% of workforce are furloughed. This will give more credibility to incoming employment reports. 

This week we will have GDP data for April showing us how strong was the start of Q2. 

Important news for GBP: 

Friday:

• GDP 

AUD 

RBA has left the cash rate and 3-year bond target yield unchanged at 0.10% as was widely expected. They stated that economic recovery was stronger than expected and they see 2021 GDP at 4.75% and 2022 at 3.5%. Potential virus outbreaks, such as one seen in the state of Victoria, have been characterized as sources of uncertainty, but they should be contained as more people receive the vaccine. Statement shows a positive on the employment front: “Progress in reducing unemployment has been faster than expected with the unemployment rate declining to 5.5 per cent in April. Job vacancies are at a high level and a further decline in the unemployment rate to around 5 per cent is expected by the end of this year. There are reports of labor shortages in some parts of the economy.” The meeting showed barely any changes from the one in May, July meeting has potential to bring changes to the monetary policy. 

Q1 GDP came in at 1.8% q/q vs 1.5% q/q as expected. Adding to the beat was the fact that Q4 GDP was revised up to 3.2% q/q. Household consumption came in at 1.2% and was led by spending on services, recreation and culture. Private investment came in at 5.3% with machinery and equipment investment had the biggest impact due to sustained improvement in business confidence and Government tax incentives. Imports rose faster than exports thus making net exports a drag on the GDP. 

Official PMI data from China for the month of May showed manufacturing dipping slightly to 51 from 51.1 in April. Expectations were for a small rise, however semi-conductor chip shortage and input costs rising to the highest level in a decade contributed to a slight decline. Non-Manufacturing PMI improved to 55.2 from 54.9 the previous month due to increased spending during the Golden Week holidays. Composite PMI was pushed up to 54.2 from 53.8 the previous month. Caixin manufacturing PMI came in as expected at 52. Total new orders index climbed to the highest level in 2021 due to strong export sales. Employment index was slightly over the 50 level. Report states:” Rapidly rising commodity prices began to disrupt the economy as some enterprises began to hoard goods, while some others suffered raw material shortages. Supply chains were also significantly affected.” Caixin services came in at 55.1 and composite at 53.8. Both experienced drops but both are in the expansion territory. New export orders component dropped into contraction indicating fall in global demand. 

PBOC raised FX reserve requirement ratio from 5% to 7% as a way to fight ongoing yuan strength. New requirement will be implemented on June 15. During the week they have set USDCNY level at 6.3572, the lowest level for the pair in over 3 years. However, after those levels the pair has gained strength as we moved towards the end of the week with Friday set at 6.4072. 

This week we will have trade balance and inflation data from China. 

Important news for AUD: 

Monday:

• Trade Balance (China)

Wednesday:

• CPI (China) 

NZD 

Final business confidence in May came in at 1.8 vs 7 as preliminary reported. It is a big downgrade of the preliminary reading, however it is an improvement from April’s -2 reading. RBNZ Assistant Governor Hawkesby put a brakes on potential NZD upside with his comments that next year’s rate hike is dependent on underlying economic assumptions. GDT price index came in at -0.9% making it the fourth consecutive auction of falling dairy prices. RBNZ Governor Orr stated that dairy exports are supporting the economy. Although the prices are steady or slightly dropping, global demand for dairy products is very strong which in turn gives strength to New Zealand’s terms of trade. 

CAD 

Employment report for the month of May showed employment change dropping -68k vs -25k as expected. The unemployment rate ticked up to 8.2% while participation rate dropped to 64.6%, which is concerning. Wages continued to decline coming in at -1.4% m/m while both full-time and part-time employment showed declines. The province of Ontario remained under lockdown in May with few other provinces increasing restrictions in May which led to weaker employment reading. GDP in March came in at 1.1% m/m and helped Q1 rise to 5.6% q/q annualized, however expectations were for a 6.8% q/q annualized growth. We have entered into the last third of Q2 so this data point will be of interest mainly to economists while markets will ignore it. 

This week we will have BOC meeting. After last month’s meeting there will be no changes in monetary policy or rate and the tone of the statement should remain upbeat. 

Important news for CAD: 

Wednesday:

• BOC Interest Rate Decision 

JPY 

Industrial production in April came in at 2.5% m/m vs 3.9% m/m as expected and 15.4% y/y vs 16.9% y/y as expected. Yearly figures are inflated due to base effects since April of 2020 was horrendous month for producers. Still, figures are softer than expected indicating slack in the economy. Retail sales for the same period are adding to the economic woes. They came in at -4.5% m/m vs -1.7% m/m as expected and 12% y/y vs 15.2% y/y as expected. Reimposed states of emergency around the country heavily impacted consumer activity. Q1 capex data came in at -7.8% q/q vs -6.8% q/q as expected indicating lower business investment which may lead to weakness in Q2 GDP. On the positive side, May manufacturing PMI was upgraded to 53 and it showed expansion in output and new orders categories with employment continuing its rise. Additionally, services reading was upwardly revised to 46.5 and propped composite reading higher to 48.8. The good news stop there as when we dig into the services reading we see drops in ouput and new businesses. Business optimism drops to four-month low. With state of emergency prolonged until June 20, services reading next month may drop even lower continuing the trend of sixteen consecutive months below the 50 level. 

CHF 

SNB total sight deposits for the week ending May 28 came in at CHF710.5bn vs CHF709.6bn the previous week. A slight increase in the sight deposits indicating that SNB is standing ready to push EURCHF over the 1.10 level. SNB Chairman Jordan reiterated bank’s stance that Swissy remains highly valued and added that inflation risk is modest. Inflation was negative in Switzerland, excluding April, since January of 2020. Additionally, strong currency will have negative impact on inflation. Q1 GDP came in at -0.5% q/q vs -0.4% q/q with prior quarter being revised down to 0.1% q/q, thus making the reading even weaker.

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_{Please note that this analysis should not be used as investing advice as it is only an overview of the economic events influencing the markets. Please remember that our accounts have Market Execution. Please note how Execution works during high impact news and other times of low liquidity.}