Forex Major Currencies Outlook (May 23 – May 27)

USD 

Retail sales report for April was a very encouraging one. Headline number came in at 0.9% m/m as expected with control group rising 1% m/m. The shine of the report was in revisions, all groups, headline, control, ex autos, ex autos and gas, were revised higher. The report today shows that consumers were not hurt by rising prices which will give Fed green light to continue with rate hikes. Additionally, April reading indicates a strong start for Q2 GDP and after industrial production printed a healthy number and shown filled order books Atlanta Fed sees it now at 2.5%. 

Fed Chairman Powell gave speech at Wall Street Journal event and stated that there is a broad support for two 50bp rate hikes at the next two meetings. He added that inflation is way too high and that Fed is determined to bring it down. Exact words on inflation were “What we need to see is inflation coming down in a clear and convincing way, and we’re going to keep pushing until we see that: we clearly have still a job to do when it comes to cooling down demand”. He stated that there is a need for supply to catch up but that their models are not based on that assumption. Yield on 10y Treasuries started the week at around 2.93%, it briefly touched the 3% level on Wednesday and then retreated. FedWatchTool now sees a 50bp rate hike in June as certain with a probability of 98.2%. 

This week we will have minutes from the latest FOMC meeting as well as Fed’s preferred inflation metric PCE. 

Important news for USD: 

Wednesday:

• FOMC Minutes

Friday:

• PCE

EUR

Member of the ECB’s Governing Council Francois Villeroy stated that June meeting will be a decisive one and that we will have an active summer. In the light of economic slowdown caused by conflict in Ukraine, supply chain disruptions, as well as surging energy prices, European Commission has downgraded EU GDP for 2022 to 2.3% from 2.7% in February. Final April CPI came in at 7.4% y/y vs 7.5% y/y as preliminary reported while core remained unchanged at 3.5% y/y. Eurozone posted in March its first current account deficit in 10 years. The reading came in at -€1.57bn, down from healthy €20.7bn in February. Goods imports outweighed goods exports, due to rising energy costs, and pushed the reading into deficit.

This week we will have preliminary PMI data for the month of May.

Important news for EUR:

Tuesday:

• Manufacturing PMI (EU, Germany, France)
• Services PMI (EU, Germany, France)
• Composite PMI (EU, Germany, France)

GBP

Employment report contained upbeat data. Claimant count change for April dropped -56.9k vs -42.5k as expected. The ILO unemployment rate for March slipped to 3.7% from 3.8% the previous month and employment change for the last three months came in at 83k. Workers had additional reasons to be joyful as average weekly earnings rose 7% y/y. Employment rate climbed to 75.7%, but it is still lower than pre-pandemic. Additionally, there is more than one job open for every unemployed worker.

Inflation skyrocketed in April to 9% y/y from 7% y/y in March printing a 2.5% m/m increase. This is the highest reading in over 40 years. Core inflation climbed to 6.2% y/y from 5.7% y/y the previous month. BOE will be pushed by the combination of tight labour market and scorching hot inflation to continue raising interest rates, however the economy does not seem to be able to cope with this so we can see fears of stagflation mounting. BOE chie economist Pill stated that inflation projections are going to run into double digits.

This week we will have preliminary PMI data for the month of May.

Important news for GBP:

Tuesday:

• Manufacturing PMI
• Services PMI
• Composite PMI

AUD

Minutes from the latest RBA meeting saw members discussing 15bp, 25bp and 40bp rate hike. Members noted the underlying strength of the Australian economy and its ongoing resilience, particularly in the labor market. The unemployment rate is expected to drop to 3.5% by the early 2023 and such tight labor market conditions will lead to further pick-up in wages. Members noted that inflation was now above the target and was not forecast to return to the target range until mid-to-late 2024. The report also shows that recent evidence regarding wages was clearly showing increases and that is why they did not need to wait for official Q1 wage data before raising interest rate. Minutes show that “Members agreed that the condition the Board had set to increase the cash rate had been met. They also agreed that further increases in interest rates would likely be required to ensure that inflation in Australia returns to the target over time.” Wages data for Q1 came in at 0.7% q/q vs 0.8% q/q as expected and 2.4% y/y vs 2.5% y/y as expected. They were basically unchanged from Q4 2021 and although RBA constantly reminds us of their gradual increase, it is simply not there in the data. With inflation running at around 5% real wages are deep into negative.

Employment report for the month of April saw employment change at 4k vs 30k as expected, however the unemployment rate slipped to 3.9% and it is now at the lowest level since 1974! Participation rate did help it by slipping to 66.3% from 66.4% in March, but the additional highlight of the report is a huge increase in full-time jobs (92.4k).

April data from China continues to show negative impact of lockdowns. Retail sales plunged -11.1% y/y vs -6.1% y/y as expected. Sales for majority of goods dropped, led by jewelry, garments and cosmetics. Industrial production fared a bit better (-2.9% y/y vs 0.4% y/y as expected). Drops were seen in manufacturing production, mainly in automobiles and in general equipment. Retail sales printed second straight month of negative growth and with industrial production declining we can see negative Q2 GDP reading. PBOC still decided to leave the rate in 1-year MLF (Medium-term Lending Facility) unchanged at 2.85%. They will need to loosen monetary conditions in order to reach official projected GDP target for the year (5.5%). Analysts from big banks have lowered their projections to around 4.2%. Interest rates for first home buyers was decreased by 20bp to 4.4%. 1-year LPR (Loan Prime Rate) was unchanged at 3.7% while 5-year LPR was cut to 4.45% from 4.6% previously. This move could provide additional support to home buyers by lowering mortgage costs.

NZD

GDT price auction came in at -2.9% thus making it fourth consecutive auction of falling dairy prices. Whole milk powder prices recorded the biggest drop (-4.9%). PPI data for Q1 showed the burden that producers are facing. Input prices rose 3.6% q/q while output prices rose 2.6% q/q. This is the largest increase since the Global Financial Crisis in 2008 and it will seriously hurt profit margins. One way for producers to avoid this scenario is to transfer costs to consumers which will have inflationary effect.

This week we will have Q1 consumption data and RBNZ rate decision. We see the bank continuing with rate hikes and delivering a 50bp rate hike.

Important news for NZD:

Tuesday:

• Retail Sales

Wednesday:

• RBNZ Interest Rate Decision

CAD

Canadian inflation data for the month of April reflects inflation troubles that all developed countries, except Japan, around the world experience. Headline number came in at 0.6% m/m vs 0.5% m/m as expected and 6.8% y/y vs 6.7% y/y in March. Core numbers came in at 4.4% for Median, 5.1% y/y for Trim and 3.2% for Common. BOC will keep themselves at the rate hike path after the latest inflation report and 50bp at the next meeting is almost cemented.

JPY

Preliminary Q1 GDP data show that Japan has had a bad quarter but not as bad as feared. GDP came in at -0.2% q/q vs -0.4% q/q as expected and -1% y/y vs -1.6% y/y as expected. Private consumption was flat while business spending increased 0.5% q/q vs 0.3% q/q in the previous quarter. Net external demand subtracted -0.4pp from the final reading as exports rose 1.1% while imports rose 3.4%. Higher energy prices were the main culprit for the higher imports. April showed a ninth consecutive month of deficit in trade balance as imports outweighed exports by large amount due to rising energy and commodity prices combined with weaker JPY. National inflation data for the month of April saw headline number at 2.5% y/y, highest in eight years with ex fresh food category rising to 2.1% y/y, highest in seven years and ex fresh food, energy category return into positive territory after more than a year with a 0.8% y/y reading. BOJ has finally gotten their 2% target, question is how will they react to it.

CHF

SNB total sight deposits for the week ending May 13 came in at CHF753.3bn vs CHF750.9bn the previous week. Another increase, however much smaller than the previous week, indicates that SNB is still acting to push the EURCHF as far as possible from parity. SNB Chairman Jordan stated that expectations for inflation are to rise above the target but then to quickly revert back down. He added that SNB considers higher inflation when making monetary policy decision. The sentence that moved the market was "The SNB is watching inflation closely and is ready to act if inflation solidified in Switzerland." If SNB decides to raise rates in order to fight inflation it will bring a massive inflow of funds into CHF.

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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.}