Overview
Geopolitical risks continue to outweigh economic factors as market drivers, with the French elections, North Korea and US political machinations all contribution to the mix. The final poll for the French Presidency will be this Sunday and although the centrist candidate Macron is now expected to win, there remain a large number of undecided votes and right wing, anti-Euro Marine LePen has run a solid campaign. Look for choppy European markets in the run-up to the weekend.
We have continued to see softer US economic data over the last week and this gives weight to the argument that the health of the economy may have been overstated and that without bigger gains in productivity or labour force participation real GDP growth may only be marginally over the 2% level. US Non-farm figures on Friday may clarify this. Expectations are for an increase of around 180K new jobs for April. Later tonight March unemployment data for the Eurozone will be released, expectations are for the improving trend to continue with a drop from 9.5% last month to 9.4%, after a confidence survey last week indicated firms had increased their employment expectations. The RBA policy decision later this afternoon is expected to keep interest rates on hold, with previous minutes indicating that the RBA’s attention remains on labour and housing markets, stronger job gains in March have strengthened the Bank’s “on hold” view. For NZ, tonight’s GDT dairy auction should result in higher prices according to the dairy futures market.
Australia
Market focus is on the RBA statement later this afternoon, and although an “on hold” outcome is widely forecast the market will be looking for any change of view on the domestic economy given the stronger employment data last month and whether the RBA provides any new views on the exploding housing market. The better manufacturing activity reported for April saw the AUD recover back over the 0.7500 level against the USD yesterday and it has managed to hang onto gains currently around 0.7540. However, given an “on hold” decision by the RBA the path for the AUD is likely to see a continuation of the weakness seen over the last week as monetary policy diverges from that of the US Fed Reserve and more general economic data remains soft.
New Zealand
The New Zealand dollar continued to drop in value late last week falling to a low of 0.6850 and closing the week out just shy of 200 points lower. Monday US personal spending and personal income date came out better than expected but PMI and construction spending was disappointing, this kept the kiwi bid pushing back above 0.6900. With the NZ dollar seen as a commodity currency we may see further weakness with speculation around the US government imposing restrictions on imported products into the United States, this may indicate tighter restrictions on NZ businesses exporting products. Tomorrow we have local employment figures to be released with expectations around the unemployment rate to be around 5.1%. Friday sees quarterly inflation expectations. Short term support 0.6850 and resistance 0.7060
United States
Politics continue to dominate the US markets with inaction continuing around the position of tax cuts, infrastructure spending, health care changes, trade agreements and of course that key Trump policy piece, “the wall”. Given all these uncertainties however US equity markets continue to hold firm and last night saw technology stocks make new highs amid optimism over corporate results, while major indexes ended mixed on tepid economic data and comments by President Donald Trump on banking structure. Markets also were jumpy after Trump’s interview with Bloomberg, as he suggested raising the gasoline tax to fund infrastructure and reintroducing rules that keep commercial and investment banking operations separate. Overall however the US economy appears to be continuing to recover and the Fed appears still to be on course for another rate hike at its June meeting. This expectation should continue to underpin longer term USD strength against most of its trading partners.
United Kingdom
The UK markets continue to be focused on the dual issues of the General election on June 8th and the frayed relationship with the EU as Brexit negotiations start to ramp up. These political fundamentals have been to the fore over the last few days, with a disputed version of the meeting held between PM May and EU Commission president Juncker last week. Brexit headlines will be moving the pound and cross from here on. The German press reported that Juncker told Chancellor Merkel that May showed no willingness to compromise and had “unrealistic expectations” about how Brexit negotiations would proceed. However, PM May’s office said it did not “recognize” this account of the meeting which it said were “constructive”. Look for more of these ‘fun & games” after the election when negotiations will begin in earnest. The GBP has risen substantially since the election was announced, on the assumption that the incumbent Conservative government will be re-elected with an increased majority and hence make Brexit negotiations more straightforward. Also helping the stronger GBP is the better performance of the UK economy, with figures out last week showing a fall in the UK deficit to 2.6% of GDP, levels last seen at the start of the financial crisis in 2008. We remain positive on the GBP economic fundamentals dominate over its Eurozone neighbours.
Europe
All about the French elections this Sunday, the outcome of which will cement the foundations for the EU, for the meanwhile that is, on a Macron win and is essential for stability in markets. The current polls are around 61% to 39% in favour of Macron. …The EUR has enjoyed a solid rally after the results of the first poll and this has been helped by economic statistics showing better results across several of the Eurozone regions….The ECB kept rates on hold at last week’s meeting….but more positive results are expected for the Euro area flash Q1 GDP (Wednesday): look for the first reading of euro area Q1 GDP to climb 0.6% q-o-q from 0.5% q-o-q in Q4. Domestic consumption is expected to maintain its recent strong momentum and exports to recover. If regional growth data continue to improve, we may not have to wait too long before the ECB indicates a change in its policy stance. We expect the ECB to announce a tapering of the QE programme at the September meeting for enactment at the start of next year….this should limit EUR downside.
Japan
The Japanese yen has shown broad weakness over the past week pushing through the 111.50 resistance level against the USD on Monday. Japanese Final Manufacturing PMI published weaker than expected at 52.7 yesterday adding to the slide- weakening further the past 5 out of 6 trading days. JPY Movement this week will be limited to US action as Japan have holidays Wednesday and Thursday this week with no major data announcements. Technically we see lower highs and lower lows based on the high of 118.50 and at 108.20 low showing the overall bearish trend is still in place. We have large resistance at 112.00 based on the 50% move of the recent high of 115.40 and the low of 108.40 suggesting JPY may make a potential reversal push back towards the low of 108.00
Canada
The Canadian dollar continues to loose support as it continues to trade above key level of 1.3650 to a 15 month low. Monday saw stronger manufacturing data released giving the CAD a boost but this was only temporary. With Oil prices still low down this week around 1% to 48.70 this continues to put strain on the Canadian Dollar as it has depreciated over 4 cents since mid- April. Later this week we have Trade Balance figures releasing which may give the CAD some much needed support leading into Bank of Canada Governor Polaz talks on Friday. On the chart we have very thin air post 1.3700 through to the previous high of 1.4650 of January 2016, unless we see a shift we may see 1.40 come into play.
Major Announcements
• US Consumer Confidence 120.3 vs 123.7 expected
• Australian CPI 0.5% vs 0.6% expected
• Canadian Core Retail Sales -0.1% vs -0.2% expected
• Bank of Japan leaves rates unchanged at -0.10%
• ECB leave rates unchanged at 0.00%
• US Core Durable Goods Orders -0.2% vs 0.4% expected
• UK GDP 0.3% vs 0.4% expected
• Canadian GDP 0.0% vs 0.1% expected
• US GDP 0.7% vs 1.3% expected
• US ISM 54.8 vs 56.6 expected