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Economies of Note

The Australian dollar had a good and bad day yesterday with choppy trading in a day dominated by data. The release of Australian April retail sales which were better than expected, showing a 1% growth for the month saw the AUD climb to 0.7453, but then was battered down to 0.7372 after Chinese manufacturing PMI figures came in at 11 month lows and iron ore prices continued to fall hitting an 8 month low. Next week will see the RBA rate decision on Tuesday, expectations are for no change but as always the wording around the statement and any forward guidance given by the RBA will be closely analysed.

Currently the AUD is trading around 0.7378 and should trade sideways at current levels ahead of tonight’s US jobs figure. Next major support is 0.7340 a break of which would then probe the sub 0.7300 level to test 0.7280. The downside is favoured for moves next week.

New Zealand
The New Zealand dollar ends the week in a strong position having rallied solidly against the Australian dollar after it fell into the Chinese data hole yesterday. The NZD made a high of 0.9574, the highest level since February, it is currently trading around 0.9560 and with underlying fundamentals continuing to be NZD supportive on this cross a move to 0.9600 cannot be discounted. However we are getting close to previous historic highs and at these levels there is value in buying AUD as further NZD upside will be tougher at these rarefied levels. From a NZD/USD perspective gains over the week have also been solid, but the NZD has eased back as the good US ADP jobs figure overnight boosted expectations for tonight’s NFP jobs data, although the NZD will come under pressure if the jobs figure is better than expected, hard to see too much downside in the Kiwi in the short term.

United States
Solid data releases this week showed that the US economy continues to power up and a rate hike from the Fed at its June 14th meeting is almost assured. US equity markets rose to fresh new highs overnight as the ADP jobs report showed private sector employment in the U.S. increased by 253,000 jobs in May, well above market consensus of 185,000, increasing expectations for a strong NFP reading tonight, this may now be in excess of 200,000, the unemployment rate is expected to remain at 4.4%, which would confirm a 0.25% Fed rate hike in June. Also released last night was the US ISM manufacturing index for May, which beat April’s reading, rising to 54.9 from 54.8 better than expectations which had been for the index to hold steady. This data from the US manufacturing also points to continuing solid growth.
The USD  strengthened after the ADP data with the EUR/USD falling back to 1.1250 , if tonight’s NFP is 185k +,  look for a more pronounced USD bump higher, with the EUR/USD falling to the 1.1160 level which if broken could see an extension to 1.1080.

United Kingdom
The news for Theresa may continue to get worse as Opinion polls show continuing erosion of the Conservative lead as the Labour party gains support, her lead is now into low single digits after being 22 points ahead only 2 weeks ago. The GBP has endured choppy trading dropping to a low around 1.2829 against the USD on election jitters then bouncing back to 1.2901 after release of robust UK manufacturing PMI data. Markets are in a quandary, caught between a temptation to panic at the tightening election polls and the knowledge that polls have proven to be fairly inaccurate in both the last US and UK elections. The GBP is now trading around the 1.2890 level and with the UK election  now under a week away (next Thursday) and although tonight’s US NFP  data will have an influence, we expect sideways trading within the 1.2800-1.2920 range, with a clear break below 1.2760 required to confirm a bearish move lower.  As long as the 1.2800/1.2920 range persists, little could be expected ahead of elections, with a clear break below 1.2760 required to confirm a bearish extension.

Eurozone economies continue on the gradual improvement track although inflation is still subdued. Next week’s April retail sales and GDP Q1 for the Eurozone region will give a better pointer as how the recovery is going. The release of May Eurozone inflation data disappointed expectations, with core CPI coming in around 0.9% y-o-y down from the 1.2% seen in April. The ECB may waver on dropping forward guidance at its meeting next Thursday, but interest rates are expected to be left on hold. Tonight’s US jobs data will provide direction for the EUR and we expect the pressure to come on the 1.1080 level if a good result.

In comments from the Bank of Japan, “ the Japanese economy continues to expand and maintain growth at a pace above its potential, mainly through fiscal 2018, on the back of highly accommodative financial conditions and the effects of the government’s large-scale stimulus measures, with the growth rates in overseas economies increasing moderately.” With this in mind there is little likelihood that the BoJ will exit its stimulus policy anytime soon as projections are for the economy to continue to expand over 2019 although  the growth pace  is projected to decelerate due to a cyclical slowdown in business fixed investment and the effects of the scheduled consumption tax hike.  The USD/JPY has squeezed higher to 111.60 and a break of 111.85/95 would target 112.15.

Canadian data released yesterday saw solid growth in manufacturing output , new orders and employment. This buoyed the CAD also helped by higher oil prices. The USD/CAD rose to a high of 1.3516 then pulled back around 40 pips to the 1.3470 level and is currently pushing back towards last night’s highs around 1.3514. Look for consolidation at current levels as we head into tonight’s U jobs figures.

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