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FX Update: Europe breathes a sigh of relief after Macron’s win

There was an air of general relief by financial markets, with geopolitical risks easing, as polls for once were proved correct and the French Presidential election was won by centrist, pro-business, pro-European Emmanuel Macron in a convincing manner. Although this result was somewhat built into pricing, there was a rally in the EUR on Monday, but this was short lived as attention focused on whether Macron and his fledgling En Marche movement will be able to win a majority in the legislative elections in June. If he does not, this will limit any reforms that he has proposed to make the French economy more efficient and lower unemployment, curtailing his effectiveness as President. 

Other positive news was that the US Non-farm employment figures on Friday showed that the US economy was continuing its forward momentum, with an increase of 211k jobs for April, above expectations of 185K. The unemployment rate also had another drop to 4.4% a decade low. The chances of another Fed rate hike in June now appear stronger.

Today the main event will be the Australian Federal budget which is expected to show a 2017/18 deficit of around $27.7 bln and nominal GDP growth for the same period to be upgraded by 0.5% to 4.25% due to more favourable near term economic factors. With the budget expected to be long on spending pledges and short on savings there is some concern that Australia’s coveted AAA rating may come under pressure as being already on negative outlook by S&P Ratings. Australia is also the only triple A rated country to have increased debt over the past three years. However we do not see the budget as a big driver of volatility as markets focus on shorter term events and many of the budget details have already been absorbed by financial markets. Chinese data still continues to hold sway over the AUD and with Iron ore prices maintaining low levels as Chinese demand stays at lower levels we continue to look for risk to remain towards the downside….0.7300 beckons.

New Zealand
The new Zealand dollar traded higher Friday after US non-farm payroll figure published at 211,000 after 194,000 was expected. The unemployment figure also was lower to 4.4% bringing risk back to the table. NZD opened the week in a less than positive mood again after falling to an 11 month low mid last week but rebounded to 0.6945 in early NY trading. The RBNZ official cash rate is announced Thursday along with the monetary money statement to follow, markets have factored in no change but governor Graeme Wheeler may signal rate hikes earlier than 2019. A head and shoulder pattern is emerging showing the kiwi may continue through to 0.7000-0.7050 resistance.

United States
Solid payrolls figure of 211K jobs for April along with a drop to 4.4% in the unemployment rate shows that the economy continues to head down the recovery road. Although there are some soft spots, inflation and retail sales data will be among indicators to watch this week as well as April’s consumer price report which may show inflation cooling from a year earlier. We are still of the view that an interest rate hike is likely next month as it continues to look as if economic weakness in Q1 was transitory and the outlook is more positive. With political concerns reduced after the French election and the North Korean situation slightly less frenzied, investor focus can now shift back to reading the global economy for fresh signs that global growth is accelerating after better-than-forecast data on American jobs. US equity markets opened slightly lower, retracing from highs the previous week as the market seeks direction. With some of Trump’s key policies looking increasingly diluted and therefore unlikely to provide immediate USD support, the main driver of support will reside with the Fed and any signals it gives on the timing of reducing their balance sheet which expanded rapidly with quantitative easing. While the US economy continues to recover at faster rate than that of Europe, the French election result has shifted levels in the EUR/USD and we look for moves above the 1.10 level over the next month or so than tests of support at 1.7500 and below.

United Kingdom
Sold results for the ruling Conservative party in the local elections, where they gained over 125 new seats. Polls now show the incumbent government led by Prime Minister Therese May seems to be on her way to an easy victory in the snap election that will be held on June 8. A recent poll by the Guardian newspaper revealed that May’s Conservative Party is seen coming on top with 49% of the votes, 22 points ahead of the Labour party. This has helped the GBP move higher over the last few days, against the USD and most of its trading partners. However economic growth has been softer than anticipated in Q1, weighed down by softening in the service sector which suggests that consumer spending started the year on a weaker note. Also, CPI inflation has started to pick up, helped by the rebound in energy prices, and core CPI has moved higher as well. This increase in prices has started to erode real income growth and reduced growth in consumer spending, which is expected to continue to provide challenges ahead for the U.K. economy. There is a Bank of England’s meeting next week, but we expect the Monetary Policy Committee (MPC) to keep its bank rate unchanged at 0.25% and remain on hold through 2017 due to the slowing growth and rising inflationary pressures the economy is facing. Currently the GBP/USD is trading around 1.2947. 1.3000 provides the next resistance level but a break above this level would see 1.3050/55.

Project Europe got to live another day, breathing a collective sigh of relief on the French election result. A muted relief rally in EUR crosses finally sent EUR/USD above 1.10 following the election result. The Macron win should dampen Eurosceptic risks to the single currency for a while and thus help to sustain the move higher in ranges for EUR/USD in particular seen recently. With euro-area political risks now side-lined for a while, focus should return to the fact that Europe is looking surprisingly good cyclically, which will most likely lead the ECB to be somewhat hawkish in terms of communication on policy rates in June, i.e. remove the possibility for rates to go lower.

The Japanese Yen dropped to 113.30 early Monday to its worst level in 3 weeks as it continues to drift weaker against the US Dollar. Non -Farm payroll Friday boosted US fortunes with lower unemployment and broader nervousness for risk. The Nikkei is trading up over 2.3% to 19,895 and should boost yen selling if this continues. We have seen a bullish breakout through support of 112.50 suggesting the previous high of 115.00 of 10 March 2017 could be tested. Japan heads into a quiet week with economic data being thin locally and no significant data to be released to the markets.

The Canadian Dollar has opened on the back foot again after a stronger than expected unemployment figures out Friday in the US. The US Dollar was also boosted by investors taking profit on EUR positions after Macron won the presidency race in France, the CAD pushing aside 1.3700. Oil prices recovered slightly but have failed to create further buying interest in the Canadian Dollar after further falls this morning. Signs of further slowing economic growth are evident as the CAD remains sensitive to oil prices and housing pressures. The bullish channel towards 1.40 remains with building permits data released tomorrow.

Major Announcements last week:
•    NZ Employment Change 1.2% vs 0.8% expected
•    NZ Unemployment 4.9% vs 5.1% expected
•    UK Construction PMI 53.1 vs 52.1 expected
•    US ISM Non-Manufacturing PMI 57.5 vs 56.1 expected
•    FOMC leaves rates unchanged
•    UK Services PMI 55.8 vs 54.6 expected
•    Canadian Trade Balance -0.1b vs 0.3b expected
•    NZ inflation expectations 2.2%
•    Canadian employment change 3.2k vs 20k expected
•    US Non-farm Payrolls Change 211k vs 194k expected
•    Australian Retail Sales -0.1% vs 0.3% expected

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