RBA and US employment report to move the markets

Leaving behind us a week dominated by fundamentals, yet still financial releases tended to function as flashpoints. In the coming week, we maintain the view that fundamentals are still going to be influencing the markets, yet financial releases may have an increased importance on their bearing. We highlight on Monday, the release of China’s NBS manufacturing PMI for May, on Tuesday Eurozone’s preliminary HICP rate for May, on Wednesday Australia’s GDP rate for Q1, yet the crown of financial releases may be on Friday the US employment report for May, which is expected to be closely watched. On the monetary front we highlight the release from Australia of RBA’s interest rate decision, while on Friday from the US, Jerome Powell, the Fed’s Chairman is scheduled to speak.

USD – US employment report to be closely watched

The weakening of the USD seems to have hit a halt once again mid-week after hitting a fresh new 5 month low. The halt may prove to be the main feature of USD’s price action against a basket of other currencies, yet it still remains to be seen whether it’s a turning point or just a recess. Fundamentally the main issue is and remains the inflationary pressures building up in the US economy. The market seems to be focusing on the Fed’s intentions and on whether the bank is about to start discussing a possible tapering of its QE program as means of tightening its monetary policy and thus tame the inflationary pressures. Hence each Fed policymaker making statements is monitored for any hints on the bank’s intentions. Thus we highlight the scheduled speech of the Fed’s Chairman Jerome Powell on Friday. The unexpected acceleration of the headline CPI rate for April and the core PCE prices Index for April, confirmed the market’s suspicions and given the Fed’s dual mandate, on inflation and maximum employment, the attention may start turning to the release of the US employment report for May. Should a strong employment report be released for May on Friday, we may see the pressure on the Fed to act rising and thus supporting the USD, while should the employment data be weaker than expected, we may see the USD weakening as it would allow the Fed to maintain its dovishness, dismissing the inflationary pressures as temporary. Also, on the USD fundamentals we note the possibility of further tensions in the US-Sino relationships, which if present could provide the USD some safe haven inflows for the greenback. Yet besides of the US employment report on Friday we would also like to note on Tuesday the release of the ISM manufacturing PMI for May, on Thursday the release of the ISM non-manufacturing PMI for May and the weekly initial jobless claims figure, while on Friday, we get also get the US factory orders growth rate for April.

GBP – BoE’s outlook improves

The pound tended to strengthen against the USD yesterday as well as the EUR and JPY. Overall though cable seems to maintain a sideways motion. It seems that comments made by BoE policymaker Vlieghe tended to provide tailwinds for the pound. In his statements, BoE’s policymaker yesterday, mentioned the possibility of BoE raising interest rates late in 2022, without excluding the possibility of an earlier rate hike, possibly in the first half of next year, should the job market bounce back faster than expected. On GBP’s fundamentals the easing of lockdown measures along with the intense vaccination program seems to continue to support the pound at rather high levels, while the spreading of the Indian variant of Covid remains a threat yet its importance seems to have deflated somewhat. Nevertheless, news that the full reopening of the UK economy in June may be on the balance, could still weaken the pound. It should be noted that the pound may be among the best performing G10 currencies against the USD since the start of the year. We intend to maintain our focus on UK’s fundamentals and BoE’s monetary policy outlook given the low number of high impact financial releases in the coming week. Yet we would like to note the release of the UK Nationwide house prices for May on Tuesday and on Thursday the final figure of UK’s Services sector PMI for May.

JPY – Fundamental worries tend to weigh on JPY

JPY weakened yesterday against the USD, GBP and EUR, practically highlighting the troubles surrounding the Japanese economy. Worries in the land of the rising sun are related to the path of the pandemic, the pace of economic recovery and the summer Olympics, while Tokyo’s state of emergency may be extended. All of that seem to weigh on the Japanese currency on a fundamental level. Nevertheless, we should not forget JPY’s dual nature, which besides a national currency is also consideredd as a safe haven. Hence should the market’s sentiment turn more towards a risk on attitude it could have an adverse effect on JPY and vice versa. On the monetary front, we highlight BoJ Governor Kuroda’s comments earlier today noting the rising inflationery pressures in the US and the variance of monetary policies on a global level, highlighting that BoJ is to stick with easing. As for financial releases we note on Monday Japan’s preliminary industrial output growth rate for April as well as the retail sales growth rate for April, while on Tuesday we get the final Jibun Bank manufacturing PMI reading for May.

EUR – Outlook continues to improve

The common currency seems about to end the week more or less where it began, indicative of the EUR’s weakness to benefit from the improved outlook. Yesterday the common currency tended to weaken against USD, GBP and CHF as ECB’s de Cos statements were hinting that the area’s inflationary pressures are of temporary nature and Panetta’s comments that it may be too early for ECB to taper its QE program, maintaining a dovish tone and may have invited the bears. Hence we may see the dovish outlook of the ECB weighing on the single currency in the coming days if there is no mentioning of a possible tightening. On EUR’s fundamentals we note the improved pace of vaccinations in Europe and the lowering tendency for the number of new daily cases in Germany and France, the two largest economies in the zone, both supporting the better outlook for the Eurozone. As for financial releases, we note on Monday Germany’s preliminary HICP rate for May, on Tuesday Germany’s retail sales growth rate for April and Germany’s final manufacturing PMI reading for May as well as Eurozone’s preliminary HICP rate for May. On Wednesday we get Eurozone’s producer prices for April and on Thursday Eurozone’s and France’s final services and composite PMI readings for May, while on Friday we get Eurozone’s final retail sales growth rate for April.

AUD – RBA’s interest rate decision in focus

The Aussie seems about to end the week on the lower end of its sideways movement against the USD. However worries for the Aussie tend to run deeper, given the efforts of China to set the price of copper and iron ore under control, two key export products of Australia. Overall though we would also like to highlight the preparations ahead of the Biden-Xi meeting in June, as well as the US-Sino relationships as a possible factor that could fundamentally affect the Aussie and a possible escalation in the tensions characterising their relationship could have an adverse effect. On the monetary front, we highlight the release of RBA’s interest rate decision on Tuesday. The bank is widely expected to remain on hold at 0.10% and currently AUD OIS imply a probability of 99% for such a scenario to materialise. Hence attention is expected to turn to Governor Lowe’s statement, yet we would not expect any change in the banks’ dovish tone as prices seem to remain below the bank’s target, hence overall we would not expect any major changes. Such a scenario could weaken AUD, given the bank’s current dovishness and monetary outlook differentials with other commodity currency central banks such as BoC and RBNZ. As for financial releases we note the release of China’s NBS and Caixin Manufacturing PMI readings for May on Monday and Tuesday respectively, while on Tuesday we also get Australia’s building approvals for April. On Wednesday we highlight the release of Australia’s GDP rate for

CAD – Data and oil prices on the radar for CAD traders

The CAD seems about to edge lower against the USD as the week is about to end and is about to halt a string of seven consecutive weeks, where USD/CAD was in the reds. Fundamentally oil prices tend to be one of the main issues of CAD traders, given that oil is one of the major export products for Canada. It should be noted that oil prices are currently at rather high levels yet could experience substantial volatility in the coming week. The OPEC+ meeting should be taken into account on the 1st of June and its going to take place via video conference. The meeting is on a ministerial level and could reaffirm the gradual easing of production cuts agreed in the previous meeting, yet the possibility of Iran reentering the oil market as a major exporter may place a shadow of a doubt on that scenario. On the demand side it seems that the global economic recovery tends to support the notion of higher demand thus supporting also oil prices. Yet its not all about oil for CAD traders in the next week. Also financial releases could affect the markets’ opinion about CAD’s direction. On Monday we get Canada’s current account balance for Q1 and on Tuesday the GDP rate on an annualised basis for Q1 as well as the Markit Mfg PMI for May. On Wednesday we get Canada’s building permits for April and on Friday we highlight the release of Canada’s employment data for May as well as the Ivey PMI reading for the same month.

General Comment

Overall, in the FX market given the high number of high impact financial releases we may see fundamentals relenting some ground and providing a more balanced mix for traders to watch out for. The USD is expected to maintain the initiative over other currencies especially given that US financial releases tend to be of high impact, especially the US employment report rates and figures on Friday. Also we would like to highlight any effect on the USD of the US yields which tended to rise in the past two days and should they continue may provide some support for the greenback. On the other hand, rising US yields may weaken gold prices, as they would highlight the opportunity cost for gold bearers. As for US stockmarkets we highlight that the main indices seem to be in a make or break position with rather low volatility albeit a bullish movement was present and must be noted. Should the market maintain a risk on sentiment in the coming week, we may see the buying interest being extended and vice versa.

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