USD’s Gains Driven by Hedge Fund Buying

USD’s gains driven by hedge fund buying                        

• USD’s tactical gains continue to be led by hedge fund buying leading to a very sharp climb in their long positions. However, longer-term (real money) investors have yet to show their hand. That said, it does appears that at least for now, there seems to be less inclination than before to sell USD on rallies by investors across the board.

   

• Markets await the start of US-China trade talks that kick off tonight with leading negotiators hoping for something positive. In the meantime, metal tariffs see mixed headlines with S&P ratings agency warning that there is broader risk of trade tensions “spiraling from skirmish to conflict” if the US doesn’t reach a deal with the EU.

GBP declined despite construction PMI rebound

• UK April construction PMI bounces back from the weather-related disruptions in March, coming in at 52.5 vs 50.5 consensus forecast. However, construction accounts for just over 5% of the economy and markets await the more important Services PMI (which covers 55% of the UK economy) tonight. Citi analysts do not expect the BoE to hike rates this month with the added risk that the May statement could be more dovish than anticipated.

Lagging weaker eurozone data weighing on EUR

• Euro area Q1 GDP growth slows to 0.4% QQ, weakest since 3Q-16 but in line with consensus while the final estimates of euro area manufacturing PMI decline to 15-month low in April to 56.2, revised slightly higher by 0.2pts vs. the flash estimate, but still declining for the fourth consecutive month to the lowest level since Feb-17. Markit note that the slowdown “is mainly due to slower (yet still robust) increases in new orders. Some firms link this to the recent strengthening of the euro exchange rate, especially against the US dollar”.

Commodity Bloc: New Zealand jobs data highlights full employment but no upside wages pressure

• NZ’s jobs data Wednesday showed the unemployment rate falling to a 10-year low in Q1 and employment rising 0.6% in Q1 (+15k), which places yearly growth at a respectable 3.1% though down on 3.7% from Q4 last year. The unemployment rate also ticked down a notch from 4.5% to 4.4% while the employment rate remains almost at a record high, printing at 67.7%. However, there is still no sign of upside wages pressure with the private sector labor cost index rising a mere 0.3% at its slowest pace in 3 years and keeping yearly wage cost growth at 1.9%.

   

• Implications for the RBNZ – the unemployment rate of 4.4% is exactly in line with RBNZ’s forecast for the year ended March 2018 and suggests that the RBNZ can continue with its neutral forward guidance and retain its current economic growth forecasts. The TWI exchange rate at 73.4 is also below the RBNZ’s near-term forecast of 75.0 though largely reflecting a stronger DXY but NZD commodity prices have been rising and other things being equal, a more competitive exchange rate has been an objective of the RBNZ for some time. As such, there is little reason for the RBNZ to change its OCR projections.

This is an extract from the Daily Currency Update, dated 3rd May 2018. Please approach a Citigold Relationship Manager if you would like more information.