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FX

USD Held Back, Awaiting Key Events

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Key events later this week (Comey, UK elections and ECB meeting) could exacerbate the USD weakness in the short term.

 

USD & JPY

  • A weaker than consensus US May jobs report as May Non Farm Payrolls rises just 138k (182k expected), alongside a 2 month negative revision of -66k.
  • ISM May nonmanufacturing falls slightly but to still strong levels, declining modestly from 57.5 to 56.9, short of consensus at 57.1 though still near the top of its 55.2-57.6 range for 2017.

 

Strategy: USD still held back awaiting key events this Thursday 

  • Citi analysts call for 2 further Fed rate hikes this year (June & September) with an announcement on balance sheet reduction likely in December, notwithstanding the softer US May jobs report. Markets though currently discount more than a 80% chance of a June hike but a mere 25% chance of one in September. And while this is potentially medium term USD supportive, key events later this week (Comey, UK elections and ECB meeting) could well exacerbate the USD weakness in the short term with USDJPY seen
    best to express this view.

 

EURO BLOC 

  • EUR: Citi expects ECB to remove easing bias from its forward guidance and upgrade risks around its economic outlook to ‘balanced’.

Strategy: UK election uncertainty sees position squaring in sterling

  • GBP: GBPUSD trades back above 1.2900 and EURGBP back down towards 0.8700 – 20 overnight, unable to break above the March highs (0.87875). With UK election polls showing very diverse outcomes and voter participation uncertain amid recent terrorist attacks, interest in sterling remains cautious. For GBPUSD to break through 1.3050 resistance, markets want to see a working majority of 60+ seats for the Conservatives, anything less than a +25 seat majority would likely see GBPUSD pull back towards 1.24 – 25, whereas an outright loss would be more much more severely damaging to sterling.

 

COMMODITY BLOC

Strategy: AUD upside limited, CAD better placed

  • CAD: The short term consequences of renewed Middle East tensions cannot be ignored and potentially puts CAD in line for renewed outperformance against its commodity cousins (especially AUD).
  • AUD: AUD still most vulnerable across the board driven by both domestic and external weakness. The medium term outlook still remains for AUDUSD to test the mid-May low of 0.7330 followed by 0.7250 and the Dec/Jan lows of 0.7150.

 

EMERGING ASIA

Strategy: Weaker China manufacturing survey sits at odds with calls for further gains in CNY. 

  • The PBoC’s announcement to changes to its daily fixing methodology on CNY has seen a 0.5% gain in CNY against USD over the past week (CNH has gained around 1%) but weakness in Chinese data (Caixin manufacturing PMI) should sit at odds with calls for further gains in the currency. Rather, it is USD vulnerability that could see USDCNY head lower in the near term though likely to correct once the political overtones in the US start to fade.

 

This is an extract from the Daily Currency Update, dated 6th June. Please approach a Citigold Relationship Manager if you would like a copy

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