Rates as of 05:00 GMT



1. Sell EUR/USD as sentiment towards Europe worsens, US economic data comes in positive
2. Buy silver/sell gold (still) as that ratio is likely to move down further
3. Sell USD/CAD ahead of today’s Canadian CPI figures


Market Recap

Odd market movement today. Stock markets did rebound, as I expected, and Treasury yields fell as the tone in Washington about the US-China trade talks turned a bit more constructive. Trump expressed some optimism that the talks with China would be successful over the next few weeks. However, in contrast to other markets, the FX market continued to show a “risk off” response. JPY continued to rise and AUD fell further. However, currency movements were relatively muted in any event.

AUD fell sharply from mid-morning Australian time. It’s not clear what that was related to. Iron ore futures prices were higher. Later in the day, China announced disappointing economic statistics – the rate of growth in industrial production and retail sales both missed estimates substantially. But the fall in AUD came before this news was announced and the currency didn’t move that much afterwards. Nonetheless, the report was bad news for AUD and the currency could fall further today, I think. The market consensus expectation of an unchanged unemployment rate overnight adds to my conviction. However after two bad calls in a row on AUD I’m going to refrain from putting it in my “trade ideas for the day” – but you might want to.

The outlier then was CAD, which rose even though the other two commodity currencies fell. This was apparently due to the slight rebound in oil prices, although the correlation between USD/CAD and oil prices has diminished considerably in recent months.

This year, the normal reaction has been for USD/CAD to fall by 0.124% for every 1% that oil prices rose. Given the small rise in oil prices (+0.16%), the small fall in USD/CAD (-0.04%) was perhaps appropriate.

But there may also be some positioning ahead of today’s Canadian CPI figures, which are expected to show Canadian inflation remaining steady. That could be positive for CAD. (See below)

In the “risk on” environment, both gold and silver fell, but gold fell more, causing the gold/silver ratio to retreat somewhat from its recent high level. I think this ratio still has further to go and still recommend silver over gold, but clearly as a relative value play, not outright buying.

EUR weakened – and USD strengthened – after Italian Deputy PM Salvini said the country is ready to break EU fiscal rules if it’s necessary to boost employment. Italian bond spread widened somewhat, but nothing extraordinary. The disappointing ZEW survey – the expectations index fell to -2.1 from +3.1 instead of rising to +5.0 as expected – shows that the mood towards Europe is worsening. I think EUR/USD could slip further as the news from the US remains positive – watch for today’s US retail sales (see below).


Today’s market

The European day begins with the first estimate of Germany’s Q1 GDP, followed by the second estimate of EU-wide GDP. The EU-wide GDP figure is rarely revised and if it is, it’s usually just by 10 bps, so it’s not that much of a deal.

The big news then will be the US retail sales figures. March’s figure was great, but policymakers will want confirmation that consumer spending is picking up again after the poor performance of Dec-Feb. Sluggish auto sales may depress the figure, however.

The “control” measure of retail sales, which is the version of consumer spending that goes into the GDP report, is expected to show an improvement in line with the recent trend. Moreover, Q2 tends to be the best-performing quarter for this measure of retail sales. A good figure here would reassure the Fed that growth is on track to meet their target for the year and therefore they can ignore the calls to cut rates. USD positive

The Empire State manufacturing survey is expected to show a small decline. That would simply keep it in the same range it’s been in for several months now. It’s not great, but at least it’s still showing the economy expanding. USD positive

Canada has a wide variety of CPI measures. The Bank of Canada said back in 2016 that the usefulness of the headline inflation figure as an operational guide to monetary policy had deteriorated and that instead they would use three measures of core inflation:  common, mean, and trim. They explained that some of the components in the CPI basket are subject to sharp and often temporary price swings that are unrelated to underlying inflationary trends. The Bank therefore uses three core inflation measures that allow it to “look through” temporary changes in total CPI inflation.

In any case, all three are expected to tell the same story – steady inflation just below the middle of the BoC’s 1%-3% target range.

The market is still pricing in a 26% chance of a rate cut this year, but that probability could fade further if inflation remains steady. The Bank of Canada said in the statement after the April meeting that “the Bank expects inflation to remain around 2 per cent through 2020 and 2021.” A result like this would confirm that prediction, meaning there’s little reason for the BoC to change rates. CAD positive

Contrary to the Empire State manufacturing survey, which shows output continuing to expand, US industrial production is expected to be relatively weak – no change after March’s small decline. However, at least it’s not deteriorating further. USD neutral

Australian employment is expected to remain fairly stable. The market looks for 15k new jobs to be added (this is the same as they forecast last month – probably they just have no idea, so they’re guessing) and the unemployment rate is expected to stay at 5.0% (also the same as last month’s prediction).

This month’s figure carries added significance after the Reserve Bank of Australia (RBA) raised the bar for the labor market in its decision to leave the cash rate unchanged this month. The RBA is now looking for a “further improvement in the labour market,” whereas before it just wanted to see the absence of a “sustained increase in the unemployment rate.” I doubt if they’d move rates based just on one month’s figure, but the market might move the odds of a rate cut – currently standing at 40% for the next meeting and 90% this year. If the unemployment rate doesn’t fall further, AUD could fall further. AUD negative


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Marshall Gittler

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