Rates as of 05:45 GMT

 

Market Recap

It’s “risk on” today as stock markets in Asia are almost all higher. Accordingly, we have the three commodity currencies up and JPY and CHF down. Other currencies are barely changed. The similarity in the range of the currencies suggests to me that there wasn’t much specific news for each of them moving the market, but just general sentiment.

The improvement in sentiment is due to optimism that Saturday’s meeting between Trump and China President Xi at the G20 meeting may result in a temporary truce in the trade war between the two countries. A truce but not a settlement; the Washington Post reported that Peter Navarro, a senior advisor to Trump and the top China critic, is also going to attend the G20 meeting. He was a last-minute addition to the team, which includes US Trade Representative Lighthizer, Treasury Secretary Mnuchin and Commerce Secretary Ross. The addition of Navarro, a staunch critic of China, reduces the likelihood of reaching an agreement, although that was never that likely anyway.

Oil had a spike in US trading after the weekly US oil inventories data showed a 12.8mn barrel drawdown in inventories, the largest since 2016 and the fifth biggest on record (back to 1982). This is good news for oil going into the summer driving season, as there have been concerns about oversupply. But what interested me more was the fact that WTI lost all the gains and is now trading virtually unchanged. This is a big switch after the commodities’ recent gains (+2.8% on Tuesday) and suggests to me that oil may have reached a buying climax. In that case, we could see some weakness in CAD in the next couple of days. 

 

Today’s market

The day starts off with the German inflation data. As usual, Saxony starts the round of releases. Although there’s no forecast, the market tends to watch it anyway to see if there’s any acceleration from the previous month.

Expectations are that the pace of increase in the nationwide CPI will slow on a mom basis but be unchanged on a yoy basis at the well-below-target level of 1.3%.

Given the close relationship between Germany’s inflation and EU-wide inflation, that’s not encouraging. Germany has a 28% weight in the EU-wide CPI, the largest of any EU country, and so an unchanged rate of inflation in Germany suggests that the EU-wide CPI, due to be released on Friday, will also remain at 1.2% yoy, as the market expects. Figures like this would only corroborate what ECB President Draghi said last week:  that “looking forward, the risk outlook remains tilted to the downside, and indicators for the coming quarters point to lingering softness [in inflation]…In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required.”

Accordingly, an inflation number as the market consensus expects is likely to be negative for the euro.

In the US, we get the third and final estimate of US Q1 GDP. There used to be big questions about the seasonal adjustments in Q1 and large revisions, but that seems to have calmed down recently. The market is only expecting a small 10 bps change, which should have no impact on USD.

After Tuesday’s disappointing fall in US new home sales, today’s pending US home sales take on additional importance. They’ve been on an uptrend for the last three months and today’s figure is expected to continue that trend. That could spark some optimism in the market about housing, which would tend to boost the dollar slightly.

Overnight we get the usual end-of-month data dump from Japan. I’m not sure any of these indicators are particularly important for the FX market nowadays; USD/JPY seems to be reacting simply to risk-on, risk-off. Perhaps if they send the stock market up or down, the currency might react in sympathy.

In any event, the one that should interest the FX market the most is the Tokyo inflation data, but since that’s expected to show almost no change in the (below-target) rate of inflation, it’s not likely to have much impact. Ditto for the employment data; both the unemployment rate and the job-offers-to-applicants ratio are expected to be unchanged. With no change in the labor market, wage pressure is likely to remain subdued (that’s a polite way of saying that wages are actually falling, if you can believe the data, which you probably can’t, but that’s besides the point). In any event, no signs of any change in inflation = no sign of any change in BoJ policy. No surprise there. JPY neutral

Finally, Australia’s private sector credit figures are expected to show no acceleration in the pace of borrowing. In fact both the mom and yoy pace of growth are expected to be unchanged from the previous month. Boring. The pace of borrowing has been declining, but at least it’s still positive. That means the Reserve Bank of Australia’s recent credit easing – and further easing expected later this year – should help to boost the economy. AUD neutral

 

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Marshall Gittler

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