Month End On a pproach

FX MMKT Weekly Outlook and Strategy, 27th to 31st March

Month end on the approach - data fairly light again

Little upside seen for USD/JPY before April at earliest

The last week:

G20 disappoints; Trump has trouble with the Obamacare repeal

Data makes a splash!

Somewhat slim pickings again in the search for highlights over the last week, getting off to a bad start on Monday as the latest G20 get together scrubbed the decade old pledge to reject protectionism, this after opposition from the US. That saw equities off to a shaky start, although most damage was seen on Tuesday when the DJIA fell close to 300 points.

It was a generally fairly light week for data, although some of the releases we did see made a splash. The UK saw inflation data and retail sales come in above expectation, while on Friday flash Eurozone PMIs were well above and managed to spur a bounce in EUR/USD, though as yet the year to date high at 1.0830 remains unchallenged. The better UK numbers also allowed Cable a currently rare look over 1.25, although a hard won break below .8650 on Thursday was proving hard to hold down after the Eurozone data.

The softer equity markets saw USD/JPY weighed, trading on a 110 handle before a modest end of week rally on the N225 just about managed to prop it back around 111. Approaching fiscal year end saw last minute exporter offers dragged down to 111.50.

Towards the end of the week the markets became fixated on the Trump administration's attempts to repeal Obamacare, a planned vote on Thursday eventually postponed, another try scheduled for Friday.....

There was some interest in the commodity currencies as the AUD's recent rise to the top of the pile continued to see some erosion, softer iron ore prices the latest weight on the currency, although at just over .7600 AUD/USD still up around 5% on the year. The NZD was an early gainer at the AUD's expense ahead of the RBNZ policy meeting, the Bank leaving policy unchanged - as expected - but the statement not adopting the hawkish tone the NZD buyers had been looking for, and AUD/NZD bottoming out just ahead of 1.0800.

CAD traders as ever had to keep an eye on Crude prices, rallies in the latter still struggling as inventory data continues to show that stocks are more than ample. However, AUD/CAD is close to 2 big figures off the highs.

All very familiar on EUR/CHF and in Scandinavia. The SNB's annual report showed CHF67.1bn of intervention in 2016, while we know it has been busy in 2017 too. EUR/SEK stuck to a tight range around 9.50, NOK traders still keeping a close eye on oil prices but NOK/SEK fairly steady after its soft first half of the month.

The Week Ahead. Strategy:

Time to sit back and see if EUR/USD can bounce a little further?

Quarter end looms (fiscal year end for Japan) and we suspect that's reason enough to keep risk appetite fairly subdued and maybe an opportunity to look a little further forward into Q2. Given that the Trump election victory back in November was generally seen as a positive for the USD developments since have been a disappointment for many, and with some encouraging data from the Eurozone (while always happy to admit it's from a low base) we would want to stand back and see if the year to date high on EUR/USD does get a test, and if it breaks just how big a follow through we might expect. We doubt that any extended rally would venture too far beyond the middle of the 1.05/1.15 range that has been in place (with minimal stretching) for the last two years, though longer term technicals might allow for 1.12.

It's both hard to look much beyond 111.50 on USD/JPY in the coming week and the likely step up in verbal intervention from MoF officials if we see an early threat to 110.00. While the equity markets have been quite volatile over the month to date, at the moment the N225 is little changed from the February close and that should at least minimize the scramble at the late London fix.

We have been around the block too many times to believe that the UK can go into negotiations over the Brexit process without GBP hitting at least a few bumps in the road. We can only see progress through the 1.2570 late February high being on the back of a push higher on EUR/USD, while on EUR/GBP the shaky nature of the dip through .8650 in the last week means we can hold our view that sub .8700 is too low for the cross with limited embarrassment. However, a break below .8600 would probably mean we have to swallow some pride.

We have championed the AUD as the commodity currency of choice from the beginning of the year, but after a strong run we note some caution creeping in despite the RBA apparently accepting that the currency is fairly valued. The drop off on iron ore prices has added fuel to the argument that it's time for a turnaround, but as long as WTI crude is holding below $50 we won't be in a hurry to switch affections to the CAD. The neutral tone maintained by the RBNZ week suggests we have not seen the last of AUD/NZD at 1.1000, though we would not look for a great deal more upside from there.

We probably have to accept that EUR/SEK is not going to wander far from 9.50 in either direction near term, while the NOK will not wander far from its neighbour either. We may have to watch out for any window dressing by the SNB on EUR/CHF in the latter half of the week, but anything over 1.08 should continue to be short lived.

Data and Events:

Much of the data in the US is of moderate importance but could be significant in building expectations of Q1 GDP. On Tuesday we expect a correction lower in the advance estimate of February's trade deficit in goods to USD67.2bn from a sharply wider USD68.8bn in January which helped to knock Q1 GDP forecasts lower. Advance February wholesale and retail inventory data due at the same time will also be significant for GDP arithmetic. Shortly after we see Jan S&P Case-Shiller house price data. Jan's FHFA house price index was weak but looks unlikely to signal a change in trend. Also due on Tuesday are the Markit Service PMI, where February data disappointed, and consumer confidence where February posted the highest level since Jul 2001!

Wednesday only has February pending home sales to offer. On Thursday we expect final Q4 GDP to be confirmed at 1.9%, though any significant revisions will also impact thinking on Q1. Initial claims will be released at the same time.

On Friday we expect gains of 0.3% in February personal income, 0.2% in spending, and 0.2% in core PCE prices. Personal spending data should be watched for GDP implications, including any revisions to what was very weak data for January. We expect mild weather to remain a restraint on utilities consumption in February. Later on Friday March Chicago PMI and final Mar Michigan CSI data are due, both following firmer preceding releases.

It's another busy week for Fed speakers, Evans and Kaplan up on Monday, both voters and a dove followed by a moderate. Kaplan also has engagements on Tuesday and Thursday.

Non-voting hawk George is scheduled on Tuesday, as is Evans again, along with the dovish Rosengren and moderate Williams, neither of them voters this year. Williams features again on Thursday, as does hawkish non-voter Mester.

The Eurozone week starts with the March IFO on Monday. We expect a modest rise in the headline to 111.5 from 111.0, with current conditions up to 118.6 from 118.4, business expectations to 104.5 from 104.0. Eurozone M3 and Italian sentiment surveys are due the same day.

Inflation dominates the balance of the week, Germany on Thursday likely to see HICP up 0.6% m/m, albeit with the y/y down to 2.0% from 2.2%. CPI is seen at 0.5% m/m, 1.9% y/y (from 2.2%).

French inflation is on Friday where both HICP and CPI are expected at +0.6% m/m, seeing y/y CPI slow further to 1.1% from 1.2%, HICP to 1.3% from 1.4%. That will be follow by flash HICP for the Eurozone where a 1.2% m/m gain would still leave the y/y lower at 1.9% from a 4 year high 2.0% in February.

The ECB's Praet speaks after the European close on Monday, the EU's Moscovici on Wednesday.

It's the usual busy month end for Japanese data, retail sales due on Wednesday, then a crowded Friday with inflation, production, employment, household spending and housing starts. We expect February core CPI to slip back to flat y/y after managing a positive 0.1% in January. Tokyo core CPI for March should push up, but at -0.2% from -0.3% still mired in negative territory.

We expect industrial production to be up 1.2% m/m after -0.4% in January.

There is no data of any note due in Australia, a speech by RBA Deputy Governor Debelle on Tuesday at the FX Week conference the one event of note. AUD traders will, however, keep the usual close eye on China's manufacturing PMI due on Friday. The New Zealand calendar is also close to empty.

In Canada BoC Governor Poloz will speak on Tuesday in what may be his last public remarks before the Apr 12 meeting. Feb IPPI and RMPI price indices are scheduled for Thursday. On Friday Jan GDP is due, with manufacturing, wholesale and retail data for the month all having shown healthy gains.