Forex Weekly Outlook and Strategy

FX Weekly Outlook & Strategy, 3rd to 7th April

FX MMKT Weekly Outlook and Strategy, 3rd to 7th April
A big week ahead for US data - we are well below consensus on NFP
RBA has the first April policy decision to make; no change expected
Brexit to move out of the headlines; President Trump to fill the void?

The last week:

UK triggers Article 50 - world keeps turning
Eurozone inflation disappoints the hawks


Wednesday saw the UK deliver the letter confirming its intention to leave the EU, the news channels devoting massive coverage but - despite some jumpy price action during the day - GBP proving little changed overall on the week.


Otherwise it was a fairly quiet last week of Q1. Data generally struggled to elicit any kind of reaction, though the EUR did come off as Eurozone inflation data proved on the soft side of expectations to undermine much of the more bullish tone that stemmed from the better flash PMIs seen the previous week, that backed up by the Ifo survey marking a 69 month high. US data was fairly uninspiring, consumer confidence the exception as it marked a 16 year high at 125.6.
We did hear from a host of central bankers, those from the Fed sticking pretty much to their track records, the ECB members erring more on the dovish side. Maybe of more interest was the SNB's Maechler who said that the CHF would be even more over-valued were it not for negative interest rates, adding that the Bank will scrap the latter as soon as practical. Her comments saw EUR/CHF back below 1.07, not by very much but reinforcing the belief that the SNB's ambitions do not extend very much higher just now. The prize for most predictable central banker went to the Riksbank's Ingves who warned yet again that the SEK must not be allowed to strengthen too quickly.
USD/JPY found a base just ahead of 110, and while expected month end offers kept the upside limited we did see some trades over 112 on Friday ahead of anticipated fresh demand as the new fiscal year kicks in.

Equities 

Equities made a soft start to the week but were ahead again as the weekend approached. Of the three major commodity currencies it was nip and tuck between the AUD and CAD for top honours, the CAD getting a hand as WTI crude managed to regain the 50 handle after outages in Libya and modest inventory builds in the US, though most of the talk of a potential extension of the current output limits came from those either not involved or unable to push out more than they are already. Saudi Arabia has been very quiet on the matter. Canadian January GDP on Friday was better than expected The NZD has slipped back again, AUD/NZD looking as though it is on the way back to 1.10 after dipping below 1.08 early in the week.
The Week Ahead. Strategy:
Looking for better levels to sell EUR/USD
AUD still holding on as favourite commodity currency
GBP can step out of the spotlight, and that should worry the shorts

USD/JPY

While the USD/JPY market did appear to get a little ahead of the gun on Friday in looking to push USD/JPY higher to greet the new fiscal year, we would be a shade cautious before getting too long of USD before we have seen all of the US data that dominates the calendar in the coming week. We would be less concerned about the FOMC minutes given what has been an almost constant running commentary from Fed officials over the last couple of weeks, but looking at our below consensus forecast for Friday's NFP gain the 'clues' laid by ADP, initial claims and the employment components of the ISM releases will also play a part. As long as 110.00 holds the base we will look for some gains in USD/JPY to kick of Fiscal 2017/2018, 114.50 looing a not unreasonable target if not necessarily before the end of week one.

EUR/USD

While EUR/USD positioning is no longer the factor it once was we would still look to any shift in expectations towards a below consensus NFP headline to provide an altogether more attractive sell level. Anywhere close to the top half of the 1.05/1.15 two-year range could be looked upon as an opportunity (1.0975 a wide channel top for the model traders), while 1.1200 looks ambitious but not outside the realms of possibility if even our low expectation of the NFP number proves optimistic. We expect that sellers would have to be quick.
On GBP it's still a balance between the long term view that the big post-referendum shake out is still a buying opportunity, and the shorter term one that there is no way that Brexit negotiations will get too far before hitting some hurdles. With the market still short a squeeze is always a danger and a push through the recent 1.2615 high might be enough to shake the tree on Cable, though we still see significant risks of a decent bounce on EUR/GBP from below .8600.

AUD

On the AUD the danger is that the RBA will disappoint those looking for a step up in hawkish rhetoric and encourage some more profit taking by longs who have enjoyed a good run. We would not be in a hurry as recent attempts to call a top on the AUD have only led to a bounce. We are not convinced that WTI crude can hang on to let along build on the return to $50, while recent dips in USD/CAD have also failed to maintain a push below 1.3300. The carry is not nearly enough to underwrite a serious move higher by the NZD and we expect that AUD/NZD is set for another run to 1.10 and change.
We can't get excited on either the Scandies or the CHF. We have said many times that there is no reason other than Riksbank paranoia that EUR/SEK should be a good deal nearer 9.0 than 10.00, while any attempts by the SNB to lift EUR/CHF will run into sellers whenever it pauses for breath.
Data and Events:
The US holds most of the attention in the week ahead with employment data the big data interest, while the minutes of the FOMC March meeting will be closely scrutinized. Data is of less interest elsewhere, while GBP may be able to step out of the limelight as the UK and EU gather their thoughts before the real negotiating gets under way, probably not before May. The RBA kicks off the April central bank round on Tuesday. President Trump entertains China's leader in Florida on Thursday and Friday.
A busy US calendar includes March employment data and the minutes of the last FOMC meeting, while the ISM surveys will also be closely watched.


For Friday's non-farm payroll we expect a below trend 130k increase to follow two straight above trend gains, harsher than usual March weather after two unusually mild months the main reason for the slowing - note that we are well below the consensus for 175k. Such a rise would still be seen as respectable by the Fed, particularly if we are correct in seeing a rise of 0.3% in average hourly earnings and a fall in unemployment to 4.6% from 4.7%, weather likely to restrain the labour force as well as job growth.




ADP private sector employment gains could slow even more than payrolls after outperforming last time. We expect a 110k rise, slower than the 125k rise we expect in private sector non-farm payrolls. Initial claims on Thursday could decline as weather improves.


We expect the ISM indices to correct lower from recent strength, manufacturing on Monday to 57.0 from 57.7 and non-manufacturing on Wednesday to 56.0 from 57.6. Most indices in the breakdowns should slip, although we do expect the manufacturing breakdown to produce a stronger employment index.
The week's other data releases should have limited market impact, but could lead to more fine-tuning of Q1 GDP estimates. These include February construction spending and March auto sales on Monday, then February's trade deficit on Tuesday, the latter set to fall to USD45.0bn from USD48.5bn in January, an improvement already signalled by advance goods data. February factory orders are also on Tuesday, wholesale data and consumer credit on Friday.
The highlight of the Fed calendar will be minutes from the March FOMC meeting on Wednesday. There seems to be a clear consensus that further gradual tightening will be needed, with June looking highly probable and 4 hikes this year a significant possibility. However that inflation remains low should be noted.
The speaker calendar is busy early in the week. Monday sees voter Dudley, traditionally dovish but recently more moderate, plus hawkish voter Harker and non-voting hawk Lacker. On Tuesday we hear from dovish voter Tarullo, in what may be his final remarks before his resignation. Non-voter Williams, recently leaning hawkish, speaks on Thursday.
Final Eurozone March PMIs are due on Monday for manufacturing and Wednesday for service and composite numbers, none of them likely to differ to any degree from the improved flash releases seen in the last week.


German factory orders are on Thursday where a 6.5% rise won't fully recover the 7.4% fall reported in January. Production data follows as usual on Friday, along with the French equivalent.
The ECB's Liikanen is due to speak on Tuesday.


Monday's Tankan report is the only major feature in Japan. We expect large manufacturing business conditions at +15, the outlook at +14.


PMIs provide the early interest in the UK. Manufacturing on Monday us expected to recover slightly to 55.6 from 54.6 in February, followed on Tuesday by a marginal increase for construction to 52.6 from 52.5. On Wednesday, however, we expect a further decline in the service measure to 53.0 from 53.3 in February and 54.5 in January.
Friday brings February industrial production where we expect a headline rise of 0.3% m/m, 3.7% y/y, with manufacturing up by 0.5% m/m after a 0.9% fall last time, the y/y up to 4.0% from 2.6%. February trade data and the NIESR GDP estimate for March are also scheduled.


The RBA is widely expected to leave policy unchanged on Tuesday for a ninth straight month, though we do anticipate some re-directing of focus to the housing market.
The week starts with a busy data calendar, February retail sales and building approvals the bigger numbers on Monday, while the AIG manufacturing index, TD-MI inflation gauge and ANZ Job Adverts also due. We expect retail sales to post a 0.2% m/m rise after 0.4% in January, with building approvals slowing to +0.6% m/m after 1.8%.
February's trade balance is released on Tuesday where we anticipate a small increase in the surplus to AUD1.39bn from AUD1.30bn.
RBA members have a busy week on top of the policy meeting, Governor Lowe set to speak at a Reserve Bank Board dinner on Tuesday, Head of Economic Analysis Heath on Wednesday, and Deputy Governor Debelle on Thursday.
It's a quiet week for official data in New Zealand, though NZD traders will look out for the dairy auction on Tuesday.
Canada has a busy week ahead of the BoC policy meeting on the 12th, though the BoC at present is inclined to treat positive data signals cautiously. It will look closely at the Q1 business outlook survey on Monday which should look quite strong, and February trade on Tuesday. Friday's March employment numbers will also be watched to see if the recent improvement in trend can persist. Other releases due are March manufacturing surveys from Markit on Monday and the Ivey PMI on Friday, while February building permits are due on Thursday.


PMIs provide the early interest in Scandinavia, manufacturing numbers on Monday expected to post small falls in both Sweden and Norway, to 60.0 from 60.9 for the former, 52.0 from 52.6 the latter. Sweden posts its service PMI on Wednesday along with February production data, with Norwegian production due on Friday.
The Riksbank's Floden is down to speak on Monday, the Norges Bank's Olsen on Wednesday and Nicolaisen on Thursday.v