Forex Major Currencies Outlook (May 9 – May 13)

USD 

The Fed delivered on its promise and raised the rate by 50bp. The new rate now stands in the 0.75-1% range. The Fed has announced a balance sheet run off, Quantitative Tightening (QT). They will sell both agency MBS and Treasuries at a pace of $47.5bn per month in June ($30bn Treasuries and $17.5bn agency MBS) and then proceed to $95bn in September ($60bn Treasuries, $35bn agency MBS). Bank members agreed that $95bn per month in tightening would be the maximum. During the press conference Chairman Powell repeated several times their worries about high inflation. The plan is to deliver more 50bp rate hikes at the next couple of meetings in order to bring inflation down, however Powell stated that 75bp rate increase is not being considered. Markets took this as a sign that USD is overvalued and brought it down. 

NFP data for April beat the expectations coming in at 428k vs 390k as expected. The March reading was revised down to 428k. The unemployment rate stayed the same at 3.6% while participation rate dropped to 62.2% from 62.4% in March. Wages were closely monitored and they came in at 0.3% m/m, down from 0.5% m/m the previous month and 5.5% y/y, same as in March. 

The yield on a 10y note climbed over the 3% level on Monday, then slipped below on Tuesday only to return above before the Fed meeting and stay above it for the remainder of the week. Despite Chairman Powell’s words FedWatchTool sees the probability of a 75bp rate hike in June at 91.4%. 

This week we will get inflation data for the month of April. 

Important news for USD: 

Wednesday:

• CPI 

EUR 

Final manufacturing PMI for the April showed an improvement to 55.5 from 55.3 as preliminary reported on the back of upward revisions to German and French readings. Spanish and Italian reading missed the expectations. A dangerous cocktail of supply chain disruptions, higher input prices and Russia-Ukraine conflict is keeping the sector under pressure. S&P Global notes that “Production trends look set to worsen. Future output expectations remain very subdued by historical standards, and the slowdown in new order growth is indicative of factory output across the eurozone falling in the coming month” They conclude with a bleak view of “In short, the eurozone manufacturing sector looks set for a difficult period of falling production and surging prices.” 

Services reading, final for April, came in unchanged at 57.7 thus making it the highest reading since August of last year. Italian and Spanish readings beat the expectations, French was slightly improved while German was gently downgraded. Overall, unchanged as business activity and demand increase while new export orders decline and input prices continue to surge. S&P Global notes that “The survey data are consistent with GDP rising at a quarterly rate of around 0.7%”. Consumer confidence continued to deteriorate and reached -22 in April, down from -18.4 in March. Other sentiment indicators also dropped on the month. 

GBP 

On Thursday, BOE has delivered a widely expected rate hike of 25bp. The vote was a 6-3 with three members (Haskel, Mann and Saunders) wanting a 50bp rate hike. The accompanying statement warns of impending doom for the World and the UK growth. The Committee’s new projections see bank rate rising to 2.5% by mid-2023 and then falling to 2% by the end of the forecast period. CPI inflation is expected to rise further to just over 9% in 2022 Q2 and averaging slightly over 10% at its peak in 2022 Q4. CPI inflation is expected to fall to a little above 2% in two years’ time. UK GDP growth is expected to slow sharply over the first half of the forecast period with recession starting in 2023 while the unemployment rate is seen rising to 5.5% in three years’ time due to a slowdown in demand growth. The statement shows that “most members of the Committee judge that some degree of further tightening in monetary policy may still be appropriate in the coming months.” The Bank Rate remains the primary tool of monetary policy. Additionally, now that Bank Rate is at 1%, the Committee will consider to start a process of selling government bonds. The plan for it will be drawn by the August meeting which will give members time to conclude whether to start the sale. Governor Bailey stated in a press conference that recession is a rather certain outcome. 

This week we will have a preliminary Q1 GDP reading. 

Important news for GBP: 

Thursday:

• GDP 

AUD 

RBA has delivered a 25bp rate hike thus raising the rate to 0.35%. Expectations were for either a 15bp or a 40bp rate hike. Interest rate on Exchange Settlement was also increased by 25bp and it now stands at 0.25%. They have assessed the economic outlook as positive and concluded that “it is appropriate to start the process of normalising monetary conditions.” Inflation has surprised to the upside and although they see it reaching 6% in 2022 members see it returning into its target range as supply issues resolve itself. The bank is prepared to do what is necessary to return inflation into the target range which will mean more rate hikes in the future. Bank members do not plan to sell the government bonds purchased during the pandemic. The statement showed “The central forecast is for Australian GDP to grow by 4¼ per cent over 2022 and 2 per cent over 2023.” During the press confidence Governor Lowe stated that more normal level of rates would be 2.5% confirming that we have started on a rate hike path and there is a long way to go. 

PMI data from China for the month of April plunged into contraction territory due to the lockdowns in Shanghai and other regions. Manufacturing came in at 47.4, non-manufacturing collapsed to 41.9 and pulled with it composite to 42.7. Caixin manufacturing, measures smaller companies, did not fare batter and also dropped to 46. Services reading was more devastating as the reading dropped to 36.2 from already low 42.2 in March. Drops were seen everywhere in the services reading, in the new business component in employment component, both domestic and external demand were weak. 

This week we will have trade balance and inflation data from China. 

Important news for AUD: 

Monday:

• Trade Balance (China)

Wednesday:

• CPI (China) 

NZD 

Employment data from New Zealand showed employment change of 0.1% q/q and 2.9% y/y in Q1. The unemployment rate remained at 3.2% while participation rate dropped to 70.9% from 71.1% in Q4. Wages are rising and are at 1.8% q/q vs 1.4% q/q the previous quarter. The report indicates that New Zealand economy is close to the full levels of employment and with wages going up it will intensify inflation pressures. RBNZ should not be discouraged to continue raising interest rates after this report. 

CAD 

April’s employment report was a mixed bag of data leaning to the downside. Employment change came in at 15.3k vs 55k as expected. The unemployment rate slipped to 5.2% thus printing a record high, however participation rate also slipped to 65.3% from 65.4% in March. Wages were weaker, at 3.4% y/y vs 3.7% y/y the previous month. The biggest disappointment came at full-time jobs which dropped to -31.6k thus marking that all of the jobs added were part-time jobs (47.1k). BOC will not be deterred by the report from the rate hike path as new record unemployment rate indicates big tightness in the labor market. 

JPY 

Final manufacturing PMI for the April saw a tick up to 53.5 from 53.4 as preliminary reported. Japan was on holiday for the entire week and then on Friday Tokyo area inflation was reported. Headline number came in at 2.5% y/y vs 1.3% y/y in March, thus printing a higher reading than much desired 2%. Ex energy component came in at 1.9% y/y vs 0.8% y/y the previous month, while ex energy, fresh food reading, the closest to the US “core”, printed 0.8% y/y vs -0.4% y/y in March. Yields on 10y JGB have been below BOJ’s upper limit of 0.25%, not warranting intervention in the market, so JPY has gained some ground. 

CHF 

SNB total sight deposits for the week ending April 29 came in at CHF744.bn vs CHF742.6bn the previous week. SNB gently adds more pressure to the Swissy attempting to steer EURCHF away from the parity. Inflation in April printed 2.5% y/y for a headline reading, up from 2.4% y/y in March while the core came in at 1.5% y/y vs 1.4% y/y the previous month. SNB Maechler stated that strong Swissy is helping keep the inflation pressures down.

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