Forex Major Currencies Outlook (June 20 – June 24)

USD 

Advanced retail sales for the month of May came in at -0.3% m/m vs 0.2% m/m as expected. Control group, the one used for GDP calculation, was flat while ex-autos came in at 0.5% m/m vs 0.4% m/m in April. US consumer is winding down its purchases which is what Fed wants as a way to bring inflation down. The report shows auto sales as the biggest drag (-3.5% m/m and -3.7% y/y) while gasoline stations sales were the biggest contributor (4% m/m and 43.2% y/y) due to surging gasoline prices. 

Fed delivered a 75bp, highest single rate increase since 1994, which was the consensus from the beginning of the week. Before that markets were bracing for a 50bp rate hike. The new rate is now in the 1.50 to 1.75% range. The newly published dot plot shows median rate at the end of the year at 3.4%, indicating a fast pace in rate hikes until the end of the year. It was at 1.9% in March dot plot. Median rate for the end of 2023 is seen at 3.8% vs 2.8% in March and long-term rate is now seen at 2.5%. Summary of Economic Projections (SEP) shows GDP in both 2022 and 2023 dropping to 1.7% from 2.8% and 2.2% as seen in March. Unemployment is seen at 3.7% in 2022 and 3.9% in 2023. In March it was seen at 3.5% for both years. PCE inflation is seen at 5.2% in 2022 from 4.3% in March and dropping to 2.7% in 2023. With rates going that high the odds of a hard landing, recession, are increasing. 

Powell stated in his press conference that bringing inflation down is essential. He added that growth in business investment and housing are slowing but that labour market remained extremely tight. Since last meeting inflation has surprised to the upside and that is the main reason why they decided for a 75bp rate hike The pace of the future rate hikes will depend on the incoming data and he sees 50bp or 75bp rate hike most likely scenario at the July meeting. During the Q&A session he stated that bank members expected inflation to start flattening by now. He did not mention neutral rate or terminal rate, instead of neutral rate he used a term “more normal range”. The yield on the 10y Treasury reached highest level since 2018 at the beginning of the week at 3.24%, it rose toward 3.486%, the highest since 2011, before easing after the FOMC meeting. FedWatchTool now sees 90.9% probability of a 75bp rate hike in July. 

EUR 

Fears of fragmentation in the bond market were exacerbated this week as the yield on Italian 10y bonds rose over 4% with spread between them and the Bunds, 10y German bonds, climbing to over 250bp. During the week ECB Governing Council had an emergency meeting to discuss current market conditions, the mounting risks of fragmentation in the bond markets. They have decided to apply flexibility in reinvesting PEPP in order to suppress spreads as well as “to accelerate the completion of the design of a new anti-fragmentation instrument for consideration by the Governing Council.” Markets were at first unimpressed with their decision and pushed EUR lower, only to see spread between Italy and German 10y bonds slip below 200bp by the end of the week. 

ZEW survey for the month of June showed improvements in both current conditions for the German economy as well as future outlook for German and EU economy. Trade balance in May showed a huge widening of trade deficit to -€32.4bn from -€16.4bn in April. Imports rose 39.4% as energy imports skyrocketed while exports rose 12.6%. 

This week we will have preliminary June PMI data. 

Important news for EUR: 

Thursday:

• S&P Global Manufacturing PMI (EU, Germany, France)
• S&P Global Services PMI (EU, Germany, France)
• S&P Global Composite PMI (EU, Germany, France) 

GBP 

April GDP came in at -0.3% m/m vs 0.1% m/m as expected. This is a second consecutive month of negative growth and it presents a bleak start for the Q2 confirming BOE’s recession fears. The cost of living crisis shows fears of stagflation. All three majors sectors recorded declines (services -0.3%, production -0.6% and construction -0.4%) which is, as ONS notes, the first time since January of 2021. 

Employment report in May showed tightness in the labor market with a twist. ILO unemployment rate for April ticked to 3.8% from 3.7% in March marking the first rise in the rate since May of last year. Still, the level of 3.8% equals to the pre-pandemic unemployment. Average weekly earnings came in at 6.8% vs +7.6% as expected and down from 7% in March while ex bonus earnings stayed unchanged at 4.2%. 

BOE delivered a 25bp rate hike as expected and lifted the rate to 1.25%. Vote was 6-3 in favor of a 25bp rate hike with three members wishing for a 50bp rate hike. Inflation is now seen hovering above 9% for the next few months before reaching its maximum of 11% in October! At the beginning of the year it was thought that inflation will max out in April. MPC members are determined to act more forcefully if the cost pressures become more persistent. Next BOE meeting in in August and a 50bp rate hike cannot be ruled out. Inflation pressures will be key economic data point influencing BOEs decisions. Investors are pricing in a terminal rate of around 3.5% which is much too high given the strength of the economy. 

This week we will have inflation and preliminary June PMI data. 

Important news for GBP: 

Wednesday:

• CPI

Thursday:

• S&P Global Manufacturing PMI
• S&P Global Services PMI
• S&P Global Composite PMI 

AUD 

Minimum wages have been increased by 5.2% which could in turn lead to sustained inflation and cause RBA to hike more aggressively in the future. RBA governor Lowe came out with hawkish statement in which he said that “Australians need to prepare for higher interest rates” and added “it’s reasonable that the cash rate gets to 2.5% at some point… How fast we get to 2.5%, and indeed whether we get to 2.5%, is going to be determined by events.” Employment report in May was another stellar one. Employment change came in at 60.6k vs 4.5k in April. The unemployment rate stayed the same at 3.9% while participation rate improved to a record high of 66.7%. All of the jobs created were full-time jobs (69.4k) while part-time jobs saw a decline (-8.8k). 

Data from China showed improvements compared to April lockdown-impacted, but it is a slow move up. Retail sales continued to decline, but at a slower pace than expected (-6.7% y/y vs -7% y/y) and better than -11% y/y the previous month. Catering, clothes, cars and jewelery were down in double digits y/y. Industrial production returned into positive territory for the year and came in at 0.7% y/y vs -0.7% y/y as expected and up from -2.9% y/y the previous month. PBOC has kept the 1-year MLF rate unchanged at 2.85%. 

NZD 

Q1 GDP saw New Zealand economy slide into contraction as it came in at -0.2% q/q vs 0.6% q/q as expected and 1.2% y/y vs 2.4% y/y as expected. Current Account/GDP ratio for Q1 came in at -6.5% vs -6.3% as expected and down from -5.8% in Q4 of 2021. 

CAD 

Finance Minister Freeland stated that BOC has tools to prevent inflation from becoming entrenched. She stated that she could not guarantee soft landing but that country is in a good condition to avoid recession. One of her main objectives is to bring down Canada’s unfavorable debt to GDP ratio. CAD has had a down week as first it was crushed by USD strength and then by weakness in oil.

This week we will have inflation data.

Important news for CAD:

Wednesday:

• CPI

JPY

BOJ offered to buy unlimited amounts of 10-year JGBs at 0.25% in their pursuit for yield curve control on June 16 and 17. Core machinery orders, a good proxy for CAPEX 6-9 months in the future, surged 10.8% m/m and 19% y/y. In the manufacturing sector, electrical machinery, information technology and auto sectors rose while in the service sector, transportation, finance, and retail sales were leaders. Additionally, orders from abroad surged 52.1%. It is possible that weakness in JPY contributed to such a massive surge in demand from overseas. Trade balance data for May saw imports rise 48.9% y/y, almost 50%, which is a new record and shows how dependent Japan is on energy imports and what dangerous combo weaker JPY and higher energy prices makes make.

BOJ managed to stand firm against the market pressures and held monetary policy unchanged. The rate is still at -0.1% while upper band of a yield curve control is set at 0.25% for 10y JGBs. They reiterated their offer to buy 10y JGBs every day at fixed yield of 0.25%. Additional easing steps will be taken if need arises. Japan’s economy is seen picking up and inflation expectations have risen. BOJ Governor Kuroda stated that there is no limit to the yield curve control adding that raising yield on target on 10y JGBs would have negative impact on the economy. They have stood their ground, but markets will keep on testing their resolve in the months to come.

CHF

SNB total sight deposits for the week ending June 10 came in at CHF753.1bn vs CHF753.8bn the previous week. There was a small decline as SNB is satisfied with the way markets are treating Swissy. Swiss government came out with new projections. They lowered growth expectations and raised inflation expectations. 2022 GDP is now seen at 2.6% vs 2.8% previously, 2023 GDP is now seen at +1.9% vs +2% previously while 2022 CPI is now seen at 2.5% vs 1.9% previously and 2023 CPI is now seen at 1.4% vs 0.7% previously. Russia – Ukraine conflict and China lockdowns are cited as main risks.

In a surprise move SNB raised it’s policy rate by 50bp and it now stands at -0.25%. The decision was made in order to counter the mounting inflation pressures and to prevent it from spreading more broadly. The bank will not hesitate to intervene in the FX market if the need arises. They have stated that further increases in the policy rate cannot be ruled out to stabilise inflation. With the new rate new inflation forecast for 2022 is at 2.8%, 1.9% for 2023, and 1.6% for 2024. All three are higher than in March and would be even higher if the rate was not raised. GDP for 2022 is still seen at 2.5%. SNB Chairman Jordan stated that price stability is priority and that Swissy is no longer highly valued. SNB has moved in front of the ECB and markets were caught off guard by the move as EURCHF plunged more than 200 pips in the first hour of the rate hike.

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_{Please note that this analysis should not be used as investing advice as it is only an overview of the economic events influencing the markets. Please remember that our accounts have Market Execution. Please note how Execution works during high impact news and other times of low liquidity.}