Forex Major Currencies Outlook (May 24 – May 28)

USD 

Housing starts in April surprised to the downside coming in at 1569k vs 1702k as expected. Building permits also missed but on a much smaller scale, they came in at 1760k vs 1770k as expected. Recent surge in material costs, particularly lumber, led to a slower supply of houses. Demand seems to be unaffected and this seems to be just a bump in a rising trend. 

April’s FOMC minutes showed members feeling that economy still has a long way to go toward the recovery. The statement that caught the most attention was: “A number of participants suggested that if the economy continued to make rapid progress toward the Committee's goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.” Although the wording is very carefully constructed and contains many conditions, markets took it as hint that QE taper can come sooner than expected which pushed USD higher. We need to consider that the meeting took place before the latest weak NFP report. Additionally, we do not expect any serious talk from the Fed about tapering before Jackson Hole meeting, scheduled to take place in August. 

This week we will have second estimate of Q1 GDP, durable goods orders for April so we get a glimpse in how Q2 is starting and Fed’s preferred inflation measure PCE along with personal spending data. 

Important news for USD: 

Thursday:

• GDP
• Durable Goods Orders

Friday:

• PCE
• Personal Spending 

EUR 

Preliminary May PMIs for the Eurozone showed manufacturing ticking down to 62.8 from 62.9 in April due to a drop in German reading. Still it is a very healthy reading indicating that manufacturing sector is going strong. Services showed impressive rebound coming in at 55.1 vs 50.5 in April. German services returned to expansion after a small dip down the previous month. Composite reading was also elevated and came in at 56.9 vs 55.1 as expected. Markit noted that: "Demand for goods and services is surging at the sharpest rate for 15 years across the eurozone as the region continues to reopen from covid-related restrictions. Virus containment measures have been eased in May to the lowest since last October, facilitating an especially marked improvement in service sector business activity, which has been accompanied by yet another near-record expansion of manufacturing. Growth would have been even stronger had it not been for record supply chain delays and difficulties restarting businesses quickly enough to meet demand, especially in terms of re-hiring.” 

Second reading of Q1 GDP came in unchanged at -0.6% q/q and -1.8% y/y. After two consecutive quarters of negative growth reopening of economies is giving boost to services sector, as can be seen in May services PMI, which would in turn boost GDP and return it back into positive territory. Final inflation data for April showed headline reading unchanged at 1.6% y/y while core reading slipped to 0.7% y/y vs 0.8% y/y as preliminary reported. 

GBP 

Employment report for April shows positive impacts of reopening. Claimant count, unemployment claims, fell -15.1k. Official ILO unemployment rate ticked down to 4.8% from 4.9% in March while employment change for the previous three months came in at 84k vs 50k as expected and up from -73k measured the previous month. Inflation came in on par with expectations, headline 1.5% y/y and core 1.3% y/y. Energy prices contributed the most with a 9% increase in gas and electricity while clothing and footwear rose by 2.4%. As reopening continues, we are sure to see inflation readings in the coming months printing higher numbers. 

Retail sales in April were impressive. Headline reading came in at 9.2% m/m vs 4.5% m/m as expected. Retail sales ex autos, fuel came in at 9% m/m vs 4.4% m/m as expected. Yearly figures came in at 42.4% y/y and 37.7% y/y respectively showing the stark contrast from year ago when the lockdown was first introduced. Clothing/footwear sales were the biggest contributor. This makes it a third consecutive month of rising retail sales indicating strong domestic demand. Additionally, this more than double beat on expectations, will revise Q2 GDP projections higher. 

Preliminary PMI numbers for May show manufacturing at 66.1, services at 61.8 and composite at 62. This is the fourth consecutive month with all three PMI readings rising. Overall business activity is expanding at a on record level pace led by pent-up demand and loosening of restrictions. Strong PMI numbers add to the story of firm Q2 GDP reading. 

AUD 

Employment report was a mix of positives and negatives. On positive side we have the unemployment rate ticking down to 5.5% and full-employment rising 33.8k. On the negative side we have employment change dropping -30.6k vs 20k as expected, participation rate dropping to 66% from -66.3% in March and part-time employment falling -64.4k. RBA stated that the return to full employment is a high priority for monetary policy. A drop in the unemployment rate will be welcomed, but there is still a long way to go until it reaches the levels needed for rate hikes. Markets were not moved by the release as more data is needed to assess the employment picture. 

Industrial production for April came in at 9.8% y/y vs 10% y/y as expected for a slight miss while retail sales came in at 17.7% y/y vs 25% y/y as expected for a large miss. Production of passenger cars was the biggest drag on the industrial production and it was caused by chip shortages while integrated circuits production showed the biggest rise. Regarding retail sales ING notes possibility that “this reflects postponed consumption to save for discounts in the Golden Week holiday in May, during which sellers offer more discounts on online shopping platforms. So, this could be a temporary slowdown, and if so, we should see a moderate rebound in May.” 

NZD 

GDT auction showed the price index coming in at -0.2%. This is the third auction in a row of falling prices, however all three drops were less than 1%. It is interesting that in times when almost all commodity prices are booming milk is staying almost flat. 

This week we will have Q1 consumption data as well as RBNZ meeting. No changes in the rate are expected, however we may see the members hinting at lowering of QE programme, which in turn would give NZD a boost. 

Important news for NZD: 

Monday:

• Retail Sales

Wednesday:

• RBNZ Interest Rate Decision 

CAD 

Inflation in April came in at 3.4% y/y vs 3.1% y/y, up from 2.2% in March. This is the highest reading almost 10 years, it comes after two consecutive 0.5% m/m increases. Energy prices and transportation prices have contributed the most to price rises indicating base effects. Core readings also showed increases with median and trim readings coming in at 2.3% y/y while common was at 1.7% y/y. BOC already announced tapering of QE to CAD3bn/week and is on the way to raise rates next year. However, inflation is creeping in faster than they will react, so the question remains will they follow in footsteps of other central banks and label this inflation as transitory? 

Retail sales in March showed another increase with headline reading coming in at 3.6% m/m vs 2.3% m/m as expected and ex autos category at 4.3% m/m vs 2.3% m/m as expected. Unfortunately, this will be the last month of positive readings in a while as during April Canada was under severe lockdown which inevitably curtailed retail sales. Advance estimate of April’s reading shows a -5.1% m/m print. Consumption component should not have a big contribution to Q2 GDP. 

JPY 

PPI data for April showed an increase of 3.6% y/y vs 3.1% y/y and up from 1.2% y/y in March. This reading confirms what we have seen in other countries, rising input prices. The 'domestic final goods prices' index, an index that has some measure of correlation with CPI, comes in at 1.7% y/y. BOJ may be happy to see some sign of inflation, although it is caused by supply-side issues. National inflation data show inflation reversing recent trend and plunging deeper into negative with headline reading coming at -0.4% y/y vs -0.2% y/y in March. Almost entire drop in headline reading can be attributed to drop in cell phone fees, which dropped 26.5% y/y. Preliminary May PMI showed declines with manufacturing coming in at 52.5 vs 53.6 in March and services coming in at 45.7 vs 49.5 the previous month. Services were hit hard by the reimposed states of emergency and it pulled composite down to 48.1 from expansionary 51 in March. 

Preliminary Q1 GDP came in at -1.3% q/q vs -1.1% q/q as expected. A small miss due to the drop in business investment which came in at -1.4% q/q vs 0.8% q/q. Personal spending contracted less than expected and came in at -1.4% q/q vs -1.9% q/q as expected. Restrictions imposed by the state of emergency pushed GDP into negative territory. Considering current covid situation and extended states of emergency around the country it is likely that Q2 will also print negative reading. GDP for the fiscal year, March to March, fell -4.6% for the biggest drop ever recorded. 

CHF 

SNB total sight deposits for the week ending May 14 came in at CHF707.7bn vs CHF705bn the previous week. SNB is stepping up their game in the markets as EURCHF slides away from the 1.10 level.

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