Forex Major Currencies Outlook (May 2 – May 6)

USD 

Advance reading of Q1 GDP came in at -1.4% vs 1.1% as expected. Consumer spending and non-residental business investment have lead the way with former printing 2.7% vs 2.5% in Q4 and latter increasing 9.2% vs 2.9% the previous quarter. Net trade was the biggest drag on the growth subtracting 3.2pp from the result followed by inventories which deducted 0.84pp from the growth. Inflation was staggering 8%. Fears of stagflation, low growth and high inflation will mount, however lack of foreign demand is the main culprit for the weak reading. Domestically economy is going strong as indicated by consumption and investment. 

PCE inflation data for the month of April came in at 6.6% y/y vs 6.3% y/y in March. However, core reading eased slightly to 5.2% y/y vs 5.3% y/y the previous month. This is the first reading since February of 2021 that core CPI declined compared to the previous month. The yield on 10y notes has started the week at 2.88% and finished it over 2.9%. Probability of a 50bp rate hike in May according to FedWatchTool is now seen at 96.5%. 

This week we will Fed meeting as centre stage followed by NFP data on Friday and ISM PMI data in distant third. A 50bp rate hike is fully priced in so the language about Balance Sheet Reduction and further pace of rate hikes will be the most important. NFP is expected to print around 400k with the unemployment rate staying at 3.6%. 

Important news for USD: 

Monday:

• ISM Manufacturing PMI

Wednesday:

• ISM Non-Manufacturing PMI
• Fed Interest Rate Decision

Friday:

• Nonfarm Payrolls
• Unemployment Rate 

EUR

Ifo survey in April showed improvements across the board. Business climate improved to 91.8 from 90.8 in March with both current conditions and expectations rising (97.2 and 86.7 from 97.1 and 85.4 respectively). Ifo economist state that economy proved to be resilient after first shock of Russian invasion in Ukraine. Additionally, although supply chain problems dominate the economy the mood of the economy has stabilized.

Preliminary reading of Q1 GDP came in at 0.2% q/q vs 0.3% q/q as expected and 5% y/y vs 4.6% y/y as expected. Germany was the only major economy whose reading beat the forecasts on the back of stronger investments while France, Italy and Spain printed lower readings. France barely avoided going into negative with reading printing 0% q/q while Italy contracted -0.2% q/q. Preliminary CPI reading for the month of April showed headline number tick to 7.5% y/y as expected from 7.4% y/y in March. The cause for concern for ECB is that core reading came in at 3.5% y/y vs 3.2% y/y as expected and up from 2.9% y/y the previous month. Inflation is not showing signs of slowing down which may be another nudge toward July rate hike.

GBP

BOE is expected to raise rates by 25bp. This will lift the rate to 1%. Previously bank members stated that when rate reaches 1% it may be appropriate to start selling bonds as part of QT. However, with financial conditions being unstable the bank may postpone outright sales of bonds and provide us with new guidance.

This week we will have a BOE meeting.

Important news for GBP:

Thursday:

• BOE Interest Rate Decision

AUD

Q1 inflation data were hotter than expected. Headline number came in at 2.1% q/q and 5.1% y/y, higher than 1.7% q/q and 4.6% q/q as expected and much higher than 1.3% q/q and 3.5% y/y in the Q4 of 2021. This is the highest inflation reading in over 20 years. Price increases have been broadly spread between components. Trimmed mean, which represents core reading and is RBA’s preferred inflation data point, came in at 1.4% q/q and 3.7% y/y. RBA’s target for the core inflation is 2-3% y/y. Now that core inflation has jumped out of the target there are growing calls for a rate hike next week. RBA still wishes to see wage growth north of 3%, data will be available on May 18 and with Federal elections on May 21, June meeting seems to be the safer option. Markets are, however, pricing in at least a 15bp rate hike.

PBOC has cut RRR (Reserve Requirement Ratio) by 1% in order to stimulate the economy. New RRR is at 8%, down from 9% previously. Industrial profits in March printed a 5% y/y increase, same as in February.

This week we will have RBA meeting. More than half of market participants see the bank raising interest rates by 15bp to 0.25% in order to keep the pace with rising inflation.

Important news for AUD:

Tuesday:

• RBA Interest Rate Decision

NZD

The ANZ Business Outlook Index came in at -42.0 in April vs -41.9 the previous month. This marks the tenth straight month of negative reading, cause by mixed activity indicators and intense inflation pressures. Kiwi has been smashed around during the week due to a one-two punch of China lockdowns and crushing USD strength.

This week we will have employment data.

Important news for NZD:

Wednesday:

• Employment Change
• Unemployment Rate

CAD

BOC Governor Macklem spoke at the parliament stated bank’s intent to use interest rate hikes to fight the rising inflation adding that they will be adamant at it. He stated that business have hard time filling in demand. In the Q&A section he stated that additional 50bp rate hike will be considered at the June meeting. Later on, in the Senate hearing he was quoted saying "...But we do need to raise interest rates to moderate that spending growth and get inflation back to target."

This week we will have employment data.

Important news for CAD:

Friday:

• Employment Change
• Unemployment Rate

JPY

BOJ continues with loose monetary policy. At their May meeting they have kept the rate unchanged at -0.10% and yield on 10y JGB at 0%. They have reiterated their willingness to defend 0.25% level as the upper limit on 10y JGB and stated it will purchase bonds in order to preserve that level every day. The statement showed clarification on bond purchases “Bank will offer to purchase 10-year JGBs at 0.25 percent every business day through fixed-rate purchase operations, unless it is highly likely that no bids will be submitted.” The bank members stated their resolve to keep the monetary policy stimulative in order to fight the impact of pandemic, while aiming to keep market stability. New forecasts see core CPI at 1.9% in 2022, so close to the 2% target. Core CPI will then retreat toward 1.1% level which is projected for both 2023 and 2024. Governor Kuroda stated in a press conference that risks for the economy are skewed toward the downside but they will become balanced in time. He added that inflation will not be sustained at 2% level as energy prices fall, indicating that he still thinks inflation is transitory.

CHF

Trade balance in February almost halved that from January and came in at CHF2.99bn. Imports rose staggering 23% on the back of rising energy costs while exports posted a healthy 5% increase. SNB total sight deposits for the week ending April 22 came in at CHF742.6bn vs CHF740.1bn the previous week. A bit higher increase than recently. SNB is gradually helping market move EURCHF from parity and they pushed it over the 1.02 level. SNB Chairman Jordan stated that higher inflation does not justify rate hike increases. He added that inflation is expected to decline in foreseeable future.

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