A weak durable goods report and comments from the Fed's Powell offered some insight into what the Fed will do next. CAD and JPY were the top performers, while the pound sterling lagged. Japanese CPI and Aussie Capex are due next.The April US durable goods report highlighted the challenges the Fed faces. There are currently 9 Premium trades in progress, 2 of which are CAD longs.
Headline orders jumped 3.4% compared to 0.5% expected that was due to a 65% jump in aircraft orders. The strong number will help to boost growth but if you strip out airplane and defense orders, they fell 0.8% and are down 8.7% year-over-year.
But durable goods orders have been weak for two years along with factories. The Fed is more focused on jobs and consumer spending. The Fed's Powell certainly had some reservations about the economy in a rare speech on the outlook but he said a hike would be appropriate 'fairly soon' if data evolves as expected.
He highlighted a desire to see better Q2 growth numbers and risks from the Brexit so that probably eliminates the June 15 FOMC but a hike before October is increasingly likely. The market is only pricing a 60% chance of a hike in September or sooner so that leaves plenty of room for US dollar gains.
In the interim, economic data is critical. US pending home sales rose 5.1% in April compared to 0.6% expected to extend a streak of strong housing data. The Atlanta Fed now sees Q2 GDP running at 2.9%, a pace that's likely strong enough to give the Fed the confidence to hike.
In the broader picture, markets are sending divergent signals. Oil touched above $50 before sagging back to $49.40 but it's debatable whether that's a signal on short-term supply disruptions or global demand. The stock market has shown no fear of a rate hike this week and is back to within striking distance of all-time highs. Bonds haven't budged with US 10-year yields at 1.82%, which is at the middle of the range since February.
In Japan, more reports are confirming that Abe will delay the 2 percentage point hike in the consumption tax scheduled for next April. An announcement is rumored for Wednesday.
We haven't heard a good explanation for the quick 50 pip drop in USD/JPY on Thursday but it never really recovered. The 2330 GMT report on the April CPI could jar the market further. The consensus is for a 0.4% decline y/y but a 0.7% rise ex-food and energy. A sizeable miss could spark speculation about another BOJ move.
|Durable Orders (APR)|
|3.4%||0.6%||1.9%||May 26 12:30|
|Durable Orders , ex-transportation (APR)|
|0.4%||0.5%||0.1%||May 26 12:30|
|Pending Home Sales (APR)|
|5.1%||0.6%||1.6%||May 26 14:00|
The Bank of Canada took a more-neutral stance than expected on Wednesday and along with rising oil prices that helped made the Canadian dollar the top performer while the yen lagged. Australian capex data and the New Zealand budget are due later. The Premium Insights added a 2nd CAD long to the trades ahead of the BoC decision and EIA inventory announcement. Full rationale and charts analysis to the CAD and other trades is in today's Premium Video.
Most analysts were looking for a hint at a lower trajectory for growth and inflation from the BoC but the communication was strictly neutral. Growth will be dinged by the forest fires in Q2 but the BOC expects a positive payback in Q3 and said the economy was evolving as expected.
They added a touch of skepticism on oil prices as they noted that temporary supply disruptions were helping to lift prices. In policy, however, the BOC will deal with whatever the oil market delivers. On Wednesday, it was more gains on the back of tighter supply in the API and EIA reports. WTI finished more than $1 higher to $49.65. The $50 level is a psychological level but the October high of $50.92 is the technical one to watch.
US dollar news was mixed. The advance trade balance report showed a $57.5B deficit compared to $60.0B expected but the Markit services PMI slipped to 51.2 from 53.0. In broad terms, the dollar was little changed despite another strong day in the stock market.
Cable closed at the highest level since early January and is nearing the May intraday high of 1.4770. Oddsmakers now see a Brexit as a longshot and that's helping to fuel gains.
The Australian dollar bounced around by risk sentiment and the falling Chinese yuan. Today the focus shifts to investment spending and forecasts are for a 3.5% contraction in Q1 in the 0130 GMT report. The number will offer some insight into how deeply mining companies have retrenched but at the same time, if resource prices can hold, that might represent a trough.
The other event to watch is the New Zealand budget at 0200 GMT. Any measures to cool the housing market would give the RBNZ more leeway to cut rates. Alternately, extra stimulus may lead Wheeler to believe that better growth and inflation numbers are in the pipeline.
The follow-through from the strong FOMC Minutes finally arrived Tuesday and EUR/USD closed at the lowest since mid-March. The pound was the top performer while the euro lagged. Australian construction and Chinese sentiment numbers are due later. The Premium Video for English speakers will be posted and sent to subscribers after this IMT, covering the existing 8 trades.
We've lamented the absence of a sustained US dollar bid after the FOMC Minutes surprise but it may have finally arrived. The FX market isn't always quick to change gears but real money USD buying appeared to ramp up.
EUR/USD fell below the 100-day moving average and the late-March lows after three trading days of consolidation. AUD/USD also fell to the lowest since early March with the help of dovish comments from Stevens. The third mover was gold, which dropped $20.
The dollar was given an added lift by a 16.6% monthly jump in new home sales compared to 2.3% expected. The enthusiasm was slightly tempered by the Richmond Fed at -1 compared to +8 expected. The Empire and Markit manufacturing numbers have also pointed to softness.
WTI crude oil caught a late bid to above $49 per barrel after API inventory data showed a 5.1 million barrel draw last week. That leaves the Canadian dollar in a tricky spot ahead of Tuesday's BOC decision. The statement is likely to cool growth expectations.
In the near-term the calendar features Australian skilled vacancies at 0100 GMT followed by Q1 construction work 30 minutes later. The latter is expected to fall 1.5%. Comments from Stevens yesterday were benign but they coincided with AUD selling.
|New Home Sales (APR)|
|619K||521K||531K||May 24 14:00|
The main narrative on the strong yen is that the lack of BOJ action and risk aversion have been behind the gains, what if it's something else. JPY was the top performer on Monday while the Canadian dollar lagged. A speech from RBA's Stevens is due later.
Japan has been locked in a never-ending cycle of deflation, government stimulus, central bank experiments and worsening demographics. Abenomics has been bold on the spending and mon pol fronts but soft on structural reform and momentum has waned.
Or has it? A trio of recent indicators in the past week have been shockingly strong. The first was Q1 GDP at 1.7% annualized compared to 0.3% expected. That was followed by a 5.5% rise in March machine orders compared to -2.0% expected and yesterday's trade balance. The 823B yen surplus crushed the 540B yen consensus and was the best since 2010.
To be fair, there are caveats in each of those data points and others pain a gloomier picture but yen strength isn't exactly an easy-to-explain phenomenon. It struck again on Monday as USD/JPY fell 90 pips and has now completely erased the post-FOMC Minutes gains.
More likely explanations include a mix of risk aversion, USD weakness, yield spreads, earthquake stimulus and BOJ inaction but it's not the time to rule anything out. Moreover, the market is growing increasingly enamored with the idea of helicopter money and debt monetization and when there is a monetary policy experiment, Japan will be there.
In the US Monday, the market flash manufacturing PMI was at 50.5 compared to 51.0 expected. That's the lowest reading since 2009. However, factories are nearly non-existent on the Fed's radar and Williams continued the drumbeat of hawkish Fed talk.
Still, the US dollar hasn't captured a lasting bid. If it doesn't in the next day or two, then it's tough to believe it will come at all.
The Asia-Pacific calendar is light for the hours ahead .The main events is a speech from the RBA's Stevens at 0305 GMT.
A steady stream of hawkish Federal Reserve commentary leaves us to ponder the question of whether officials are trying to maintain the option to hike, or they want to signal that a rate rise is coming. Early FX moves have been small, the pound led the way last week while the loonie lagged. Japanese manufacturing data is due later.
The FOMC Minutes last week had the makings of a game-changer. They were an admission that the Fed erred in the language of the April FOMC statement and a deliberate attempt to boost hike odds. The market is now pricing in a 28% chance of a June move and 48% in July.
Yet, the drum beat of hawkish commentary continues. Last week, Lockhart, Lacker and Williams made the case for a hike in June or soon after. On Thursday the normally-dovish Dudley said the economy is on track to satisfy most conditions for a hike. The biggest surprise was on the weekend with Boston Fed dove Rosengren saying conditions for a hike were 'on the verge' of being met.
Naturally, they all fall back on the importance of incoming data but there is clearly a coordinated campaign to let markets know a June hike could come. Or are they trying to say it will come? The schedule this week features Bullard, Williams, Harker, Kashkari, Kaplan, Powell and Yellen (on Friday).
The weekend featured sparring from Japanese and US finance ministers on FX intervention. Aso said the recent 8-9 big figure move in the yen in 10 days was disorderly while Lew highlighted the G7 commitment to refrain from FX targeting. Curiously, Aso also said that Japan would proceed with its consumption tax hike. That's a stance most expect will change.
However, if the recent string of upbeat Japanese data continues, then the economy could tolerate the planned increase. Up next is the May Nikkei prelim manufacturing PMI at 0200 GMT. The prior was 48.2. The all-industry index for March is expected up 0.2% at 0430 GMT.Commitments of Traders.
Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.
EUR -23K vs -22K prior JPY +59K vs +59K prior GBP -38K vs -35K prior CHF +4K vs +7K prior AUD +25K vs +38K prior CAD +23K vs +26K prior NZD +7K vs +9K prior
Australian dollar longs fled for the second week but after the RBA Minutes they may be tempted to weigh back in.