G10 FX Week Ahead: The dollar’s independence day

In a week culminating with US payrolls and the Independence day bank holiday, risk sentiment is likely to remain choppy as rising Covid-19 cases in the US keep halting reopening plans. In FX, we will look for any hints that the dollar may start to lose any of its safe-haven status, if the second wave of the virus continues to look predominantly like a US story

Chris Turner

Global Head of Markets and Regional Head of Research for UK & CEE

Francesco Pesole

FX Strategist

Independence Day celebrations, Washington DC, USA

DXY: Questioning the safe haven role

	Spot	Week ahead bias	Range next week	1 month target
DXY	97.4150	Neutral	96.5000 - 98.0000	95.0000

The return to better functioning of wholesale USD money markets and the flood of dollar liquidity has re-installed a ‘risk-on, dollar-off regime’. This can be seen, for example, with the rising negative correlation between the S&P 500 and the dollar crosses. The biggest current threat to that risk-on regime probably comes from the unchecked rise in the US Covid-19 cases and the response at the district, state and federal level. Renewed lockdowns stand to delay the US recovery. But we also know that Congress and the Fed have a light trigger-finger when it comes to fresh stimulus. At some point, will investors start to identify the second wave as a problem unique to the US, meaning that the dollar does not receive the typical boost on bad US news?
The week ahead culminates in the 3rd July public holiday on Friday but will see much data and Fed speak beforehand. Thursday sees the release of NFP, where our team are looking for a slightly above consensus 3.5mn jump in hiring as April’s 20mn jobs decline continues to be reversed. We should also see a good manufacturing ISM (perhaps even hitting 50) and reasonably strong consumer confidence. FOMC minutes of the 10 June meeting will also be released and a host of Fed speakers. if you have to make a pick, we'd choose Williams speaking on a panel with the IMF on Monday and Jerome Powell and Mnuchin testifying before the House on Tuesday. It’s been a good quarter for risk (20% and 30% gains for the SPX and Nasdaq respectively). A little profit-taking may be the theme next week, but we’re bearish on the dollar in 2H20 and any corrective rallies, e.g. DXY to the 98.00/98.15 area, should be short-lived.

EUR:Tariff threats make a comeback

	Spot	Week ahead bias	Range next week	1 month target
EUR/USD	1.1213	Neutral	1.1100 - 1.1300	1.1500

EUR/USD continues in its consolidation mode, with support in the 1.1160/70 area so far holding. One worrying development for the EUR has been the US re-considering sanctions against European goods. Negotiations on a tax on the digital industries have not been going well and a much larger threat looks to be in the making over Nordstream II. It’s clearly in US interests for this pipeline (delivering Russian gas to Germany/Europe) not to go ahead, but the EU looks like it is prepared to stand up to US interference in domestic energy policy. A turn for the worse in newsflow here could undermine some nascent European optimism. On the subject of optimism, Angela Merkel and Emmanuel Macron meet on Monday as they try to finalise plans for getting the EU recovery fund over the line.
The eurozone data calendar sees June CPI and some final June PMI releases. Germany also sees June unemployment figures, where the rate is expected to rise to 6.5%. We’re bullish on EUR/$ for 2H20, but for the week ahead the threat of new Covid-19 cases in the US, profit-taking in equities and the threat of a re-opening in the trans-Atlantic trade war suggest that EUR/USD may briefly drop to the 1.1100 area.

JPY: Is Softbank's divestment of T-Mobile at work?

	Spot	Week ahead bias	Range next week	1 month target
USD/JPY	106.96	Mildly Bearish	106.00 - 107.50	108.00

In thinning summer markets, there has been some focus on whether Softbank’s divestment of its share in US telco T-Mobile could be hitting USD/JPY. Softbank’s stake is worth around $30bn and corporate finance activities are already underway as part of Softbank’s plan to buy-back JPY 2trn of shares. M&A flows typically only have a temporary impact on spot markets and in our view, this may have been a factor behind the recent dip in USD/JPY to 106.00.
In the week ahead, the Japanese calendar sees retail sales and industrial production for May and on Wednesday, the 2Q release of the Bank of Japan’s Tankan business survey. This is expected to fall heavily as the impact of the 2Q shut-downs are factored in, though consensus for the large manufacturers at -25 is way off the -50 low seen in 2009. We’ve also been watching Japanese buying of foreign bonds – with three consecutive weeks of strong buying. Unless we do see a paradigm shift to a bearish US story driving the dollar lower, USD/JPY will be largely range-bound. Also, an outside risk are the developments in Hong Kong. China looks set to sign new HK security legislation into law this weekend, which could prompt further retaliation from the West.

GBP: No clarity, no upside

	Spot	Week ahead bias	Range next week	1 month target
GBP/USD	1.2379	Neutral	1.2230 - 1.2570	1.2600

It is a fairly quiet week on the UK data front, with final Q1 GDP and June PMI readings having little impact on GBP. Instead, the focus will be on the series of policy speeches over the next week from Bank of England officials. Our economists look for further clues on possible shifting policy preferences (between QE and negative interest rates), following Governor Bailey’s comments on the sequencing of between rate hikes and unwinding the balance sheet.
Other than that, the prime and overriding driver of GBP remains the UK-EU trade negotiations. We expect little progress during the summer months, keeping the uncertainty about UK growth and trade outlook in place and in turn making GBP one of the G10 FX underperformers. The deadline for the UK to request a transition period extension will pass next week, but the impact on GBP should be limited as the UK government already indicated it won’t opt for it.

AUD: Monitoring new outbreak in Australia

	Spot	Week ahead bias	Range next week	1 month target
AUD/USD	0.6872	Mildly Bearish	0.6750 - 0.6950	0.7000

The Australian dollar keeps tracking global sentiment without a clear idiosyncratic direction due to a lack of key data releases/central bank activity. This should continue to be the case next week, although an unexpected jump in infections in Australia may start to show its marks on the currency as the notion that Australia had successfully contained the virus was one of the factors that helped AUD build its recent resilience.
Australian prime minister Morrison has shrugged off the new outbreak and pledged to continue with the re-opening of the economy, but should the number of cases grow at a higher pace, markets may start to price in at least a slower easing of the lockdown. Looking at the calendar, retail sales on Friday are expected to show a double-digit rebound, and RBA’s Debelle’s speech on Tuesday may clarify the Bank’s position on AUD after Lowe’s comment this week. We expect the market mood to stay subdued next week as concerns about second waves linger, so we see AUD/USD losing some ground.

NZD: Dealing with the threat of negative rates

	Spot	Week ahead bias	Range next week	1 month target
NZD/USD	0.6435	Mildly Bearish	0.6325 - 0.6500	0.6700

The Reserve Bank of New Zealand didn't deliver any surprising move this week but – as we expected – openly mentioned the NZD dollar’s strength as a drag to the recovery of the economy. At the same time, it kept all options open in terms of monetary poli`cy measures. This is inevitably fuelling expectations that negative rates will be ultimately deployed in NZ. However, we remain reluctant to endorse this possibility, as negative rates may end up doing more harm than good. In turn, we see as more likely that Governor Orr will maintain the threat of more cuts without eventually delivering any, possibly with the aim of curbing more NZD appreciation.
The issue is, however, that the NZD – despite an initial drop after the meeting – is staying anchored to the decent resilience of risk assets. Next week, as highlighted above, we do expect a mildly risk-negative environment, that may put a cap on NZD/USD. But in the longer run, the RBNZ may need to look at different ways to avoid more NZD strength if they want to stir away from negative rates.

CAD: Hoping for more good news on oil

	Spot	Week ahead bias	Range next week	1 month target
USD/CAD	1.3662	Mildly Bullish	1.3570 - 1.3780	1.3400

More cuts on oil exports by Russia are an indication that the country is indeed focused on moving in accordance with the OPEC+ to counter the slump in crude demand. However, second virus waves around the world are setting oil investors on a bearish mood as the demand glut may end up being even more severe than expected. In this sense, CAD will rely on more positive news on the supply side next week (more indications of coordinated output cuts and increased compliance) to be able to resist risk-off pressures.
Data-wise, April GDP numbers will provide an indication of the deepness of the slump in the worst month of the pandemic crisis. The reading may be in the -15% YoY region, although markets have likely priced in most of the contraction and the impact on CAD may be somewhat contained. PMIs on Friday, instead, will be watched to gauge how much Canadian manufacturing is on the path to recovery. Overall, we see the balance of risks for USD/CAD slightly tilted to the upside next week.

CHF: Gravity returns to EUR/CHF

	Spot	Week ahead bias	Range next week	1 month target
EUR/CHF	1.0630	Mildly Bearish	1.0600 - 1.0700	1.0800

EUR/CHF has defaulted to a gentle bear trend (generally driven by the broad EUR/USD story) and if EUR/USD trades 1.1100 in the week ahead, EUR/CHF probably trades 1.0600. A difficult external environment, of course, poses challenges, but the biggest positive surprise could be any break-through on the EU Recovery Fund.
Swiss data this week sees the June KOF leading indicator on Tuesday (big bounce back to 75 expected) and the June CPI on Wednesday – expected at -1.2% YoY. These kinds of levels were seen by the SNB as the low point for the CPI cycle in its latest set of forecasts. Any bigger surprise on the downside will make the SNB’s job of a return to inflation (not forecast until 4Q21) even harder.

NOK: Underperforming SEK

	Spot	Week ahead bias	Range next week	1 month target
EUR/NOK	10.8830	Mildly Bullish	10.6270 - 11.0840	10.5000

It is a very quiet week on the Norwegian data front. June PMI Manufacturing due Wednesday and June unemployment data due Friday should have a negligible impact on NOK, with the currency’s prime driver (as was the case so far this year) being the general risk environment
Our cautious stance on risk for the next week suggests struggling NOK (the krone was the worst-performing cyclical currency this week when the risk appetite deteriorated due to the rising Covid-19 cases in the US). Within the region, this also means lower NOK/SEK, with the cross moving below the 0.9600 level. As for EUR/NOK, the pair may re-test the 11.00 level.

SEK: The solid G10 cyclical currency

	Spot	Week ahead bias	Range next week	1 month target
EUR/SEK	10.4770	Neutral	10.3550 - 10.5980	10.3000

The main focus will be on the Riksbank rate meeting on Wednesday. We are not looking for any major surprises and interest rates should remain unchanged and the QE purchases are likely to remain in place. There is an outside risk that the Riksbank will follow the Norges Bank and pencil in a modest hike at the end of the forecast horizon. Should this be the case, the SEK reaction should be positive but as was the case for NOK (and its reaction to the NB forecast) it should be a one-off as such, a soft guidance on easing would be theoretical (ie end 2022/ early 2023) and not imminent. Thus having a limited positive impact on the currency
As for the general risk environment, should caution prevail and the possible further rise in Covid-19 cases in the US weigh on the risk sentiment, SEK is likely to outperform other G10 cyclical currencies given its lower beta vs its peers, the lack of commodity exposure and one of the highest real rates in the G10 space. SEK to remain the steady force in the G10 FX space

Authors

Chris Turner

Global Head of Markets and Regional Head of Research for UK & CEE

Francesco Pesole

FX Strategist

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