Articles
11 May 2020

G10 FX Week Ahead: Walk the line

Markets are maintaining a mildly optimistic stance as they walk the line between reopening plans and the risk of second contagion waves. While keeping an eye on any re-escalation in US-China tensions, a quiet calendar should offer room for stabilisation in FX. The only central bank meeting, in New Zealand, should yield few surprises and no cuts

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USD: Delicate exit from lockdown

  Spot Week ahead bias Range next week 1 month target
DXY 100.0500 Neutral 99.5000 - 100.5000 97.0000
  • This week the DXY looks set to trade well within April’s range. Risk assets have a slightly bid tone as governments slowly implement lockdown exit strategies – balancing the costs of closed economies against social health. Assuming there is not a noticeable spike in cases among the early openers, a slight bid for risk assets should limit the dollar’s advance. We doubt US data will have a big impact on market pricing this week where large April falls in the CPI (Tuesday), Retail Sales and Industrial Production (both Friday) are now expected.
  • In terms of politics, the market will be on the lookout for any fresh insights into US-China relations (after trade negotiators held a call last week) and whether Congress needs to accelerate plans for extra fiscal stimulus. Tuesday also sees the Supreme Court rule on whether President Trump needs to publicly release his financial records. A ruling that the President’s tax returns be made public could leave the White House open to further legal challenges and unnerve equity markets.

EUR: Waiting on ECB speakers

  Spot Week ahead bias Range next week 1 month target
EUR/USD 1.0819 Neutral 1.0770 - 1.0900 1.1000
  • It is a quiet week for eurozone data, where 1Q20 eurozone GDP should be confirmed at - 3.8% quarter-on-quarter and we’ll also see March data on Industrial Production. More interesting may be the words from a variety of European Central Bank speakers, including Chief Economist Philip Lane on Wednesday. The ECB will have welcomed the support from the European Court of Justice last week, and further reassurances from the ECB that its asset market support programmes will continue unhindered will be welcome news for the euro.
  • The biggest risk for a downside break in EUR/USD, below support at 1.0770, probably comes from a deterioration in external conditions and some defensive support to the dollar. There does not seen an obvious catalyst for that this week, but we do note that equities have come a long way quite quickly and will struggle to repeat the advances made last month.

JPY: USD/JPY proves resilient

  Spot Week ahead bias Range next week 1 month target
USD/JPY 107.26 Mildly Bearish 106.00 - 107.80 105.00
  • USD/JPY is proving surprisingly resilient, although this may have to do with the yen's negative correlation with risk (more so than the dollar currently). Dollar demand seems to have been found at 106.00, although we expect the upside to prove limited. From what indications there are, Japanese residents seem to have reduced demand for foreign bonds and there does not seem a strong case for USD/JPY to move much higher.
  • On the Japanese data calendar we have the March current account figures and the Economy Watchers outlook for April. The March outlook reading already fell below the GFC low and little rebound is expected in April. Our team forecasts Japan GDP contracting 4.9% in 2020, to be followed by a 0.9% recovery next year.

GBP: Not much clarity ahead

  Spot Week ahead bias Range next week 1 month target
GBP/USD 1.2318 Neutral 1.2240 - 1.2520 1.2500
  • Prime Minister Boris Johnson's speech had a muted impact on the pound, with markets focusing on the lack of clarity rather than the slow journey towards the reopening of the economy. On the economic front, UK 1Q GDP (Wednesday) should dip to around -2%, but it is the 2Q GDP figure which should constitute the trough for the economy. With the prospects of a V-shaped recovery rather remote (both in the UK and globally), the UK economy should return to the pre-Covid 19 levels in 2022 at the earliest.
  • As risk appetite is likely to stay supported this week (no clear risk events on the horizon and declining expectations of an imminent escalation in US-China trade tensions), this suggests a neutral outlook for GBP/USD, with the cross staying in a tight range of GBP/USD 1.2240-1.2520. With uncertainty about the UK-EU trade negotiations rising, speculative GBP shorts continue to increase modestly.

AUD: Likely to keep leading the recovery

  Spot Week ahead bias Range next week 1 month target
AUD/USD 0.6489 Mildly Bullish 0.6400 - 0.6673 0.6500
  • AUD/USD broke above 0.65 after recovering from a setback in global optimism last week. The resilience in global equities may continue to provide steam to the Australian dollar which (as we highlighted in recent publications) is well poised to keep leading the pack, if sentiment continues to improve, due to a number of factors: a) low domestic contagion, b) not too-dovish central bank (Reserve Bank of Australia has kept tapering), c) resilience in iron ore prices and Chinese demand.
  • The key risk factors for AUD this week are: a) externally, signs of second contagion waves in those countries that eased lockdown measures early and any escalation in US-China tensions; b) domestically, April’s jobs numbers, where consensus is centred around a very grim read (-600k). Even if data proves worse than expected, the market impact may be quite short-lived, as global sentiment should prevail as the key driver.

NZD: RBNZ to stay on hold, keep the door open for cuts

  Spot Week ahead bias Range next week 1 month target
NZD/USD 0.6085 Neutral 0.5950 - 0.6230 0.6100
  • The New Zealand dollar's good momentum will be challenged this week by the central bank meeting. As highlighted in our recent publication “RBNZ: Keeping it positive”, we don’t think the Bank will cut rates again this time around. This seems to be what the market is expecting too, but some additional focus will be on whether Governor Adrian Orr provides more indication about a possible leap into zero/negative rates. In our view, it is more likely that the RBNZ will keep the door open to the possibility of such a move, maybe with the intent of curbing NZD appreciation, but we doubt more cuts are effectively on the cards.
  • All in all, the impact on NZD should be neutral/mildly negative (if negative rates are mentioned as part of the monetary toolkit, for example). In turn, NZD should trail AUD this week. AUD/NZD should consolidate above 1.07.

CAD: Only oil can keep it below 1.40

  Spot Week ahead bias Range next week 1 month target
USD/CAD 1.3980 Neutral 1.3750 - 1.4200 1.3900
  • The oil downturn may be behind us, according to our commodities team and this may allow USD/CAD to remain below the 1.40 mark this week, especially after the Canadian jobs numbers on Friday proved less disastrous than expected.
  • No data worth mentioning in the coming days, but keep an eye on the Financial Stability Report by the Bank of Canada and especially on the following press conference by Governor Stephen Poloz, as he may take the chance to make monetary policy comments.

CHF: SNB happy to operate with negative equity

  Spot Week ahead bias Range next week 1 month target
EUR/CHF 1.0520 Mildly Bearish 1.0520 - 1.0570 1.0500
  • It is becoming increasingly clear that the Swiss National Bank has drawn a new line in the sand for EUR/CHF at 1.05. Total CHF sight deposits have risen CHF70 billion since mid-March and the SNB has confirmed it is undertaking more aggressive FX intervention. Additionally, SNB President Thomas Jordan over the weekend said that the SNB can operate with negative equity – addressing the concern that large losses on FX reserves, wiping out the SNB’s capital, could cause the Bank to back away from FX intervention.
  • For the time being, the SNB will hope that pressure eases on Italian asset markets and poor liquidity/low volatility discourages interest in EUR/CHF. However, we doubt the SNB could follow through with threats of lower interest rates, and the 1.05 area will remain under pressure until there are much clearer signs of a global recovery. Swiss data this week is April PPI – pointing to broader deflation.

NOK: The brighter future

  Spot Week ahead bias Range next week 1 month target
EUR/NOK 11.0500 Neutral 10.8800 - 11.3300 11.3300
  • With risk appetite stable and oil prices rangebound after their recent rise, the downside to the Norwegian krone should be fairly limited this week. We expect EUR/NOK to hover around the 11.00 level this week.
  • NOK weathered the surprising NB rate cut last week quite well, with the NB at the zero lower bound, and its unwillingness to bring rates into negative territory or embark on QE suggest the downside risks to NOK stemming from the NB policy set up have by and large evaporated in our view.

SEK: Ongoing improvement in the real rate

  Spot Week ahead bias Range next week 1 month target
EUR/SEK 10.5990 Neutral 10.5000 - 10.7000 10.7000
  • The Riksbank April Meeting Minutes kept the door open for the return of interest rates back into negative territory, yet we continue to see the balance sheet measures as the next easing move, should it be necessary. We see the Swedish krona as well positioned in the G10 FX space, as the interest rate differential is no longer prohibitive while the real rate improved dramatically given the falling CPI and the lack of interest rate cuts.
  • On the latter, the Swedish April CPI (Wednesday) is expected to dip further, with the headline reading likely to touch zero. On a comparative basis, this should keep the SEK real rate attractive vs most if its G10 peers. This is a clear change in the SEK's fortunes which, in the pre-Covid 19 world, were suffering from one of the most negative rates in the G10 FX space.
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