Major currencies have traded without direction

May 27, 2016

FX News Today

European Outlook: The major currencies have traded without direction with markets hunkered down into Fed chairwoman Yellen’s speech later today, and ahead of the long U.S. holiday weekend. The dollar has lost its rallying impetus, tracking a decline in U.S. Treasury yields as markets take a more circumspect view of Fed tightening prospects. USDJPY has consolidated in the mid-to-upper 109s after failing to sustain gains above 110.0 this week. Japanese inflation data showed core CPI remained unchanged in April at -0.3% y/y, slightly above the median for -0.4% y/y. The BoJ’s has been (forlornly) targeting core CPI at 2%. The data didn’t impact markets much but will cement expectations for the central bank to expand policy by July. EURUSD has traded a narrow range near 1.1200, above the 10-week low seen on Wednesday at 1.1129. Commodity currencies have settled after recent gains. Oil prices have corrected from the seven-month highs seen yesterday. Asian stocks have mostly gained today. Data out of China showed industrial profit growth decline to +4.2% y/y in April, down from 11.2% in the prior month.

G7 News from Japan: Topics ranged from North Korea, Russia,  & China to skirting around the FX situation and vowing to pursue economic growth. “Global growth remains moderate and below potential, while risks of weak growth persist,” the G7 leaders said after a two-day summit in central Japan. “Global growth is our urgent priority.” Japanese Prime Minister Shinzo Abe has been playing up what he calls parallels to the global financial crisis as growth in his country sputters.

US Data Releases; some strong, some weaker:  US reports revealed a 3.4% April durable goods pop and a welcome 10k drop in initial claims to a respectable 268k that further unwound the early-May spike to a 294k one-year high. The component data for the durables report were weaker than expected, however, leaving a mixed set of data for the day, and we’ve lowered our Q1 GDP growth estimate to 1.0% from 1.1% in today’s release, versus the 0.5% advance figure. We still expect an inventory-restrained 2.0% GDP growth clip in Q2 with a 3% pace for real equipment spending, despite a disappointing 0.8% April decline for ex-transportation equipment orders, and we still peg the May nonfarm payroll rise at 190k.

Fedspeak:  Powell – said another rate hike could be seen “fairly soon,” in the text of his speech on “Recent Economic Developments, the Productive Potential of the Economy and Monetary Policy.” We seldom hear comments on policy or the economy from this Fed official, so his near term forecast is important. However, he wants to see a “significant strengthening in growth” in Q2, including further strong job gains and declines in the unemployment rate and other measures of slack, along with increases in wages. Should data support his expectations, he is in favor of gradual rate increases. He noted the asymmetric risks of zero rates, headwinds from weak global demand and geopolitical events, a lower long-run neutral funds rate, and the “apparently elevate sensitivity of financial conditions to monetary policy.”

Main Macro Events Today

Yellen to speak at Havard As we reported on Monday the highlight of Fedspeak this week. Her colleagues have been fairly consistent in talking up a rate rise at either the June or July meetings. As Chair and chief moderator she is never as direct as some on the FOMC and is unlikely to stray far from that today. However, her speech and interview with renowned Keynesian economist Greg Mankiw will be followed closely.

US GDP  Expectations are for 0.7% Q1 rise and for the Annualized figure to be revised up to 0.9% (median- although we expect 1.0%) from 0.5%.

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