Dollar majors have been challenged

5 July, 2017

European Outlook: Asian stock markets are narrowly mixed, with investors assessing the impact of North Korea’s test launch of an intercontinental ballistic missile. Telecommunication shares weighed on markets in Japan and Hong Kong. The Nikkei is up 0.06%, the Hang Seng managed to climb 0.55%, after yesterday’s harp loss and the ASX is down -0.36% as geopolitical concerns make a come back and markets await the reaction of U.S. markets, which were closed yesterday. U.S. stock futures are narrowly mixed, while FTSE 100 futures are slightly down, pointing to ongoing caution on equity markets, which should keep bond futures underpinned. ECB Executive Board member Praet urged caution and patience, which suggests the ECB remains reluctant to commit to policy changes just yet and thus add support especially to peripheral EMU bond markets. Today’s data calendar focuses on Services PMI readings out of the Eurozone and the U.K.. The Eurozone also has retail sales data for May.

FX Update: The dollar majors have been directionally challenged so far today, with narrow ranges prevailing. EURUSD has settled around 1.1350, modestly above the five-session low posted yesterday at 1.1336. USDJPY has been trading on either side of 113.00 over the last day, holding in a consolidation pattern after logging a seven-week high at 113.47 on Monday, itself the culmination of a three-week rally. Emerging Asian currencies have been steady, as has been the Canadian dollar, which has traded slightly softer today after rallying yesterday on fresh hawkish BoCspeak, and the Australian dollar, which took a tumble yesterday after the RBA signalled out exchange rate gains as been an impediment to the post-mining boom transition of the economy. A joint U.S. and South Korean missile test, in response to North Korea’s launching of its first an intercontinental ballistic missile yesterday, has upped the geopolitical ante in that part of the world, but to little forex market impact, while contributing to choppy trade on Asian equity bourses (although South Korea’s KOSPI still managed a gain of 0.4%). Today’s release of the FOMC minutes from the mid-June will be a big focus for markets as they should detail justification for the Fed’s unexpected resolve toward normalizing policy.

Eurozone producer price inflation fell back to 3.3% y/y in May from 4.3% y/y in the previous month. The deceleration was mainly due to base effects and not unexpected after national data, but it will help the arguments of the doves at the ECB, who remain cautious about moving too quickly towards tapering steps. Still, while the doves can point to the marked decline in the number, the hawks will stress that the headline rate remains quite high.

Division at the BoE’s Monetary Policy Committee, with member McCafferty having advocated a rate hike while Vlieghe argued that hiking too soon would be worse than hiking too late. McCafferty, who was one of the three (out of eight) MPC members who voted to hike the repo rate by 25 bp in June, said that “the economy has not slowed to the extent we feared” in the wake of the Brexit vote last June, and with inflation having been high “there is a need for change” and reverse the 25 bp rate cut of last August. This would take the repo back to 0.50% from the present historic low of 0.25%. Vlieghe, meanwhile, argued that the “consumption slowdown is here, it’s not over” that that he doesn’t think there’s going to be “sufficient offset from investment and net exports to compensate.”

Main Macro Events Today

FOMC minutes – The minutes to the June 13-14 policy meeting will be interesting for any additional insight the report may provide on the Fed’s hawkish gradual stance. Recall, the Committee generally overlooked weaker real sector data and a “transitory” slowing in inflation in recent months, and instead showed unexpected resolve toward normalizing policy. The minutes may provide some context, as well as the support behind that decision. Of course, the big question now for the markets heading into the second half of 2017 is whether the Fed will get cold feet on the doorstep of the balance sheet unwind, and if it will have the nerve to hike the funds rate for a third time this year.

EU Final PMI – Final Eurozone Services PMI readings for June are expected to confirm preliminary numbers – i.e. services reading of 54.7, suggesting robust expansion across both sectors.

UK PMI – The UK services PMI expected to soften to 53.5 after 53.8 in May.

US Factory Goods – May factory orders are expected to be -0.5% from -0.2% on April.

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