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United States
At least for the USD, April showers have tended to yield May flowers in recent
years. After falling in six consecutive Aprils including 2015, the DXY has
rebounded strongly in each of the past five years in May, though developments
in the Euro-area periphery crisis and ECB policy action have played a role in
several of those May USD rebounds. The moderation in US data appears to
have been more broad-based than most anticipated, and the recent sell-off in
the USD likely reflects in part a loss of confidence in the view that the economy
rebounds in the spring. Our economists expect a solid bounce-back in US April
employment, which could be a positive for the reeling USD. We remain
strategically positive on the USD, largely because we think the US data will
indeed begin to recover as soon as next week and that the FOMC will ultimately
gain reasonable confidence needed to hike the Fed Funds rate later this year
(base case September).
Fed Chair Yellen is scheduled to speak on a panel alongside IMF head
Lagarde. The FOMC statement noted a downgrade in the recent data but did not
clearly indicate that the FOMC sees new downside risks to the outlook, noting
that the weakness in the economy is likely due in part to transitory factors. Chair
Yellen highlights the plethora of FOMC speakers next week that may flesh out
the current views on the FOMC in greater detail than did the statement.
The US trade balance for March is due, and with a heightened focus on the
strength of the USD and its impact on the economy we anticipate the monthly
trade figures should garner interest. These will be the first trade figures released
since the resolution of the West Coast port strike.
Euro-area
For EUR/USD, the short-term unwind of carry positions funded in EUR along
with a further sell-off in European fixed income may prove a larger driver of the
cross than the US data. That may keep EUR/USD sticky even if the US data improve, though we agree with our Rates Research Team that thinks there are plenty of reasons to fade the correction in European FI. We see the risks around European QE as on the upside rather than on the downside – i.e. higher risk of more bond purchases than an early taper, despite recent upside in data. At least in the near-term, a sticky EUR/USD may make GBP or JPY shorts more attractive as ways to express a stronger USD view on more positive US data.
The ECB has long noted that the decline in EUR/USD was related to a divergent stance in monetary policy outlooks, as the ECB is actively easing policy via its asset purchases and the FOMC still signalling that rate hikes are likely later this year. The trade-weighted EUR has rebounded off the lows but remains very low on a historical trade-weighted basis, thus it is perhaps unlikely that the ECB speakers, including vice Chair Constancio next week, begin to more forcefully talk down the EUR. Nevertheless, this risk will likely increase should the EUR positioning squeeze continue.
On the data calendar, services and composite PMIs across the Euro-area are released and German trade and retail sales figures for March are due as well.
UK
The UK general election on May 7th appears likely to result in a hung parliament, with neither Labour nor the Conservatives likely to secure a majority. We think the risks to the UK economic outlook lie on the downside relative to consensus, and the political gridlock that may result could weigh on investment intentions and business confidence. That risk may be under-appreciated and could keep the Bank of England more accommodative for longer. In their preview, our economists cite the 10PM local time exit polls as potentially crucial, given the accuracy seen in exit polling in the previous two elections. (Note – our economists preview is a product of Independent Research) The April services PMI is the key UK data point released next week.
Australia and New Zealand
The RBA has suggested repeatedly that “further easing of policy may be appropriate over the period ahead”, which is a surprisingly blunt assessment from the central bank and suggests easing is likely in the coming months. Still, in an April 21st speech, Governor Stevens expressed a lessened enthusiasm about the value of additional rate cuts given the already high level of leverage in the economy. That, paired with inflation holding essentially steady in 1Q 2015 (and in line with the RBA’s last forecast round), stronger than expected employment data in March, and a small pickup in iron ore prices makes this week’s RBA decision a close call. The recent data may support a wait-and-see stance to assess the housing market in light of December macro prudential measures, but the decision accompanies a forecast update in the new Statement on Monetary Policy, a 25bp cut at this meeting is certainly not out of the question. The Australia data calendar also includes April employment data.
The RBNZ delivered a more clearly dovish statement following their April meeting, suggesting that rate hikes are not currently being considered. Importantly, however, the statement does not suggest that rate cuts are being considered at this time either, instead saying that it would be appropriate “if demand weakens, and wage and price-setting outcomes settle at levels lower than is consistent with the inflation target.” First quarter employment statistics are released next week and with a direct reference to wage inflation as one of the factors the RBNZ is watching, the quarterly average hourly earnings should
be a focus. The y/y rate of average hourly earnings, at 3.0% y/y as of 4Q 2014,
is just below the average rate since 1990 (3.2%) but well below the 5-6% y/y
levels seen in 2005-2008.