Risk appetite returned in the Asian session as the hype over a potential June Fed rate hike calmed down. However, on the back of more hawkish FOMC meeting minutes, Fed members continued to provide a pro-hike message. New York Fed President William Dudley said yesterday: “the US economy could be strong enough to warrant an interest rate increase in June or July.” Richmond Fed President Jeffrey Lacker supported the healthy US story and stated that the argument for a rate hike was “strong”. However, Philadelphia Fed manufacturing survey and initial jobless claims were weaker than expected highlighting the choppy incoming economic data. The VIX index retraced from yesterday's high of 17.65 back to 16.33, while DXY fell from 95.50 high to 95.28. Asian regional equity indices were higher across the board with the Hang Seng leading the way up 1.13%. Crude oil firmed, around the $48.65 level, on concerns over Canadian wildfires and supply disturbances in Nigeria, providing commodity linked currencies with some breathing room from recent selling pressure. Yet, weakness in gold and copper prices suggested recovery will be short-lived. US front-end yields retreated from the recent highs as the 2-year yields declined 3bps to 0.88%. USD was weaker against G10 and EM currencies but volumes have been thin. With a near empty Friday calendar directional breakout trading is unlikely. Despite the pullback in US yields, the JPY faced renewed selling as Kuroda provided the usual threats and raised expectations for policy divergence. USDJPY grinded higher from 109.85 to 110.26, traders are targeting the 55d MA resistance at 110.21.
Traders are hesitant return to EM currencies as politically negative stories and uncertainty surrounding the Fed policy path keep risk taking sidelined. This weekend’s G7 Finance Ministers and Central Bank Governors' Meeting in Sendai, Japan will focus on currency policy and Brexit. However, like countless such meetings before this we do not expect any solid initiatives to be taken. While the pre-meeting hype has been focused on potential Japan FX intervention and negative policy it is unlikely any decision will result in Japan not having the flexibility to defend its interest rate target. Elsewhere, the EgyptAir jet carrying 66 passengers and crew from Paris to Cairo is speculated to have been caused by a terrorist attack. Finally, this weekend Austria is expected to elect a Eurosceptic president highlighting the relevance of other Anti-EU fires burning outside of the UK.
Canada will shift into the spotlight today as the G10 calendar is light. Traders will see retail sales, and inflation read. Overall, we expect weakness on both fronts. Perhaps the only saving grace for the CAD is the uptick in oil prices. A weak export environment, wildfire forced supply disruptions, Canadian style political scandals and a general sagging confidence over rebalancing efforts have put a dampener on the outlook. We remain bearish on CAD, focused on USDCAD to extend bullish rally to 1.3160. In the US, markets will end the week with April existing homes sales which is anticipate that pace of acceleration will as marginal to 3.1% from 5.1%
Yann Quelenn, market analyst: “US Existing Home Sales much awaited: After the Fed’s minutes that surprised financial markets, the US domestic situation is back in the spotlight and will be closely monitored until the next FOMC meeting in June. Until now, the global economic slowdown, in particular the oil price collapse, has been thought to be behind the delay in a Fed rate hike, much more so than the actual state of the US domestic economy. It is now time to decide if data is supportive enough to trigger a further rate hike. Today will see the release of existing home sales data for April. Over the past few years, this indicator has traded mixed but in March it seems that it rebounded sharply. The trend is expected to continue as financial markets expect a rise to $5.40 million from $5.33 million. In April increasing rates expectations declined so it is reasonable to assume that sales went up as both mortgage prices were expected to remain weak and housing prices to strengthen.
From our vantage point, we think that the true state of the US economy is overestimated, especially the labour market, even if the unemployment rate is very low and NFP is still at a decent level. We believe that new jobs creation is more about part-time jobs than full-time jobs and that the ability to purchase a home will weaken. Downside pressures should soon appear on the housing market. The recent March pick up in new home sales and existing homes sales is due, in our view, to a diversification concern from large institutions. Indeed, US housing homeownership rate continue to decline currently at around 63.70% - this figure was 66% in 2011.” ---