- Divisions between US and Japan may cause divisions between G7 countries on major economic policies
- Kiwi may keep going higher to 0,6850 against USD
- Commodity and EM currencies may be vulnerable this week as traders shift back into a risk-aversion mood
- Further easing announcement by Boj Kuroda may irritate US
There was a subdued open to global markets with risk appetite mixed and trading volumes thin. As we expected, the Sendai G7 meeting of finance ministers and central bank governors provided nothing of substance. Members were able to sketch out a negotiated agreement on the coordination of macro-policy. However, there is a growing sense that coordination is breaking down between member nations. This comes on the back of a rising sentiment among members that independently managing their own domestic policy is the cleanest solution. The division is highlighted by the friction between the US and Japan and the fiscal approach rejected by Germany and the UK. Again, this is a case of action versus words. We anticipate that this week's Ise-Shima G7 summit on 26-27 May will stick to the company line although executions may be deficient. Outside of policy issues the G7 members were united against a “Brexit.” UK polls are showing a clear deviation away from Brexit as undecided voters migrate to the “remain” camp with bookmakers predicting a 20% (from 24% last week) probability of UK leaving the EU.
Asian regional equity markets were mostly higher with marginal weakness stemming from the Nikkei and antipodeans. USD was weaker against G10 and Asia EM FX as hype of a June Fed rate hike cooled over the weekend. IMM data indicated that short USD bets have been pared down. Interestingly, it was commodity-linked currencies that lead the way. NZDUSD continued to grind higher after a bounce off 0.6711 weekly lows, rallying to 0.6804 below a strong resistance at 0.6850. Commodities firmed, following news that China had increased iron ore stockpiles, with crude oil hovering around the 6-month high at $47.60, driven by supply disruptions. Precision metals remain at the whim of Fed policy path as gold eased to $1250. With an extended calendar of risk events this week, commodities and EM are vulnerable as trader shift back into a risk aversion stance.
In a clear shot at US policymarkers BoJ governor Kuroda indicated that Japan's monetary policy still had "enough ammunition" and would use whatever tools necessary. He insisted that the BoJ would still hit its 2% inflation target. Kuroda stated that a stronger JPY would pressure Japan’s tepid recovery and that the BoJ would “not hesitate” to ease or intervene. This defiant commentary at the G7 talks comes on the back of a fresh warning from the US against competitive currency devaluation.
Yann Quelenn, market analyst: “Russia – Higher retail sales again raise inflation concerns: The Russian economy is still suffering. Retail sales, which surged to 5.1% m/m in March are expected to decline at -1.6% m/m. Consumer spending is very volatile and it may be difficult for the Russian Central Bank to assess the current economic outlook as Russian policymakers will need to make decisions concerning their interest rates at the next monetary policy meeting to be held next month.
The central bank is concerned about upside risks on inflation and in particular about wages. The last print, in March, indicated a 9% y/y nominal wage increase. When adjusted for inflation, wages are growing 1.6% y/y which appears more accurate. Wages have spiked since the start of this year - reflecting the rebound in oil prices. We believe that domestic demand should improve and that retail sales should print higher than expectations today.
Monetary policy will be considered as successful once inflation has been lowered. We do not believe that it is going to be the case in the short or even medium-term. The central bank may then be forced to further tighten rates. We remain bearish on the USDRUB as the major driver will be the end of rate hike hopes from the Fed for this year.”—
In the European session traders will be watching PMI data from France, Germany, and headline Eurozone. In the US session, following last week’s Fed signal that June remains a live meeting, Fed speakers and US data will become the main point of focus. Today St. Louis Fed President Bullard, FOMC voter and known hawk, is scheduled to speak. We anticipate Bullard will continue his hawkish tone by advocating an early rate hike.