For the past few weeks, front page news dictated currency flows with investors taking in headlines on big stories like the U.S. attack on Syria to the bombing in Afghanistan and President Trump’s currency comments.
Of course the U.S. is not only the source of trouble as there’s also been terrorist attacks across Europe, Brexit and this weekend, we have the first round of the Presidential election in France. So it should be no surprise that the main theme in the Forex market is risk aversion and that explains why the Japanese yen traded higher against all of the major currencies this past week.
The U.S. dollar struggled on the back of softer U.S. data. Despite stronger wages and higher consumer confidence, retail sales dropped for the second month in a row by -0.2%. Spending in February was revised down to -0.3% from 0.1%. Excluding autos and gas, spending rose 0.1%, less than the market’s 0.3% forecast. Consumer prices also fell for the first time in more than a year by -0.3%. This pushed the year over year rate down to 2.4% from 2.7%. Today’s reports pretty much guarantees that the next move will be in September and not June as the weakness of spending will weigh on first quarter GDP growth. Fed fund futures are currently pricing in a 56.7% chance of a rate hike in June and a 76.3% chance of a hike in September. With that in mind, this week’s Beige Book could still report general improvements in the U.S. economy as that is the overall trend.
One of the biggest stories this past week was President Trump’s U.S. dollar comments. He described the greenback as too strong and credited himself for part of the currency’s performance. While important we are much more interested in his views on U.S. rates and China’s currency manipulation. He eliminated any guessing by confirming that the Treasury would not be labelling China a currency manipulator in their upcoming report because it would hurt talks on North Korea. He also indicated that he likes a low interest rate policy. Considering that the Treasury is “very close” to filling the open seats at the Fed according to Mnuchin, chances are he’ll be nominating doves, which is the only legitimate reason for the dollar’s negative reaction. Bringing in more doves means at most we’ll see 2 more rate hikes this year. So while the dollar could recover in the coming week from oversold levels, rallies in USD/JPY will attract sellers for the rest of the month. Aside from the Beige Book, manufacturing and housing market reports are also scheduled for release in the coming week.
Of course the main focus will be on the French Presidential election and the euro. Incoming polls will have a direct impact on how the euro trades and will overshadow the April PMI reports, which are normally the most important pieces of data released from the Eurozone each month. We expect the euro to trade with a heavy bias as the recent terrorist attacks boost the popularity of far right leader Marine Le Pen. The polls have been tightening ahead of the first round vote. She is expected to do well but fall behind in the second round. If Le Pen gains more votes than Macron, the EUR/USD will make a run for 1.05. Even if she has fewer votes but strong support, investors will immediately worry about a Trump style victory by a candidate who is anti-immigration and has called for a EU referendum within 6 months of her victory. While the latest German ZEW survey showed an uptick in investor confidence, if taken today we believe sentiment will be weaker. The path of least resistance for the euro should be lower this week ahead of the French election with the single currency underperforming most of its peers.