Forex Institutional Research: BNPP FX Daily
Key quotes from the BNPP FX report:
The UK March employment report should do little to support the GBP in our view. Employment growth was 44k on a 3m/3m basis, above consensus for a 0k print. Average weekly earnings including bonuses rose to 2.0% 3mma y/y from 1.9% versus expectations for a 1.7% print. Despite these upside surprises in March, the overall labour market trends remain soft with both series near the lowest levels since 2015. Following on the soft inflation data reported on Tuesday, the data should keep a firm cap on BOE rate hike expectations even with the political risk of the June 23 EU referendum surrounding GBP. GBP has weakened since today’s release consistent with our STEER™ model generating a short GBPUSD signal this week. STEER currently signals fair value of 1.4170 for GBPUSD vs spot at 1.4415 (see chart).
Japan’s Q1 GDP data beat expectations rising by 0.4% q/q (vs expectations for 0.1% q/q) helped by a leap year consumption boost, still the rebound may not be strong enough to prevent a Q2 contraction. Nominal growth only met expectations as the GDP deflator fell to its lowest level in two years. Private consumption made only a feeble recovery from last quarter’s slump, while business spending was weak and negative. Accordingly, the scheduled sales tax hike for next year may still be delayed and hopes for further BOj easing may stay alive. We stress that the market remains long of JPY according to our BNP Paribas FX Positioning Analysis at +31, significantly ahead of EUR at just +8. We favour fading JPY strength vs EUR into H2 2016 but look for the Fed expectations to have the greatest impact on USDJPY rather than the BOJ.
Recent comments from regional Fed presidents (Williams, Lockhart and Kaplan) have forced rate markets to begin pricing more chance of Fed tightening in the coming months.US 2y yields have continued to rise in response, reaching new highs for May at 84bp and providing support to the USD. We see scope for this move to extend a bit further but do not anticipate a sustained revival of USD momentum. We expect data in the weeks ahead to be too mixed to support expectations for hike in mid-2016. Perhaps more importantly, key members of the FOMC, including Chair Yellen herself, have been quiet lately but are believed to be much more cautious on policy. The minutes to the April FOMC meeting to be released today will likely highlight the concerns of these members about slowing activity as was reflected in the statement at that meeting. Lastly, it remains far from clear that the risk environment can sustain a significant increase in Fed pricing. Indeed, the S&P 500 has fallen nearly one percent, presumably reacting in part to the adjustment in yields. The rally in the USD has pushed our short USDSEK recommendation to its stop at 8.28. We exit with a 1.5% loss.
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