Forex Institutional Research: ING FX Daily
Key quotes from the ING FX report:
US rate spreads are close to their widest levels of the year and are once again providing support to the dollar. A June Fed hike is still only 34% priced (July 54%) suggesting there is scope for further dollar appreciation should US macro data allow it. That data may not be evident until next week, although the markets have definitely shifted to a glass half full view of the world, where high cash levels of investors are seen as a cushion to any sell-off in asset prices. Overnight there has also been focus on the high USD/CNY fixing from the PBOC. Notably the 12m CNH forwards have not been widening on this and the CNY CFETS basket remains stable. However, this is a fragile state of affairs and given: a) the March/April industrial metal rally having completely reversed and b) latest data showing World Trade growth contracting again, it would not be a stretch for China once again to become a concern, e.g. to currencies like BRL, COP, ZAR, KRW and AUD. For the time being expect DXY to trade 95-96.
Short term EUR:USD rate spreads (see chart) are weighing on EUR/USD again. These may reverse a little today if the German IFO index follow’s the headline ZEW a little higher. 1.1050 looks a strong near term support level for EUR/USD and one that probably is not broken ahead of NFP next week. However, corrective bounces look set to stall in the 1.1250/1320 area. Elsewhere, we noted the strong sell-off in EUR/SEK yesterday. For a country with very negative rates and an on-going QE scheme, discussing 2017 exit strategies is a delicate matter for the Riksbank. After a sharp decline in Swedish unemployment yesterday, today sees the Economic Tendency Survey. Another strong reading here will heap pressure on the Riksbank to justify their extraordinarily loose policy settings. Favour EUR/SEK to 9.17/20.
USD/JPY is staying bid on the US rate story and looks as though it could edge up to the 110.50/111.00 area. We would not chase it higher, though.
All eyes will be on the BoC meeting; while the recent run of domestic data has been unequivocally weak, we suspect the central bank will hold off until the July press conference/MPR meeting to deliver a 25bps cut. 1Q16 GDP is due to be released at the end of the month and there are clear signs that it will come in materially below the BoC’s 1.4% estimate (our models suggest that the economy broadly stagnated during this period). With markets only pricing in an 8% chance of a cut this year, we think a dovish BoC signal in today’s statement (i.e., the bank opening the door to a near-term rate cut) could catch markets out. Risks are for a sharp USD/CAD move up towards 1.3350-1.3400 (our short-term fair value estimate consistent with a 50% probability of rate cut at the July meeting).
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