FX Week USD firmer despite soft payrolls The USD recovered last week in spite of slightly weaker than expected US non-farm payrolls data for April. Rather the USD s recovery came on the back of better overall US economic data, which meant that the 16k rise in payrolls was not seen as such a big disappointment. Remarks from Fed officials were also seen as keeping the door open for a June/July interest rate hike, although the balance of risks over whether the Fed will pull the trigger is admittedly likely to be very close. Weekly 8 May 216 Tim Fox Chief Economist +971 4 23 78 timothyf@emiratesnbd.com Strength in the JPY and the EUR were also seen as overdone, as the BOJ only appears to be delaying cutting interest rates further and the EUR s upside is being hindered by structural problems again related to Greece. With the RBA in Australia cutting interest rates causing the AUD to plunge 3.12% over the week, and with soft UK survey data hurting GBP, arguments for one currency over another are not particularly compelling at the moment, keeping range trading preferred. Although there was disappointment at the end of the week with the modest rise in US non-farm payrolls, most of the other components of the employment report were encouraging, while other US data released during the week were also relatively resilient. At 16k payrolls were only a little below the consensus expectation of 2k, while the unemployment rate remained steady at 5.% and average earning rose by.3% m/m and 2.5% y/y, up from 2.3% in March. Furthermore the average weekly hours worked increased to 34.5 from 34.4, and the broader U6 measure of unemployment fell to 9.7% from 9.8% showing that slack in the labor force is still being used up. Other US economic data revealed over last week also showed some positive trends, in that the non-manufacturing ISM s improvement more than offset the relative softness of the manufacturing sector, while auto sales were also firm, up around 6.% m/m. The coming week will see the focus continue on the household sector in the US, with retail sales and consumer confidence reports both expected to be relatively upbeat. Inflation readings are also expected to start moving up soon following the recent rises in commodity prices and the softness of the USD. The markets have more or less written off a June Fed rate hike so to the extent that the data challenges this view (which we expect) the USD should respond positively. Fed officials have after all kept the door open for a June move, but they will need to see an improvement in the data if they are to follow through. Mohammed Al-Tajir Research Analyst +971 4 69 35 mohammedtaj@emiratesnbd.com Weekly currency movement vs USD (%) EUR -.41 GBP -1.27 CHF -1.36 JPY -.72 CAD -2.74 AUD -3.12 NZD -2.9-3. -3. -2. -2. - - -.. www.emiratesnbdresearch.com Source: Bloomberg, Emirates NBD Research
EUR s gains unravel fast EUR/USD s gains to 1.1616 last week quickly unraveled as markets doubted the sustainability of the move in the context of the ongoing stand-off over the Greece bailout review, as well as stronger US economic data. Eurozone finance ministers and ECB officials are meeting on Monday to discuss the Greek situation, with Greek PM Tsipras reluctant to implement additional austerity measures, while the IMF continues to stress the need for debt relief. Meanwhile the ECB continues to watch developments in the Eurozone economy, which have recently been slightly encouraging. German production and orders data will be released next ahead of GDP data which is due out on Friday. German Q1 GDP growth is expected to be firm given that overall Eurozone GDP expanded by.6% q/q in Q1, but March production data is expected to have fallen by 3.% m/m. Brexit fears hurting growth and GBP GBP/USD had a bad week falling by 1.27% as data showed the UK economy slowing quite sharply at the beginning of Q2. The April UK composite PMI fell to three-year lows, with Markit suggesting that the risk of the UK leaving the EU is negatively affecting business and investment planning. The latest FT poll tracker suggests the issue remains a close call, with 46% favouring Remain and 43% in favour of Leave. The BoE's Monetary Policy Committee will conduct its May meeting this week but an unchanged decision is all but certain. The Bank has said that it will refrain from changing policy pending the outcome of the June 23rd referendum, but given the evident deceleration in growth the minutes are likely to show dovish bias. Indeed if the referendum were to result in the decision to leave the EU then it seems likely that the Bank might cut interest rates relatively quickly following the result. UK housing data, trade figures, industrial production and construction output will all be watched closely to see if they reinforce the perception of stagnating growth, which if they do could see sterling lose more ground. USD/JPY finds a floor Even the JPY lost a little ground last week after its recent strong gains, although holidays in Japan last week probably detracted a little from the recent focus on the currency. Certainly the central bank will need to make a bigger commitment to NIRP, which has been an unpopular policy in Japan, if it is to reduce the JPY s status as a safe haven currency. Slower Japanese wage growth and softer survey data this week are likely to reinforce the need for more stimulus measures, although US data may now begin to take on more significance for the USD/JPY rate especially if it brings the possibility of a June/July Fed rate hike back into view. Over the weekend Chinese FX reserves were reported to have risen in April (to USD3219bn from USD3212bn in March) and the trade balance was also boosted by strong exports data and weak imports. The weak import figures (-1.1% y/y) may attract attention initially but attention will later turn to Chinese CPI and bank lending data which are released this week. CHF remains under pressure: Last week saw the CHF lose ground on the other currencies (with the exception of AUD) after the Franc was the subject of selling pressure following data that showed Swiss consumer confidence had decreased in April to -15 and March retail sales showed a 1.3% decline on an annual basis. Over the course of the week, the USDCHF rose 1.32% to close at.9725. The week ahead brings with it both Page 2
upside and downside risks to the CHF. The primary upside risk is the potential of safe haven bids should risk aversion be the dominant theme when markets open following weak Chinese trade data. The major downside risk remains Monday 9 th of May s inflation report which is expected to show that consumer prices have contracted by.7% on an annual basis. CAD retreats despite firm data: A better than expected Canadian unemployment rate (7.1% vs 7.2%) and Ivey PMI (53.1 vs 52.3) were not enough to support the CAD which lost ground on most of the other majors last week, with USD/CAD closing the week 2.81% higher at 1.299. No doubt sentiment in the CAD soured in conjunction with declining hydrocarbon prices (Oil decreasing more than 5% last week). The week ahead will see the CAD still largely driven by oil prices and we expect the risks for USD/CAD to remain to the upside, with the first significant resistance level at 1.37, the day moving average (daily) and immediate support at 1.2841, the 3 day moving average. RBA pulls down AUD After the central bank cut interest rates by 25bps to a record low of 1.75% on May 3 rd, the immediate market reaction was AUD sell off. The central bank exerted further downward pressure on the currency through its Statement on Monetary Policy which showed that the bank had cut its inflation forecasts. Over the course of last week, AUD/USD declined by 3.11% to.7366, reaching our one month forecast from the 1 th of April 216. We expect a further decline, spurred on by the disappointing Chinese trade data released this morning which showed that in April imports declined by 1.1% on an annual basis (in dollar terms). This should put downward pressure on the AUD due to the trade relationship between the two countries as well as through the indirect impact on commodity prices. We expect the first significant support to come in at.7261, the 2 day moving average (on a daily basis). NZD retreats from highs to test day MA (daily) The NZD/USD fell from highs of.754 (its 216 high) on 3 rd of May to close the week 2.1% lower at.6831, after falling from its 3 day MA (daily), and finding support at its day MA (daily) of.6819. The kiwi was weighted down by worse than expected employment data released on the 4 th of May which showed that unemployment in Q1 216 has increased to 5.7% from 5.4% and average hourly earnings increased by.3% q/q disappointing expectations for an increase of.5%. Over the next week, we expect it to make another immediate attempt to break below its day MA and should it succeed, then it will head towards its day MA of.6725. NOK to be supported by data and weighed down by Oil? Last week saw the NOK weaken against the other majors, with USD/NOK increasing 1.92% to 8.255 as the krone was weighed down by a decline in oil prices. While we expect the currency to follow the path of oil in the next week, there is some economic data that could lend support to the krone. Data on the 1 th of May is expected to show that consumer prices have increased 3.2% in April on an annual basis. Should the data live up to expectations, such a reading would reduce pressure on Norges Bank to cut interest rates. Furthermore, on the 12 th of May, Norges Bank is expected to maintain the deposit rate at.5%, while data is expected to show that Q1 216 GDP grew.2% q/q compared to a decline of 1.2% in the previous quarter. Page 3
SEK has muted performance. The SEK generally held its ground against the other currencies, losing and gaining in equal measure against its major counterparts. The krona enjoyed some positive sentiment after the data released on the 3 rd of May showed that industrial production has increased 1.4% m/m in March, greater than expectations for a.3% increase. However, on the other hand other data was less poitive and while the Swedbank Manufacturing PMI for Apr was 54. (greater than 53. expected), the Services PMI was disappointing at 52.6 (56. expected). In the week ahead, the greatest point on interest will be the consumer price inflation report on the 12 th of May, which is expected to show that consumer prices increased by.9% y/y in April. Should the data fail to meet expectations, it may boost market expectations of another rate cut from Riksbank, which last cut rates 15 bps to -.5% in February 216. Page 4
FX Forecasts FX Forecasts - Major Forwards Spot 6.5 1m 3m 6m 12m 3m 6m 12m EUR/USD 1.144 1.12 1. 1.2 1.1437 1.1473 1.1559 USD/JPY 17.12 15. 112. 117. 12. 16.83 16.47 15.63 USD/CHF.9725.98 1..9685.9641.9544 GBP/USD 1.4427 1.43 1.4 1.42 1.48 1.4432 1.4441 1.4469 AUD/USD.7366.73.7.68.6.7341.7318.728 USD/CAD 1.299 1.26 1.3 1.3 1.2 1.291 1.299 1.293 EUR/GBP.796.7832.781.7394.6892.7926.7946.799 EUR/JPY 122.17 117.6 123.2 122.85 122.4 122.17 122.17 122.17 EUR/CHF 9 32 25 1.122 76 6 31 NZD/USD.6831.66.64.6.58.68.6774.6727 FX Forecasts - Emerging Forwards Spot 6.5 1M 3M 6M 12M 3M 6M 12M USD/SAR* 3.7 3.7 3.7 3.7 3.7 3.7571 3.7633 3.7831 USD/AED* 3.673 3.67 3.67 3.67 3.67 3.6744 3.6759 3.684 USD/KWD.34.29.29.29.3.313.323.353 USD/OMR*.38.38.38.38.38.3859.3875.3926 USD/BHD*.377.376.376.376.376.3777.3784.381 USD/QAR* 3.646 3.64 3.64 3.64 3.64 3.6497 3.6547 3.6677 USD/EGP 8.8776 9. 9.2 9.2 9. 9.2675 9.72 1.64 USD/INR 66.555 68. 66. 65. 65. 67.57 68.56 7.53 USD/CNY 6.5753 6.6 6.7 6.8 6.9 6.5465 6.591 6.6895 Source: Bloomberg, Emirates NBD Research *Denotes USD peg Page 5
Major Currency Pairs and Interest Rates Interest Rate Differentials - EUR Interest Rate Differentials - GBP -.4. 1.7 -.6 -.8-1. -1.2-1.4 1.15 -.2 -.4 1.65 1.6 1.55-1.6 -.6 German 2yr yield - US 2yr yield GBP 2yr yield - US 2yr yield Interest Rate Differentials JPY Interest Rate Differentials - CHF 13. 125..9 12..8.7 115..6 11...4 15. 2. 1.8 1.5.95 1.3.9 1..85 US 2yr yield - JPY 2yr yield US 2yr yield - CHF 2yr yield Interest Rate Differentials - CAD Interest Rate Differentials - AUD.8.4 1.3. 1.25 1.15 -.4 2..8.75 1.5.7.65 1..6.55.5. US 2yr yield - CAD 2yr yield AUD 2yr yield - US 2 yr yield Source: Bloomberg, Emirates NBD Research Page 6
Major Currency Positions CFTC Speculative Positions - EUR 1 1.3 1.25 - -1 1.15-2 -2 long short net long (lhs) CFTC Speculative Positions - GBP 1.75 75 1.7 1.65 25 1.6 1.55-25 -75 - long short net long (lhs) CFTC Speculative Positions - JPY CFTC Speculative Positions - CHF 11 9.75 7 3-1 11-9 12-13 -17 13 long short net long (lhs) 25.85.95-25 long short net long (lhs) CFTC Speculative Positions - CAD 1 - -1 1.15 1.25 1.3 long short net long (lhs) CFTC Speculative Positions - AUD 1 125.95.9 75.85 25.8.75-25.7.65-75.6 long short net long (lhs) Source: Bloomberg, Emirates NBD Research Page 7
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Emirates NBD Research & Treasury Contact List Emirates NBD Head Office 12thFloor Baniyas Road, Deira P.OBox777 Dubai Jonathan Morris General Manager Wholesale Banking JonathanM@emiratesnbd.com Aazar Ali Khwaja Group Treasurer & EVP Global Markets & Treasury +971 4 69 3 aazark@emiratersnbd.com Tim Fox Head of Research & Chief Economist +9714 23 78 timothyf@emiratesnbd.com Research Khatija Haque Head of MENA Research +9714 23 783 khatijah@emiratesnbd.com Jean Paul Pigat Senior Economist +9714 23 787 jeanp@emiratesnbd.com Aditya Pugalia Analyst +9714 23 782 adityap@emiratesnbd.com Anita Yadav Head of Fixed Income Research +9714 23 763 anitay@emiratesnbd.com Athanasios Tsetsonis Sector Economist +9714 23 7629 athanasiost@emiratesnbd.com Edward Bell Commodity Analyst +9714 23 771 edwardpb@emiratesnbd.com Mohammed Al-Tajir Research Analyst +9714 69 35 mohammedtaj@emiratesnbd.com Sales & Structuring Group Head Treasury Sales Tariq Chaudhary +971 4 23 7777 tariqmc@emiratesnbd.com London Sales James Symington +44 () 2 7838 224 jamess@emiratesnbd.com Shady Shaher Elborno Head of Macro Strategy +9714 2123 shadyb@emiratesnbd.com Saudi Arabia Sales Numair Attiyah +966 11 282 5656 numaira@emiratesnbd.com Egypt Gary Boon +2 22 726 garyboon@emiratesnbd.com Singapore Sales Supriyakumar Sakhalkar +65 65785 627 supriyakumars@emiratesnbd.com Group Corporate Affairs Ibrahim Sowaidan +9714 69 4113 ibrahims@emiratesnbd.com Claire Andrea +9714 69 4143 clairea@emiratesnbd.com Investor Relations Patrick Clerkin +9714 23 785 patricke@emiratesnbd.com Page 9