The mighty buck has fallen to a new three-week low against its main currency rivals. Friday’s weaker-than-expected non-farm payroll (NFP) print for May (+38k vs. +152k) is now clouding the chances for a rate increase from the Fed this summer, and also generating worries of a looming slowdown in global growth.
Given the horrid employment print, capital markets are more interested than ever to hear what Fed Chair Janet Yellen has to say about interest rate policy in a speech this afternoon (Monday at 12:30 p.m. ET).
The Fed Chair should be the main event of the week. Down under, both the Reserve Bank of Australia (RBA) and Reserve Bank of New Zealand (RBNZ) will announce their respective monetary policy decisions.
In Europe, merchandise trade and industrial production data dominate. While China releases its own May data for merchandise trade and consumer and producer prices. In Japan, revised GDP data and machine orders will be released.
1. Fed hike in June unlikely, but July still alive
The weak U.S. May jobs data effectively rules out a FOMC rate hike at next week’s June 16 meeting – market pricing for a Fed rate hike has declined to just +4%.
However, one report does not make a trend. Will we see a bounce back? The next NFP for June will be released before the July 28 Federal Open Market Committee (FOMC) meeting. If there is a bounce back, expect fixed income market to aggressively be repricing their U.S curve.
Nevertheless, report from Fed watcher Hilsenrath over the weekend suggested that June is now “almost surely off the table” and July is still possible though less likely. Fed fund futures currently see a +27% chance on a move in July and +48% on a move by September.
It feels like déjà vu with the Fed – this time last year they should have been hiking, but ended up missing their window of opportunity. They then rolled the dice on their own ‘credibility’ for the remainder of the year, but eked out a December hike to save it. Don’t expect the Fed to make the same mistake.
2. Poll gives Brexit campaign lead of three percentage points
Regarding the U.K’s E.U referendum on June 23, are the markets becoming too comfortable with “things will be alright on the day”?
Overnight sterling price action would suggest that the market is far less prepared for a ‘Brexit’ outcome than for a ‘Bremain’.
GBP plummeted in early Asian trade after numerous polls placed the “Leave” camp in the lead less than three-weeks ahead of the E.U referendum.
The biggest divergence was in the poll of the Daily Telegraph subscribers showing just +29% planning to vote for staying in E.U and +69% for leaving. The Opinium poll saw Brexit supporters gain +1pt to +41% vs. +43% for Stay while the TNS poll saw Brexit camp gain +2pts to +43% vs. +41% for Stay, and YouGov Brexit support rose +4pts to +45% vs. +41% for Stay.
The pound plummeted to below £1.4360 – down about -150pips from Friday’s close. Nevertheless, GBP has managed to pare some of its losses after reports circulated that “Stay” MPs might consider using majority in Commons to delay Brexit and keep the U.K within the single market in the event of a leave vote.
3. U.S- China summit in Beijing
As to be expected, the bilateral annual US-China summit in Beijing has yielded some tough rhetoric from both sides on both political and economic issues.
China’s President Xi Jinping opened the annual meeting by highlighting areas of cooperation, while striking an accommodating tone despite South China Sea tensions.
“It’s not scary to have disagreements,” Xi said. “The key is not to use disagreements as an excuse for confrontation.”
U.S Treasury Secretary Lew noted great progress is being made in currency talks with China. The world’s second largest economy is committed to moving in an orderly way to a more “market oriented” exchange rate.
Lew added that PBoC should work on its communication, referencing the August devaluation giving “rise to fears that China’s economy was in a much weaker place than it actually appears to be.”
The annual dialogue concludes tomorrow.
4. BoJ is in a tight spot
Like most central banks, the BoJ was hoping that the Fed would do most of the heavy lifting when it comes to rate differentials.
Friday’s disappointing U.S employment report has thrown the ‘cat amongst the pigeons’ when it comes to U.S rate normalization policy.
The yen was expected to underperform with the potential of higher U.S rates – a competitive advantage for the export driven Asian economy.
However, the yen is trading within striking distance of its three-week high (¥106.53), aided by last week’s delayed sales tax-decision by PM Abe and a potential “no hike” Fed.
It’s only natural to expect verbal yen intervention rhetoric. Overnight, Vice-Finance Minister of International Affairs (currency chief) Asakawa reiterated that the Japanese Government was closely watching forex moves.
USD/JPY has managed to move off its Asian session lows by almost 100 pips to trade above ¥107.20 ahead of the open stateside.
5. Yellen’s speech today is next big event risk
Fed Chair Yellen is due to speak on the economic outlook in Philadelphia at the Philly World Affairs Council (Monday at 12:30 p.m. ET).
Given Friday’s abysmal employment report, investors more than ever want to hear what the Fed Chair has to say about U.S interest rate policy. Friday’s data would suggest a rate hike in June or July is looking more unlikely, but investors should remain cautious that Ms. Yellen might not rule this out.
What can the markets expect? The Fed may have little interest in allowing the markets to completely price out a summer rate hike. A plethora of recent Fed rhetoric supports this. Friday’s NFP is one benchmark, and not a trend; do not expect the Fed Chair to sound the alarm. More likely, Yellen will be expected to stick to the script that a rate hike “in coming months” – which could mean June, July or September – would be appropriate if economic developments unfold as the Fed expects.
Any different tone from Ms. Yellen’s earlier dovish statements should suite dollar bulls.