In a quiet week for events, FX markets might wake up and take note of the advanced release of the US April trade balance. This is expected to show a record $92bn deficit. Does the dollar need to cheapen? Elsewhere, while swings in commodity prices will remain in focus, the RBNZ might start to lean in favor of slower asset purchases, which could support NZD
USD: Is it time to focus on trade deficit?
Dollar Index
Week Ahead Bias: Mildly Bearish
Range this week: 89.50-90.55
1 month target: 89.00
The week ahead will also see a variety of Fed speakers, who largely sit on the dovish end of the spectrum. Away from the US calendar, the market will keep close watch on volatility in crypto-currencies and tech stocks as well as developments in the Renmimbi. Any signs of independent Renminbi strength could lend weight to the notion that the PBOC wants a stronger currency to insulate against imported commodity price rises. This would be bearish for the dollar in our opinion.
EUR: EU summit in focus
EURUSD
Week ahead Bias: Mildly Bullish
Range Next week: 1.2150-1.2310
1 Month Target: 1.2300
The early part of the week will also see a special European Council meeting. Top of the agenda here is climate change and the EU’s plan to implement a net reduction of greenhouse gases of at least 55% by 2030. Increasing interest from the corporate treasury community in the hedging of carbon emission allowances will see much focus on what the EU does with allowances and whether the spot price will surpass the recent peak of EUR56/MT.
JPY: Time for a Japanese re-rating
USDJPY
Week Ahead Bias: Neutral
Range Next Week: 108.35-109.50
1 Month Target: 108.00
US Treasury yields have stalled around the 1.60/65% area and there does not seem a clear catalyst in the week ahead as to what will drive them higher. This has taken some of the steam out of the USD/JPY rally. And indeed if any currency pair showed a hinted of reacting to last week’s crypto-crash – it was USD/JPY. Let’s see whether the dollar starts to take any notice of the US trade deficit this coming week – if so USD/JPY might start to soften were a risk premium start to be priced into the dollar.
GBP: The BoE to matter more for sterling than the Scottish elections
GBPUSD
Week Ahead Bias: Mildly Bullish
Range Next week: 1.4010-1.4380
1 Month Target: 1.4400
GBP/USD managed to shake off the recent USD rebound quite well and in line with the other European FX it now continues grinding higher. The strong UK May PMIs have underlined the optimistic case for the UK economic outlook and it is a clear tailwind for GBP. Although domestic data are unlikely to provide much boost to GBP next week, as long as the soft USD environment remains in place, GBP/USD is likely to breach the multi-year high of 1.4237 quite soon and head towards the 1.44, in line with our 1-month forecast.
AUD: FX market not too worried about iron ore, for now
AUDUSD
Week Ahead Bias: Mildly Bullish
Range Next week: 0.7700-0.7830
1 Month Target: 0.7800
On the commodity side, iron ore showed signs of recovery at the start of the week but then followed other commodities lower and broke decisively below 180 USD/Mt. It is still trading at very high levels compared to historical standards, although markets will remain highly focussed on any signs the slump in prices has further to go. For AUD, this remains (along with any other developments in the Aussie-China trade relationships) the main short-term downside risk.
CAD: Flirting with 1.20
USDCAD
Week Ahead Bias: Neutral
Range Next week: 1.1980-1.2100
1 Month Target: 1.2000
Next week will be very quiet data-wise and there are no central bank speakers scheduled. External factors should therefore drive the large majority of CAD moves, and leave the loonie more vulnerable to potential unwelcome swings in commodity prices. USD/CAD is very close to the key 1.2000 support, which may well be heavily tested in a risk-on environment next week .
CHF: Is ECB tapering playing a role here?
EURCHF
Week Ahead: Mildly Bullish
Range Next Week: 1.0930-1.1030
1 Month Target: 1.1100
We prefer EUR/CHF to trade back to 1.11 over coming weeks as confidence grows in the global recovery and EUR/USD stays supported. As a core view, we expect the Swiss National Bank to position itself substantially behind the ECB when it comes to policy normalization – a key factor that should drive EUR/CHF higher multi-quarter.
SOURCES: ING