View update, GBP vulnerable, Canada business survey seals the deal, AUD/NZD may be a buy
View update
Since yesterday, one of our EUR/NZD stops was triggered (in profit), we remain long EUR/USD and EUR/NZD. Price action appears corrective to end the week after a strong run higher in EUR. Eurozone inflation data beat expectations, and strength more generally in the Eurozone economies continues to support EUR.
There is a risk of further consolidation, but we will stick to our long positions and current stops The topside for EUR is still ultimately limited by the ongoing ECB commitment to negative rates and QE. But it could be ready to break out of the range over recent years in anticipation of tapering next year and relative economic and political strength.
GBP had weak consumer confidence data, and much may hinge on its PMI data next week. The BoE needs the data to support the notion of a hike. GBP may be vulnerable after its recent rise.
NZD had a good end to the week, shrugging off struggling equities and rising US global yields, out-performing mixed Asian currencies. AUD, NZD, and CAD all joining stronger trends in European currencies, part of a shift in sentiment towards higher rates, led by BoC, BoE and ECB.
Rates have been rising in Australia and New Zealand, more than in the US in recent weeks. New Zealand ANZ business survey was strong this week. The market may be wondering if RBA and RBNZ will move in the same direction as BoC in rhetoric.
The RBA meeting next week will receive considerable focus.
AUD/NZD may be worth a buy, iron ore prices stronger, milk stable, some rise in AUD/NZD rate spread. After the fall back on Friday the cross is at mid-range. Data next week for Australia, preceding the RBA meeting includes house prices and building approvals, these have been weakest in Australian indicators, so perhaps see how they turn out. China PMI data on weekend also of interest.
Fresh developments
US PCE deflator core as expected, following the CPI lower to 1.4%y/y in May, a low since Dec-2015.
Uni of Mich Consumer sentiment revised up from 94.5 to 95.1 in June, down from 97.1 in May. Current conditions rose a bit from May and were revised up in June, essentially flat for the year around its high. Expectations were revised down and fell from May. Overall confidence remains relatively high. The long-term inflation expectations were revised down from 2.6 to 2.5, up from 2.4 in May, still trending lower gradually.
Eurozone inflation flash core rose in June from 0.9% to 1.1%, above 1.0% expected, appears to have stepped up since April from around 0.0/0.9 to 1.0/1.1%; exhibiting a gradual rising trend.
CPI core inflation %y/y (see pdf for chart)
German retail sales stronger than expected, unemployment change a bit weaker than expected.
French consumer spending stronger than expected in May, following its sharp rise in consumer confidence in June, reported on Wednesday.
Bank of Canada quarterly business survey stronger, future sales expectations up from 21 to 31, a high since Q3-2014. Future employment rose strongly to 58, a record high in the survey back to 1999. Investment intentions dipped a bit from +35 to +29, still solid, second highest since 2011.
Bank of Canada business survey (see pdf for chart)
Canada 2y rates up 3.7bp on Friday, US and Euro 2yr swap rates up 1bp, UK down 0.6bp. The probability of a BoC hike on 12 July up to 84% (from 76% on Thursday).
UK consumer confidence that came out in early Asia trading fell from -5 to -10; slipping to a low since the first month after the Brexit vote (July-2016), and the second lowest since Dec-2013.
The narrative from the BoE recently has been that business investment will pick up to offset the fall in consumer demand. The evidence isn’t looking great for consumer demand.
The UK Lloyds Business Barometer rose a bit, but it was down more sharply in May and is the weakest of the business surveys at this time. The BoE need the data to push them over the line to hike in August. The PMI surveys next week may be quite important for the GBP outlook.
After its recent rebound GBP may be vulnerable.
China government PMIs firmer on Friday, Caixin versions due Sunday and Tuesday. For what it’s worth? The China Satellite PMI was down significantly, diverging from the PMI.
(see pdf for chart)
Japan industrial production a bit weaker than expected, but still up 6.8%y/y in May, a new high since 2014.
Japan core inflation, ex-fresh food, and energy rose to 0.4%y/y in May, as expected, a high since the consumption tax implemented in 2014. However, the Tokyo data continues to slide in June.
Jobs to applicants ratio rose to a new high of 1.49, a high since the 1970s. However, the unemployment rate rose from 2.8% to 3.1%, still above the 2 to 3% levels in the 80s/early 90s. Nevertheless, the labour market looks tight, wages growth needs to be watched for. At this stage it’s there but stable and modest.