Weekly FX Wrap

16/06/2017
email: contact@talking-forex.com

Overview
Weekly FX Outlook: A quiet week on the data front, so focus on UK politics and Brexit, while
the USD may extend its recovery after the FOMC wrong-footed this week. RBNZ, Norges bank
and Banxico all due next week.

Before the start of the trading week ahead, we have the second round of the French legislative
elections, where Macrons En Marche is fully expected to win a majority, with centrists the
Modern party, in the National Assembly. As such, there has been, or will be little to detract
from the EUR on the political front, but looking at the lead USD rate, we expect the next week
will produce some sideways action as the greenback also recoups a little more ground post
FOMC.

The overly dovish USD tone going into the Fed meeting saw some extended levels generated
across the board, but notably so against the EUR which had already attempted a break above
the 1.1280-1.1305 area a number of times. The strongest push was on the back of the soft
inflation numbers and retail sales released just before the FOMC announcement, but the figure
level held firm to precede the subsequent pullback. Into the 1.1110-60 zone we note fresh
demand, eyeing an eventual signal that the ECB will start tapering their asset purchases.

This is on the premise that the gradual recovery in the Euro zone has fresh legs, and we get
more on this from the French, German and EU wide PMIs on Friday next week. All the indices
are well above the expansionary 50 mark, (only French manufacturing below 55.0), so any
modest deviations will be discounted.

From the US side, the PMIs from Markit are also due out on Friday, but in light of what has led
the latest USD recovery, perhaps Tuesdays heavy schedule of Fed speakers including Evans,
Rosengren, Fisher and Kaplan will impact in the meantime, with Mester speaking on Friday.
As a pure USD trade, USD/JPY levels inside 111.00-112.00 also suggest the market has tamed
its dovish view on the rate path. The normalisation process is seemingly back on track for
this year at least, but beyond 2017, the market is clearly sceptical as the mid curve remains
well off the highs seen a few months back. The key 10yr rate is only 6-7 bps off the 2017 lows
seen midweek. Alongside this, BoJ policy is well anchored in QQE mode, but Japanese
divestment flow is tepid at the present time with levels on Wall Street unnerving to say the
least.

On the latter point alone, EUR/JPY and CAD/JPY may garner a little more attention over
coming weeks, with the AUD and NZD not too far behind.

It is a big week for the UK, as Monday is when the Brexit talks are scheduled to begin. This is
also the earliest the Conservatives and the DUP could strike a deal, but given Theresa Mays
failed gamble to strengthen her mandate going into the negotiations, sentiment has warmed to
the notion that this spells a greater likelihood of a softer Brexit than PM May and minister
Davis would have opted for. Nevertheless, irrespective of the approach taken by the UK
contingent, there are plenty of twists and turns ahead, plenty of contentious sticking points -
in the 2 years ahead, never mind next week so it is no surprise to see GBP upside levels well
contained, despite the hawkish leanings within the MPC revealed this week.

Cable remains a clear sell into (or before) the 1.2900-1.3100 zone, but given outright valuation
levels (PPP), then we have to expect buyers coming in below 1.2400 if not a little higher.
Technically, 0.9000 looks the obvious target for EUR/GBP, bolstered by the uncertainty factor,
but given the drivers and prospective ranges for EUR/USD and Cable ahead, we expect tight
price action in the cross rate on the downside. 0.8625-50 and 0.8575-80 are levels worth
noting, but looking out of reach on the immediate horizon.

For the antipodeans, both the RBA and RBNZ feature in next weeks proceedings, with the
former delivering the minutes from the early June meeting, and offering little fresh insight as is
 Weekly FX Wrap

16/06/2017
email: contact@talking-forex.com

usually the case. Governor Lowe is down to speak on Monday, and we may get some
references to the employment report which has aided the AUD recovery along with the choppy
recovery in metals as well as China concerns slipping into the background for now.

Gains expected in AUD/NZD more so than AUD/USD, as the wheels have come off the NZD
recovery in a little. This may well prove temporary if the RBNZ backs up their unchanged rate
call by a steady-to-positive outlook on the economy, looking past the Q1 GDP miss which still
produced a 0.5% rise on the quarter (vs 0.7% consensus). Against this however, could be
some potential comments on the exchange rate, but this looks to be more of a concern if or
when we get to levels closer to 0.7500. The Fonterra dairy auctions are held this Tuesday
coming.

Technically, we are still wary of the proximity to the weekly rising trend line below 1.0400 in
the cross rate, with the move above 1.0500 this week showing limited traction. AUD/USD may
well press for 0.7700 at some point, but the USD side of the equation will have more of a say
now, as it will in NZD/USD, having fallen back off the 0.7320 highs in the aftermath of the Fed
rate call and statement this week.

In Canada, CPI is the major data release of note, due out on Friday and largely expected to see
little change as the exchange rate effects (CAD weakness) will be offset by the drop off in Oil
prices. The day before we get the April retail sales data, but in light of the change in BoC
rhetoric, all releases will have to disappoint by some way to derail rate hike expectations now
brought forward by the major domestic banks.

The fall in WTI and Brent will have less of an impact given the purported adjustment to prices
in Canada, and given USD40.00 is a major support point in Light Texas, we expect to see any
major push higher in USD/CAD to attract fresh selling interest ahead of the upper 1.3300s
initially, but pre-1.3600 will be very strong (resistance). Getting back there will take some
doing if the price action of the past week or so is anything to go by.

The Norges bank meet on Thursday, and while growth rates have been hit and miss in recent
quarters, and annualised rate has risen back to the mid 2.0%s. The central bank mood has
improved accordingly, but no major surprises expected here this time around.

Swedish growth rates are also translating into a rising annualised rate, a touch below that of
Norway, but this is enough to be pushing the key NOK/SEK rate back in the direction of parity,
though 1.0200-1.0100 is a major sticking point/area when looking at the weekly charts.

Finally, the Mexican rate decision is also due next week, with accelerating inflation levels
showing no signs of slowing and leaving the prospect of another 25bp move as a wildcard
call. In the past year, CPI has risen from just above 2.5% to over 6.0%, so the USD/MXN
losses over late have been a welcome development. Key support seen around 17.2000 on the
downside, so some way to go having broken under 18.0000 only this week.