Summary for 26 May 2016 

·       USD/JPY slumped when Tokyo participants started, perhaps prompted by a FT article re-running comments from Japan’s vice minister suggesting less chance of market intervention to weaken JPY.

·         USD mildly softens after the U.S. April services and composite PMI’s roll in slightly below expectations and softened to a three-month low. U.S. April durable goods and weekly jobless claims data are not likely to generate much currency movement.  More FOMC speakers are likely to talk up the prospects of near term tightening.

·         GBP hung on to yesterday’s gains ahead of today’s second estimate of Q1 UK GDP .

  ·        AUD/USD rallies after Q1 CAPEX survey beats expectations and indicates some further modest progress towards transition to non-mining investment.

·         NZD/USD slumped and AUD/NZD surged after Fonterra predicted a weaker than expected milk price for 2016/17 of $4.25/kg (consensus: $4.60).

USD Analysis

USD/JPY slumped at the start of the Tokyo open apparently because of an FT article.  In the FT article, Japan’s vice Finance minister suggested that FX intervention is less likely.  However, the key quote from the FT article was from 16 May: “Mr Asakawa defended Japan’s decision to keep currency intervention in its policy toolbox. “What we need to be conscious of is that excessive volatility and disorderly movements will have an adverse impact on economic stability,” he said.”  USD/JPY partly recovered its losses but remains below 110.0.

USD is unlikely to be affected much by today’s release of US April durable goods survey (1:30pm London).  FOMC participants Bullard (11.10am London) and Powell (5:15pm London) are the main highlights today and we expect them to make the case for a near term lift in the Funds rate.  However, tomorrow’s comments by Yellen will be more important for near term direction of the USD if she talks about monetary policy.

GBP/USD Analysis 

GBP hung on to yesterday’s gains in the Asian session as Brexit fears further recede.  The second estimate of Q1 UK GDP (9:30am London) should confirm the 0.4% (QoQ) initial estimate, the weakest quarter of growth since late 2012.

 CAD/USD Analysis 

CAD continued to move higher versus the USD and AUD. Higher crude oil future prices and the Bank of Canada’s decision to leave rates on hold supported CAD. As widely expected, the Bank of Canada (BoC) left its policy rate on hold yesterday at 0.50% and maintained a neutral stance. The BoC noted that “business investment and intentions remain disappointing” and reiterated that the risks to Canada’s inflation profile remain “roughly balanced”. However, the BoC warned that “household vulnerabilities have moved higher”, supporting the latest upward revision to Canadian interest rate expectations. In the short term, USD/CAD and AUD/CAD are vulnerable to a move lower towards 1.2835 (30-day MA) and 0.9200, respectively.  

AUD/USD Analysis

AUD/USD lifted back to yesterday’s high after the Q1 CAPEX survey beat expectations.  The expected plans for 2016/17 was $89.2bn (consensus: $87bn).  Therefore, the RBA’s hopes of a recovery in non-mining CAPEX is happening, but very slowly.  This report is mildly supportive for AUD.  For the RBA, it is more focused on low inflation and low growth in wages rather than spending indicators such as CAPEX.  Therefore, the CAPEX report will not make or break the case for a near term rate cut by the RBA.

 NZD/USD Analysis

NZD/USD slumped after Fonterra, New Zealand’s largest dairy exporter, released a weaker than expected milk price forecast for 2015/16 of $4.25/kg (consensus: $4.60/kg).  The ongoing stress in New Zealand dairy keeps the odds high that the RBNZ will cut its cash rate again.

The continued low advance payments means farmers’ cashflow will remain under considerable financial pressure into 2017.  A RBNZ report in March 2016 estimated that more than half of New Zealand dairy farmers need a $5.00/kg milk price to break-even.  Therefore, New Zealand dairy production is likely to decline over the season more than the 3% we expected off the back of an assumed $4.80 milk price.