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As we are about to enter the last week of May, the markets are once again in turmoil. The tensions in the US-Sino relationships seem to be escalating once again and provide safe-haven flows for the market depending on the headlines. Hopes and headlines for vaccines tended to also provide considerable swings in the market’s mood. We could see the market’s hopes once again being fuelled, should news on vaccines appear. However, the reaction as such may not be so intense, as headlines for a number of possible vaccines have surfaced over the past days. On the monetary front we expect little action, yet statements in various days of the week from central bank officials, could create movement. A number of financial releases are scheduled for next week with the heavyweight being on Thursday and Friday. On Monday we get Germany’s detailed GDP growth rate for Q1 as well as the Ifo business climate for May. On Tuesday we get New Zealand’s trade data for April, Germany’s GfK consumer sentiment for June as well as the US consumer sentiment for May. On Thursday, we get Australia’s CapEx growth rate for Q1, Eurozone’s economic sentiment and Germany’s preliminary HICP rates for May, while from the US we get the durable goods orders rates for April, the 2nd estimate of the GDP rate for Q1 and latest initial jobless claims figure. On Friday, from Japan we get the industrial output for April, Germany’s retail sales for April, France’s and Eurozone’s preliminary HICP rates for May, the US consumption rate for April as well as Canada’s Q1 GDP rate.
USD – US-Sino relationships in the forefront
In the US political stage, the frictions in the US-Sino relationships seem to be on the forefront. After the US accusations against China for the pandemic, an old issue resurfaces, namely Hong Kong. New protests seem to be planned in Hong Kong, as China wants to enact a national security legislation, which some residents of Hong Kong fear will curtail their current freedom. US senators seem to prepare a bill to sanction Chinese officials for violating Hong Kong’s independence on a bipartisan line, which could escalate tensions further. We expect the situation to worsen as the antagonism between the two superpowers may intensify causing some safe haven flows for the USD. On the monetary front, the Fed Chair’s statements in the past week, provided three key take aways. The first would be that the bank rejects, at least currently negative interest rates, the second is that Powell tends to nurture the idea that more fiscal stimulus is required for the US economy, while the third is that difficult days lay ahead. Next week little action is expected, yet various Fed officials are scheduled to speak and could reach the headlines. Financial releases in the past days provided for substantial turbulence and next week we could see the USD being influenced by the release of the US consumer confidence for May on Tuesday. The durable goods orders rates for April, the 2nd estimate of the GDP rate for Q1 and the initial jobless claims figure come out on Thursday and on Friday the consumption rate for April.
EUR – Preliminary HICP rates in the epicenter
The common currency jumped on Monday, due to a common German Franco proposal for a €500 Billion recovery fund for Europe and proposed that the European Commission would be allowed to borrow money to finance it. The program is to offer grants to sectors and regions most affected by the pandemic and be repaid by the EU budget in the long term. The proposal, curently, seems to face resistance from fiscally strong countries such as the Netherlands and Austria, yet may still serve as the basis for a joint fiscal response of the EU. As for financial releases, May ‘s preliminary PMI’s may have supported the comments made by ECB officials that the Eurozone is bottoming out as the readings showed a rebound of economic activity. Yet the slow improvement of Germany’s manufacturing sector PMI indicator, tends to create worries as it may imply deeper, more structural problems for Germany’s economic engine. As for financial releases next week, we note on Monday, Germany’s detailed GDP rate for Q1 and the Ifo Business climate for May, while on Tuesday we get Germany’s GfK consumer Sentiment for June. On Thursday, we get Eurozone’s economic sentiment indicator and Germany’s preliminary HICP rate, both for May. On Friday, we get Germany’s retail sales for April, as well as France’s and Eurozone’s preliminary HICP rates for May. We expect the HICP rates to draw substantial attention, as deflationery pressures may threaten the Eurozone.
GBP – Remaining under pressure
The pound remained largely under pressure over the past days and any gains made seemed temporary. The weaker than expected inflation rates as well as the better than expected preliminary PMIs for May tended to provide some volatility for the pound. Media and analysts tend to mention that the pound may have remained under pressure as UK five-year government bond yields dropped into the negatives for the first time on Thursday. At the same time the market continues to price in the possibility of BoE lowering its rates into the negatives especially after BoE Governor Bailey’s refusal to rule out the idea, the previous days. We should note that Brexit uncertainty remains elevated and tends to deter investors. Brexit remains a pressing issue as officials from both the UK and the EU say that little progress has been made in the negotiations. The UK economic outlook may be darkening, as UK’s finance minister, Sunak, stated that he sees a recession in the U.K. on a scale ‘we have not seen’. Only a few financial releases are expected from the UK next week, with the release of the CBI distributive trades for May being on Tuesday and the nationwide house prices may be coming out on Friday, yet the exact date of release remains uncertain.
JPY – Safe haven flows and financial releases eyed
JPY tended to maintain a sideways motion against the USD in the past few days after weakening at the beginning of the week. Safe haven flows tended to influence the currency’s direction substantially and we would not be surprised to see this modus vivendi continuing in the next week. On the monetary front, BoJ in an extraordinary meeting today during the Asian session, initiated a new lending program worth ¥30 trillion to support small businesses which tend to struggle financially due to the coronavirus outbreak. However the bank refrained far from adding a major stimulus, at least for the time being. It should be noted that in the past days, the Japanese economy had a number of adverse financial data as the GDP rate confirmed the recession, as it hit the negatives for Q1 as well, exports showed a record contraction, the widest since 2009 and the CPI rates implied that it is on the verge of deflation, which tends to be a major issue. As for next week’s financial releases from Japan, we get e slew of data on Friday, including note the Tokyo’s CPI rates for May while also the unemployment rate, the preliminary industrial output growth rate as well as the retail sales growth rate, all for April.
CAD – Oil prices and GDP rates in focus
The CAD weakened against the USD and seems poised to reverse any gains made at the beginning of the week. CAD strengthened reaching a three-week high against the USD in the first days of the week, as the rise of oil prices tended to provide biddings for the Loonie. Also, the easing of lockdown measures in Ontario tended to create hopes for CAD traders. Canada’s most populous province and economic engine is expected to reopen its economy in three stages. Yet the drop of oil prices accompanied also by a substantial slowdown of Canada’s CPI rates weakened the CAD. Oil prices dropped suddenly during Friday’s Asian session, as China seems to be abandoning its GDP target, which in turn could weaken demand for the black gold, as per analysts. We expect oil prices to continue to affect substantially CAD’s direction, yet traders may also be keeping an eye out for the release of current account balance for Q1 on Thursday. Yet even more interest could be gathered for Q1’s GDP rate due out on Friday as well as the producer prices growth rate for April, the same day. On the monetary front, BoC Governor Stefan Poloz’s speech yesterday, was of substantial interest. The governor mentioned that “We are in an era where interest rates are probably going to stay low”, practically stating that the bank is to retain its accommodative stance for a long period ahead. We could see also his speech on Monday gathering substantial interest, before Poloz, leaves office on the 2nd of June.
