The major forex pairs had a slow start this week, and then volatility kicked in thanks to some market surprises.
In particular, the New Zealand dollar made the biggest moves in a bearish fashion when the RBNZ’s policy decision became less hawkish than expected. The bulls were quick to jump out of their long positions when the central bank revealed that the rate hike cycle was likely to be nearing its peak.
Initially, dollar traders seemed unsure how to take the price outlook and the lack of progress in the US debt ceiling negotiations, but risk aversion eventually pushed the greenback higher towards the latter part of the week.
US dollar pairs
Overlaying the US dollar against major currencies Planned by TV
The greenback was stuck in ranges early in the week, as traders were likely preparing for the release of the May FOMC meeting minutes and any important updates from the debt ceiling talks.
The bulls barely budged even after a few Fed officials expressed openness to tightening last June, especially after Powell suggested last Friday that a pause could be on the table next month.
Very soon, all the uncertainty of a potential US government default tipped the scales in favor of the safe-haven dollar, as risk-off inflows took over midweek due to negative debt-ceiling deal developments.
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FOMC official Bullard says he sees “two more (tightening) steps” this year while Kashkari says rates “should go north to 6%.”
The US Flash Services PMI improved from 53.6 to 55.1 to indicate faster growth for the industry in May.
US new home sales rose from 656K in March to 683K in April from 665K, reflecting the ongoing recovery in the housing market.
US Preliminary GDP for the first quarter was upgraded from 1.1% to 1.3% instead of flat as expected and the price index was revised higher from 4.0% to 4.2% qoq
There were reports on Friday that Biden and McCarthy were “closing” a US debt ceiling deal
US April core PCE: +0.4% mom (+0.3% mom expected) vs +0.3% mom prior; +4.7% p.a. vs. 4.5% p.a. expected
US Durable Goods Orders in April: +1.1% m/m (-1.1% m/m/3.3% m prior; Core Durable Goods Orders came in line with expectations at -0.2% m/m vs. +0.3% m/m prior
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Over the weekend, a White House official said debt-ceiling negotiations would resume early this week, though House Speaker McCarthy said the talks had “slipped backwards” in Biden’s absence.
The US Manufacturing PMI fell from 50.2 to 48.5 to reverse contraction in May versus an expected drop to 50.0
The US Richmond manufacturing index fell from -10 to -15 indicating a deterioration in conditions in May rather than an expected improvement to -8
Minutes of the FOMC meeting showed that members were “unsure” about how much tightening might be needed, with “many” committee members believing it was time to pause.
Fitch’s credit rating put the US on “negative watch” due to the debt ceiling impasse
US Consumer Confidence for May: 59.2 vs. 63.5 previously
euro pairs
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Economic data from the Eurozone was mixed, with PMI readings from major economies giving mixed signals about the performance of the manufacturing and service industries.
There were some noticeable weaknesses in Germany, however, with consumer and business sentiment indicators still pointing to deteriorating conditions. This did not help in a negative revision of the country’s GDP reading for the first quarter to put the economy into a technical recession.
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French Rapid Manufacturing PMI improved from 45.6 to 46.1 as expected in May to reflect a slower contraction
German Flash Services PMI rose from 56.0 to 57.8 vs. 55.0 expected to indicate stronger expansion
German Consumer Confidence rose from -25.8 to -24.2, marking the strongest level since April 2022 and the eighth consecutive increase thanks to higher wage expectations.
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German Manufacturing PMI for May fell from an improved 44.5 to 42.2 vs. 44.9 expected
The French Flash Services PMI fell from 54.6 to 52.8 versus the 54.0 consensus.
Germany’s Ifo Business Climate fell from 93.6 to 91.7 in May vs. 93.0 expected, indicating worsening economic conditions.
German GDP for the first quarter of 2023 was revised from 0.0% to -0.3%, after the fourth quarter’s decline of 0.5%.
Sterling pairs
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The data was mostly downbeat for the UK economy, with any upward surprises in inflation numbers being weighed against the potential for a wage price spiral.
Even BoE Governor Bailey himself has expressed concerns about sticky price pressures as this could potentially force the central bank to raise interest rates again at the expense of economic growth.
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UK Rightmove’s House Price Index shows a 1.8% month-over-month rise in house prices in May, reflecting increased confidence in the market, after a previous rise of 0.2%.
UK core CPI fell from 10.1% to 8.7% y/y in April versus the figure estimated at 8.2% to reflect stubborn inflationary pressures, core CPI rose from 6.2% to 6.8% rather than flat.
UK April Retail Sales: +0.5% MoM (+0.3% MoM expected / -1.2% MoM); Core Retail Sales came in at +0.8%m/m (+0.5%m/m expected / -1.4%m/m
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UK May Manufacturing PMI fell from 47.8 upgraded to 46.9 vs 47.9 estimate Flash Services PMI fell from a revised 55.9 reading to 55.1 vs 55.5 expected to indicate slower growth
UK producer input prices fell 0.3% m/m in April versus an expected rise of 0.1%, and output prices held flat rather than showing a gain of 0.2%.
Bank of England Governor Bailey has expressed concern about “viscous” inflation amid a tight labor market, but still denies that the UK is in a spiral of wage and wage prices.
Swiss Franc pairs
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There are no economic updates or news from Switzerland on Friday. CHF moves were mainly driven by cross currency flows and general risk sentiment.
AUD pairs
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Ongoing concerns about the recovery of the Chinese economy, mostly weaker-than-expected Australian economic numbers, and risk-off flows pushed the high-yielding Australian dollar south in the latter half of the week.
PMI readings and lower consumer spending suggest that RBA tightening is already bearing fruit, which could prompt Australian traders to reaffirm expectations that policymakers will remain in their hands for a while.
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Australia’s manufacturing PMI was unchanged at 48.0 in May, and the flash services PMI fell from an upgraded 53.7 reading to 51.8 to reflect slowing industry expansion.
Australian retail sales fell flat in April instead of posting an estimated 0.3% monthly gain, after a previous gain of 0.4%.
China’s leading CB index rose 0.6% month-on-month in April, after the previous figure was raised by 0.3%.
CAD pairs
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There wasn’t much on the agenda for the Canadian economy this week, which left the Canadian dollar to take directional cues from crude oil prices and overall market sentiment. Unfortunately for the Canadian dollar, risk aversion kicked in as the week went on.
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The Energy Information Administration (EIA) Crude Oil Inventories revealed a surprise drawdown in inventories of 12.5 million barrels, after consecutive weeks of sharp gains.
Canadian Wholesale Sales for April: +1.6%m/m (expect -0.4%m/m) vs -0.1%m/m
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Canadian corporate earnings fell 5.6% on a quarterly basis in the first quarter, erasing part of the previous 7.3% increase.
NZD Pairs
NZD overlay against major currencies Planned by TV
The New Zealand dollar fell sharply across the board when the Reserve Bank of New Zealand announced its policy decision in the middle of the week.
Even though the central bank still raised interest rates by 0.25% as expected, officials have thrown a bombshell into the markets by suggesting that interest rates have peaked and they in fact have a split vote for tightening this month.
The accompanying statement noted that global growth remains weak while inflationary pressures are easing. Domestically, they also note that companies are reporting slower demand conditions.
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New Zealand headline retail sales fell 1.4% in the first quarter of 2023 versus an expected rise of 0.2%, the previous quarter’s reading was revised down from -0.6% to -1.0%
The RBNZ raised interest rates by 0.25% as expected from 5.25% to 5.50% but indicated the possibility of a halt soon, as policymakers had a split decision to tighten.
Japanese yen pairs
Overlaying the Japanese Yen against major currencies Planned by TV
Yen crosses saw a mixed path, with lower-yielding currencies managing to squeeze some gains against higher-yielding currencies thanks to risk aversion. However, it ended up on a much weaker footing against the US dollar in the safe haven race.
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Japan’s Manufacturing PMI for May improved from 49.5 to 50.8 to indicate a shift from deflation to manufacturing growth
The BoJ’s core CPI rose from 2.9% to 3.0% y/y in April versus an expected decline to 2.8%, confirming the BoJ’s views on improving inflation.
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Japan’s core machinery orders fell 3.9% month-on-month in March, posting a sequential decline after a previous decline of 4.5%.
Tokyo core CPI fell from 3.5% to 3.2% y/y in May versus an expected decline to 3.4%
