G10 FX Week Ahead: Toes To The Fire

The Fed's toes will be held to the fire this week as another round of potentially strong data in the US (ISM and payrolls) may add pressure to start discussing tapering. With some possible fresh weakness in Treasuries on the way, USD might find find some respite against the low-yielders. Central bank meetings in the UK and Australia should yield no surprise.

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  • April saw the dollar suffer an uninterrupted 3% sell-off. May is typically a better month for the dollar in seasonal terms and the coming week may provide an opportunity for a small corrective rally. At the top of the market’s agenda is the question over the Fed’s commitment to super-dovish policy amidst increasing signs of the US economy gaining momentum. The week should be full of strong US data releases including the April ISM and employment releases – the latter could see in excess of one million jobs added. Would this constitute substantial progress towards the Fed’s goals such that tapering should be discussed? 2Q was always going to be an uncomfortable quarter for Fed communications and hot US data in the week ahead pose upside risks to US rates and the dollar. 
  • It will also be a busy week in EM, where we will see rate meetings in both Brazil and Turkey. Assuming Brazil hikes 75bp and the Turkish central bank remains hawkish – both as expected – the EM environment should remain conducive for carry trades which can limit the dollar’s upside. This all assumes, however, that any fresh sell-off in US Treasuries remains orderly (UUP, TLT).

EUR: Better placed to withstand US yield rise

  • While entering a technical recession, 1Q21 Eurozone data was a little better than expected and many signals point to the region rebounding through 2Q. With headline inflation jumping back to 1.6% in April, like the Fed the ECB will face a communications challenge in 2Q. In the week ahead, the market will be looking for insights into the 10 June ECB meeting from a variety of ECB speakers, including the heavy-hitters of Lagarde, Lane and Schnabel. Of particular interest might be remarks from Philip Lane at an OMFIF event on Wednesday, where he’ll be talking about the monetary policy strategy review. Any convincing remarks about Average Inflation Targeting (AIT) could briefly weigh on the EUR – as the Fed’s AIT has weighed on the dollar.   
  • Other than that, the focus will be on the recent acceleration of the vaccine roll-outs and lockdowns being unwound – plus any progress on the EU Recovery Fund. The latter could be a positive for the EUR later this quarter if recovery funds do indeed start to be dispersed in July (FXE).

JPY: Time for a Japanese re-rating

  • USD/JPY remains beholden to the US Treasury story, which on paper means upside risk to USD/JPY in the week ahead. The common argument here is that Japanese investors are attracted by these higher yields and buy Treasuries and the dollar. But we think this argument is full of holes. In fact, USD hedging costs for Japanese investors have this week fallen to the cheapest levels since 2014 and surveys suggest there is very little Japanese appetite for buying unhedged Treasuries in the current market environment.
  • Instead we think the Asian growth story could see a little re-rating of the JPY – especially as the currencies of trading partners start to advance. Indeed, foreign buying of Japanese equities seems to be picking up – flows which are less likely to be hedged. The Japanese data calendar is very quiet this week and more interest will be had in the April trade data of key partners such as Korea – assessing whether export trends continue to strengthen despite disruption in the semi-conductor sector (FXY).
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Disclaimer: This publication has been prepared by the Economic and Financial Analysis Division of ING Bank N.V. (“ING”) solely for information purposes without regard to any ...

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