G10 FX Week Ahead: We Need To Talk About Deficits

10 and 20 us dollar bill

In a quiet week for events, FX markets might wake up and take note of the advanced release of the US April trade balance. This is expected to show a record $92bn deficit. Does the dollar need to cheapen? Elsewhere, while swings in commodity prices will remain in focus, the RBNZ might start to lean in favour of slower asset purchases, which could support NZD 

USD: Is it time to start focusing on the US trade deficit?



Week ahead bias Range next week 1 month target



Mildly Bearish 89.5000 - 90.5000 89.0000
  • DXY continues to slip and is less than 1% away from the lows of the year. That is quite remarkable given that US 10-year yields have risen 70bp and a number of Fed participants want to be talking tapering sooner rather than later. Yet the weakness in the dollar owes a large part to a core of the Fed unhurried about the need to withdraw stimulus and recovery stories elsewhere in the world. These core views are unlikely to be challenged in the week ahead. We say this because the US data calendar is relatively light. Here the focus will be on any possible upward revisions to 1Q21 GDP, but what may be some softer home sales and durable goods orders data. We will also see May’s advanced US trade balance. A $92bn deficit is expected. Yes that’s $92bn. That is quite a large hole to fill when the US exceptionalism of the 2018-2020 period is being challenged by the overseas recovery and US real rates remain very negative.
  • The week ahead will also see a variety of Fed speakers, who largely sit on the dovish end of the spectrum. Away from the US calendar, the market will keep close watch on volatility in crypto-currencies and tech stocks as well as developments in the Renmimbi. Any signs of independent Renminbi strength could lend weight to the notion that the PBOC wants a stronger currency to insulate against imported commodity price rises. This would be bearish for the dollar in our opinion.

EUR: EU summit in focus



Week ahead bias Range next week 1 month target



Mildly Bullish 1.2150 - 1.2310 1.2300
  • EUR/USD continues to hold up well and a key story here is probably the rotation into European asset markets as confidence in the recovery intensifies. In local currency terms, Eurostoxx has outperformed the S&P 500 and flow data suggests US investors are increasingly interested in Eurozone equity ETFs. Somewhat surprisingly the Treasury:Bund spread has also been narrowing since a wide of 200bp in late March – a move which could discourage some of the reverse yankee issuance which had been weighing on the EUR. For the week ahead, the highlight of the Eurozone data calendar will be May readings for consumer and business confidence. We’ll also see the May reading of the German Ifo, which risks come in a little softer based on the manufacturing PMIs.
  • The early part of the week will also see a special European Council meeting. Top of the agenda here is climate change and the EU’s plan to implement a net reduction of greenhouse gases of at least 55% by 2030. Increasing interest from the corporate treasury community in the hedging of carbon emission allowances will see much focus on what the EU does with allowances and whether the spot price will surpass the recent peak of EUR56/MT.
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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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