FX Strategy Weekly By Lloyds TSB

Stronger than forecast employment data from Australia and Canada along with short covering in risk assets boosted the AUD, CAD, NZD and NOK, but doubts over momentum have not disappeared as markets square up to the first Market Outlook

Tactical view:

Turning point for the USD?

Stronger than forecast employment data from Australia and Canada along with short covering in risk assets boosted the AUD, CAD, NZD and NOK, but doubts over momentum have not disappeared as markets square up to the first reports of US Q2 company earnings. With market positioning still overwhelmingly short EUR, we look for bearish EUR trends eventually to be reasserted on profit taking ahead of July 23, release date of the bank stress tests. Correlation with risk assets remains elevated for higher yield and commodities currencies, but with the balance tipping in favour of a second rate hike by the Bank of Canada later this month, the CAD looks well placed to resume its upward move vs the AUD. The prospect of a 7th drop in the UK claimant count rate in June may neutralise this month’s rally in EUR/GBP. Greece will tap the capital markets on Tuesday.

• Recap

• A rally in global equities propelled the AUD to the top of the G10 ranking, helping the currency to log a 4.7% gain vs the JPY, a 4.4% gain vs GBP and a 4% profit vs the USD. GBP fell against all G10 peers, but losses were limited to 1.3% vs the EUR and 0.7% vs the USD. The weakness in sterling was partially attributed to the compression in UK/G10 yields. UK/EU 2y benchmark yields fell into negative territory for the first time since February. The unwinding of safe haven flows put the JPY at the bottom of the G10 table, with losses ranging between 5% vs the AUD to 0.4% vs GBP, despite the report of record JGB buying by China in May and a 0.5% upward revision by the IMF to Japan’s 2010 growth outlook.

• UK economic data came up short of expectations this week for most of the releases, except for the bullish report by the NIESR on Q2 GDP. The NIESR estimates that the economy expanded by 0.7% q/q in Q2, down from an upward revised 0.9% in Q1. The BoE left Bank rate and the APF unchanged at 0.50% and £200bln, respectively. The services PMI slipped to 54.4 in June from 55.4 in May, marking a 3rd drop in 4 months. The global trade deficit widened to £8.0bln in May, a 3-month high as imports rose 2.4% to £29.5bln, the highest since Jul-08. Industrial output rose a stronger than forecast 0.7% m/m in May, and PPI output price inflation slowed to 5.1% in June vs 5.7% in May (core up to 4.8%).

• A mixed week for UK rates but overall yields stayed within the tight recent ranges and close to the cycle lows observed since mid-May. 5y swaps finished the week at 2.44% and 10y yields dropped back to 3.32% following a very solid session on Friday post weaker PPI and trade data. The prospect of lower June CPI data next week could bring the prospect of new lows and a bull flattening of the 2y/10y curve. The 3mth Libor/Ois spread narrowed a fraction to 22.5bp. EUR libor/Ois also tightened to 27bp (-5bp). The 2020 gilt sale drew very solid demand and was covered 2.45 times (0.2bp tail).