FX Daily Strategy: APAC, May 7th

Thursday sees mostly second tier data, with the usual US jobless claims numbers, German factory orders and UK construction PMI. There is also a Norges Bank monetary policy meeting, and speeches from several ECB council members, notably chief economist Lane, as well as Elderson and Schnabel. We also have local elections in the UK.

While it’s still quite a long time until the next ECB meeting on June 11, the noises from the ECB have been suggesting a willingness to hike, and the market is pricing in a hike as around a 70% chance. But given the volatility in the Middle East situation and the oil price, it’s hard to see how the market can price in a lot more than this more than a month away from the meeting. Nevertheless, we would expect the tone to be on the hawkish side and favour EUR gains, albeit modest. We would continue to favour gains against GBP more than other currencies, as EUR/GBP remains close to the bottom of its range for the year, and we would expect a more hawkish tone from the ECB than the BoE. The UK local elections are also likely to deliver substantial losses for the governing Labour party, and trigger renewed calls for a change of leadership. This still looks unlikely to happen anytime soon, but political uncertainty could add to downward pressure on the pound.

The NOK fell back on Wednesday in response to the dip in the oil price, but remains substantially higher on the year due to the impact of the US/Iran conflict, and NOK strength will help to limit Norwegian inflation and, for now at least, reduce the case for any monetary policy tightening. Even so, the market sees the Norges Bank decision on Thursday as a close call, pricing a hike as a 60% chance, although only 35% of forecasters expect a hike. The NOK still looks to represent good long term value here after underperforming for the last couple of years, particularly against the CHF and SEK. But on the day we may see further short term downside if Norges Bank leave rates unchanged, given the uncertain market pricing.

Of course, the fate of the NOK and most other currencies will depend as much on any news on the US/Iran talks as any monetary policy decisions. The last two days of strong risk sentiment on the back of optimism over a deal make the market look a little vulnerable to a sentiment shift. If that does occur, the JPY may benefit on the crosses, with apparent BoJ intervention on Wednesday underlining the lack of JPY downside from current levels.  Riskier currencies like the AUD and GBP may have the most downside against the JPY if we do see any turn in sentiment.

Datawise, German orders have been volatile in the last few months, so we doubt the market can glean much from them, while the US jobless claims data has continued to suggest a solid labour market, and it would take more than one poor number to affect that view, especially in a US employment report week, so the data seems unlikely to have much effect.