FX Daily Strategy: N America, May 8th
SEK dips on Riksbank
German production data supports EUR
JPY still struggling to show general strength
AUD may test upside, but break higher still looks unlikely at this stage
SEK dips on Riksbank
German production data supports EUR
JPY still struggling to show general strength
AUD may test upside, but break higher still looks unlikely at this stage
The Riksbank have cut rates as the majority expected, triggering a 0.5% rise in EUR/SEK, as there was a minority opinion seeing no change. The Riksbank indicated that he policy rate was expected to be cut twice more in H2, and while they say this is in line with the March forecast, the March forecast didn’t include a May cut, so it does look as if there has been a dovish shift. Nevertheless, front end yields have only fallen modestly, and the SEK’s decline has also been modest. EUR/SEK continues to look on the high side given current yield spreads, and we favour the downside from here with the ECB likely to produce similar cuts to the Riksbank this year.
While revisions mean that the March German industrial output numbers were much as expected, the 3m/3m trend now looks to be clearly improving, with Q1 managing nearly a 1% q/q rise. The EUR has firmed up slightly early in the session, which may partly be related to the data, although may also simply be a correction to the overnight decline. While more evidence of European recovery will be required for the EUR to advance, we would expect to see buying on any dips towards 1.07.
USD/JPY has seen a modest recovery from the declines seen last week, but we still see scope for losses from here. As it stands, solid equity market performance continues to limit the downside for EUR/JPY, with the correlation between equity risk premia and EUR/JPY still holding up. USD/JPY declines may therefore only materialise in the short run if we see EUR/USD gains, even though we see a lot more potential for JPY gains than EUR gains longer run.
After dipping in Asia time following the RBA meeting yesterday, AUD/USD pushed back above 0.66 in European hours, and we don’t see anything in the RBA language to prevent a retest of the resistance near 0.6650. Solid global equity performance would continue to favour AUD gains, but at this point yield spreads don’t suggest a successful break higher is likely. Further declines in US yields look necessary to underpin an extended AUD rally.