By Raiko Shareef
Friday saw the USD regain some ground, with quite sharp gains against GBP and NZD.
The Fed’s Williams and Mester, the first speakers out the gate following Wednesday’s FOMC decision, both indicated that a June rate hike remains on the table, while details of April’s ISM report were strong.
San Francisco Fed President John Williams told reporters after delivering a speech on Friday that to support a rate rise in the early summer would require the data between now and then to be good.
He said that while economic activity over the start of the year was disappointing, he had not yet changed his forecast for the year and that he could imagine that constellation of data coming in before June or the meeting right after that.
Consistent with Williams’ comments, Cleveland Fed President Loretta Mester said Friday that the Fed is getting close to the appropriate time to raise interest rates and all scheduled meetings, including June, are ‘on the table’. She explicitly highlighted the importance of the next two employment reports, the first of which is due at the end of this week.
This did seem to give some much-needed support to USD bulls, whose confidence has been flagging throughout April.
An encouraging ISM report will help hopes of a Q2 turnaround. While the April report did modestly miss expectations at a headline level, the new orders sub-index rose to its highest since December. Investors clearly chose to ignore the (separate) weak construction spending outturn for March. Appropriately, it is the Q2 data that is now getting the most attention.
GBP was the outright underperformer, partly on a significant undershoot in the UK PMI relative to expectations, and also with an eye on Thursday’s General Election. Polls suggest a hung parliament is the most likely outcome.
NZD’s position near the bottom of the G10 leader-board on Friday is a little curious, unless one is willing to ascribe it to a continued reverberation of Thursday’s RBNZ decision. Instead, we suspect the snap toward 0.75 was technically driven, after support at 0.7550 was broken by the positive US ISM report.
As such, NZD starts this week on the back foot, sitting almost exactly on the 50-day moving average.
The downside looks vulnerable, with 0.7480 eyed as the next support, ahead of 0.74. We revised higher our near-term NZD/USD forecasts on Friday, and now expect 0.74 by June (prev. 0.72). We continue to expect 0.70 by year-end.
It is an action-packed local and international calendar this week.
Locally, the highlights will be Wednesday’s dairy auction and the Q1 labour market report. Offshore, tomorrow’s RBA decision and Friday’s US employment reports will be significant drivers for NZD.
Ahead of Friday, there are plenty of Fed speakers. Notably, Fed Chair Yellen is making a panel appearance on Wednesday night.
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