FX Treads Water on Friday

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Market Drivers May 20, 2016

EU Current Account 27.3B vs. 19.6B
RBA Edwards – chatter over lower inflation premature
Nikkei 0.54% Dax 1.18%
Oil $49/bbl
Gold $1258/oz.

Europe and Asia:
EUR CA 27.3B vs. 19.6B

North America:
CAD Retail Sales 8:30
USD Existing Homes 10:00

It’s been an extremely quiet night of trade in the currency market with most pairs trapped in very narrow 30 pip ranges as FX participants were content to hold current levels ahead of the G-7 meeting this weekend in Japan.

With economic calendar nearly barren there was little newsflow to drive trade in either Asian or European sessions and whatever movement there was was created few scattered comments from officials. In Australia RBA board member Edwards stated that any talk of lower inflation target was “wildly premature” adding that RBA 2-3% range was always a flexible number. His comments helped push Aussie up to 7250 as market participants took the statement to mean that RBA is unlikely to ease further for the time being.

One of the key themes this month that has taken Aussie nearly 600 points off its highs was the surprisingly low inflation data, which many traders projected to mean that the RBA had much greater scope to lower rates this year. Mr. Edward’s comments however suggest that Australian central bank is content to keep rates where they are for the foreseeable future.

Yesterday’s AU labor numbers while hardly robust, still showed overall job gains on the headline number. Although all of the gains were from part time rather than full time work, the RBA clearly feels that final demand is not slow enough to warrant yet another rate hike this summer and Mr. Edwards may have been trying to manage expectations to that effect in his interview with the Wall Street Journal. In either case the Aussie appears to have found a modicum of support around the 7200 level and unless the market sees another round of dollar buying, the pair could consolidate at these levels for the next few days.

The commodity dollar on the other side of the world was not nearly as strong in today’s trade as the loonie lagged the other antipodeans despite a firmer bid in crude that has taken it above the $49/bbl level. The Canadian dollar has seen less and less benefit from rising oil prices as traders are focused on other factors. Specifically the market is becoming concerned about the aggressive expansion of deficit financing of Justin Trudeau’s government. Mr. Trudeau noted that $CAD30 Billion gap was not a hard and fast limit on spending and that has the market clearly concerned.

With no major eco releases on the US calendar save for Existing Homes at 1400 GMT, today’s Canadian Retail Sales could take center stage. The market anticipates a sharp decline of -0.6% versus 0.4% gains the month prior, but if the number prints anywhere north of -1.0% the loonie could quickly weaken further and could target the key 1.3200 resistance level as the day proceeds.

Boris Schlossberg
Managing Director

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