On the face of it, the macro data continues to look rather shaky with Singaporean exports falling almost 8% year on year in April. Still this is a marked improvement on the prior month which registered a nearly 16% decline. I tend to think of Singapore as a global bellwether because of its incredibly open economy, so perhaps we can take this as a sign of stabilisation of some sort. Certainly China looks to be on the mend, but the Empire Manufacturing data published yesterday afternoon from New York paints a picture of weak manufacturing in the United States. Still I’m not too concerned at the moment, stocks bounced quite nicely off the support zone I’ve been watching and with oil on the rise, the risk of systemic issues in the oil and gas sector loans market looks to be receding.

We also got a negative inflation surprise from the UK this morning, with inflation significantly less than forecast. But again, when you tie that in with the bounce in oil prices it would seem to me that there’s less of a risk of disinflation in the near future.

It’s no real surprise that the politics is turning ugly in Nigeria following the raising of the price cap for petrol last week. The government is being criticised by economic pundits and labour unions alike. Historically the unions have responded to fuel price hikes with strikes and this time is unlikely to be any different, we are talking about an effective two thirds hike in prices after all. Let’s leave aside the fact that a huge percentage of the Nigerian population – the non-urban poor – doesn’t benefit from subsidised petrol prices, government is also being attacked because they still refuse to adjust the official naira exchange rate and have required fuel importers to access an already stressed parallel market. The critics may have a point about the exchange rate, but it’s hard to see how a fiscally challenged government could maintain the subsidies. It’s just a pity that these critics haven’t been more constructive in their opposition. As they say, it’s easy to sit in an armchair and criticise. The critics are correct though, this will just increase the spread between the official rate and parallel markets. At some point this has to be reversed and it’s hard to see how that doesn’t involve an official devaluation.

For now consolidation seems to be the name of the game for dollar crosses, but it is still our view that the next short term trend should see a stronger greenback.

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Mixed news for the oil sector. Just as Goldman Sachs upgrades its short term outlook for oil, Moody’s downgraded Saudi Arabia’s credit rating. Supply disruptions in Nigeria coupled with robust Chinese demand have helped the recovery in prices which are now up 70% from the lows at the start of the year. Quite a remarkable turnaround, but too late for Saudi Arabia, where Moody’s is of the opinion that the fiscal situation and higher debt makes the kingdom more vulnerable in the longer term. I remain sceptical about how much further the rally in oil can go, but if the Chinese government has been able to stabilise their economy perhaps we will all need to re-assess not just the oil sector but the global economy’s prospects as well.

While all this has been going on the greenback is quietly strengthening across the board. Looking at the majors like EUR/USD, GBP/USD and USD/JPY the pattern is the same, for the last few days the pairs have shown signs of consolidation. These patterns are fairly typical, and normally end with a move consistent with the preceding trend – dollar up. This is what we’re expecting in the next few days. I would be surprised if we don’t see GBP/USD below 1.43, EUR/USD below 1.12 and USD/JPY above 110 (see below). We see a similar situation in a lot of emerging market dollar crosses as well.

It seems that the period of stability for the naira is well and truly over for now. Setting aside the recent supply disruptions which have pushed output down to a 20 year low (Chevron and Royal Dutch Shell have had to shut down production at a number of sites), the move last Wednesday,  which we reported, to end petrol shortages has had a negative short term impact on the naira. And it just got worse this morning. The naira has now weakened 11.4% over the last week! We believe this to be short term turbulence in the wake of what is a hugely significant and warranted policy shift. This is a move to eliminate subsidies and in time the market for refined products will start to clear more effectively, and we should no longer see queues for petrol in Africa’s biggest oil producer. This is the short term price that needs to be paid.

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Don’t look now, but the greenback is getting stronger. Since the beginning of May there’ve been signs of this. I believe in a recent blog we even mentioned that key levels were being approached in some of the major crosses that could be the optimal points for reversals back into trend. At the time, USD/JPY was the critical currency pair as it was right at the limit of where I thought it should get to, and it duly bounced and the dollar has been appreciating versus the Japanese yen since. I’m already thinking of that 105.55 level as a confirmed key support area now. Any move through that could well fatally damage my conviction in the dollar bull trend. In any case here are some of the interesting movers, you’ll note that the moves are quite decent. I’ve included gold for 2 reasons, (i) it’s not unusual to see gold weaken as the greenback strengthens, so this looks consistent with the thematic move, and (ii) if recent stock market moves were really of such concern, then perhaps gold’s use as a store of value should have aided it over this period, but there is no sense of negative risk sentiment in the air.

The Brexit debate is hotting up. Bank of England governor Carney was at it again, warning of the risks of leaving the EU. In his view this will be very bad for the UK economy, and the word is the IMF is going to come out with a statement soon supporting him. The Brexiter’s might rail at this as political interference, but let’s not kid ourselves, if he came out with analysis that it wouldn’t impact the UK economy they would be shouting it from the rooftops. All of this took centre stage and it’s easy to forget that Carney’s comments came after yesterday’s MPC vote, which remains unchanged. All 9 voted to hold. As we’ve observed many times before, there’s very little likelihood in a change of stance from the BoE for the foreseeable future. Don’t count on sterling going on an appreciation trend anytime soon.

Some hugely significant news from Nigeria. I’ll simply copy what I’ve been sent here:

“The Nigerian government will deregulate the domestic pump price of imported gasoline in a bid to encourage private marketing companies to import more, minister of state for petroleum Emmanuel Kachikwu said late Wednesday, as the country seeks to end months of crippling fuel shortage.

Kachikwu said on state television that the national fuel pricing regulatory body, the Petroleum Products Pricing Regulatory Agency, would announce Thursday a new price band not above Naira 145/liter ($0.74/liter), which fuel marketers would not be permitted to exceed.

“In order to increase and stabilize the supply of the product any Nigerian entity is now free to import the product, subject to existing quality specifications and other guidelines issued by regulatory agencies,” Kachikwu said.

The government previously maintained a regulated price of Naira 86.50/liter for gasoline, but private marketers said this was not enough to cover the cost of imports, which had already been hiked by tight access to foreign exchange as well as high bank charges.”

About time I say! I was actually expecting something like this from the Buhari administration just after the inauguration last year. But one thing that we’re learning about President Buhari is that he takes his time. There’s nothing wrong with a deliberative executive, as long as he’s trying to move the country in the right direction, he should be applauded for this. It has always been an embarrassment for the largest oil producer in Africa to be crippled by queues at petrol stations. I suspect this will eventually drastically reduce that phenomenon. The naira took a hit with fall of over 5% yesterday. This is a new dynamic that is likely to put consistent pressure on the Nigerian currency as new entrants into the refined products market scramble to buy dollars to make purchases. But that’s ok, in the longer term this will make it far more profitable for private firms to invest in refining capacity in Nigeria and this will be of benefit for the naira in the years to come.

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Stocks were weak yesterday probably because of poor updates from retailers like Macy’s and Gap which paint a worrying picture about the US consumer. The decline in prices was the worst we’ve seen in a month, but from a technical perspective there doesn’t seem to be much to worry about (see below). The S&P continues to trade above support, and the trend remains bullish.

If US consumers are anything like me, there might be a simple explanation for what on the face of it looks like falling consumption patterns. These days I buy everything I can online, and I can’t remember the last time I actually walked into a department store. The chart for Amazon tells the story, bricks and mortar are dying, this is the age of the internet retailer!

So why talk about stocks, when the focus of this blog is currencies? Stocks matter, because currencies are affected by risk sentiment and the general economic environment. If it was indeed the case that US consumers (the engine of global growth, don’t let anyone tell you different!), then that would have negative implications for the world economy. It still may be the case, but the data doesn’t yet justify such gloom. In fact the continued strong performance of oil (see below) is probably a boost to the global economy at this point. After all, it lessens the systemic risk in the oil & gas sector loans market, and doesn’t hurt export dependent developing economies. We’ve already talked about why the disposable income boost from lower energy costs has proved elusive.

What does this all mean? Don’t count on the Federal Reserve to wait too long, if the news about the US consumer isn’t as bad as feared. Furthermore if stocks do stay in a bullish trend the odds of some tightening in the US in a few months will only increase. It means that the odds of a stronger greenback look fairly decent from here. I certainly think that the next big move in EUR/USD looks to be to the downside, but over the next few weeks earnings volatility might keep any trends from taking root.

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The dollar has been in retreat at the start of this week. Yesterday, with European markets closed and liquidity light, it probably didn’t take much selling of the greenback to see major dollar crosses move significantly. These moves have seen major dollar crosses approach key technical levels. In my view, it’s more than  likely that we are seeing the necessary position cleansing before the dollar starts to rally again. It would make sense as those levels are where I am expecting the new bullish dollar trend to start from.

Here’s weekly chart for EUR/USD, note that equality for the corrective pattern which has been in force for over a year comes in at 1.1775….

And here’s the daily chart for cable (GBP/USD), where what looks like an A-B-C wave (iv) of 5 has seen the currency pair retrace almost exactly 61.8% of the preceding wave 3. From an Elliott Wave theory (EWT) standpoint the bearish GBP/USD trend is still intact and it would take a move above 1.5025 (EWT states that wave 4 cannot violate the territory of wave 1) to invalidate the downtrend.

And finally here, a weekly chart of USD/JPY which has reached a key support level. This is the cross that I’ll be keeping an eye on most because we really are right at the limit on this one. Any further declines and it threatens to call into question the whole bullish dollar rally.

Elsewhere the theme of slowing global growth is still impacting the macro-economy at large, and the Reserve Bank of Australia has reacted accordingly by cutting interest rates to a record low of 1.75%. Despite the stabilisation in China, the reality is that pressure in the domestic housing market and lower inflation has given the Australian central bank room to ease monetary conditions. We see a similar theme in the Eurozone where the European Commission (note.. not the ECB) has cut its forecasts for inflation in 2016 and 2017 blaming lower oil prices and a slower global economy. The IMF has also weighed in cutting the forecast for African growth in 2016 from 4.3% to 3% on the back of lower commodity prices. I’m not sure if that forecast change captures the bounce back in commodity prices, but to be honest, I consider the bounce temporary, there has been no change in the fundamentals that makes me believe it is sustainable. There is nothing that makes me want to retreat from a longer term bullish dollar view either…

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Two major central banks have made their decisions over the last 24 hours, the US Federal Reserve and the Bank of Japan. One was roughly as expected, the other, perhaps not so much. I should add that there were other central banks – New Zealand and Brazil – who also made decisions, but of course those have to be considered less impactful on the global economy. They all left rates unchanged, albeit the rationales for their decisions varied.

FOMC – The statement showed that policy makers are less concerned about the global economy and systemic risk than in their previous meeting. This is not that surprising given the rally in stocks since the last meeting (see the chart of the S&P since the March 15-16 meeting).

However they noted that recent data has shown a domestic economy in which growth has slowed a little and household spending has been lacklustre. There wasn’t any new statement elaborating on the balance of risks, whether external hazards or domestic positives, which might have shed some more light on their future decision making. It’s fair to say that the FOMC has left room to raise rates at future meetings, even June, but we would all be wise to keep a close eye on activity and inflation data between now and then. Another issue to be mindful of is the fact that the UK’s EU referendum will be close to the next scheduled FOMC meeting. If the outcome is uncertain it’s likely to influence Fed thinking in my view, Brexit could be a disaster for markets. In the immediate aftermath of the announcement dollar traded in the same range as it had before, but this morning it has weakened, which leads me on to the other major central bank announcement.

Bank of Japan – the rally in USD/JPY over the last few days in anticipation of the BoJ meeting was as a clear a sign as any that the market was expecting and even hoping for more stimulus in the face of an economy slipping back into deflation. We didn’t get it! Perhaps it might be too soon to call the whole Abenomics strategy into question, but some recent trends have been a blow to Prime Minister Abe’s growth programme. The BoJ looks to be relying on the recovering US economy, a stabilising Chinese economy boosting Japanese business confidence, he’s also betting that a stronger yen shouldn’t be as damaging for Japanese businesses as it might have been in the past. I have a lot of sympathy for the latter view, Japanese corporates have spent the last decade moving a huge chunk of their operations offshore, I’ve always suspected that the positive benefits of a stronger yen are at least a match for the negatives now. The only issue might be the negative impact of translation effects on earnings, and thus the Japanese stock markets. Anyway, the point is that the yen surged in the wake of the BoJ lack of action and other major currencies have gained ground on the dollar as well, although not to the same extent as the yen.

In terms of the bigger picture, I still look at the dollar as being in a corrective pattern, there’s ample room for more weakening, but the next major move in my view will see the greenback strengthen. It could be some time before that happens…

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Core durable goods orders that came out yesterday for the United States are an example of the dilemma facing the Federal Reserve Board later on today as they complete their FOMC meeting to determine where US interest rates go from here. They weren’t impressive, month on month for March there was a slight decline of -0,2% versus February when numbers had fallen by 1.3%, compare this to economist forecasts of growth of 0.5%. There is definitely a case for the FOMC to consider caution, and to be honest no one really expects a hike later on today. As I mentioned yesterday some economists do however expect the FOMC to give themselves room to hike in June, and they could well do, the more forward looking data like the PMI surveys are indicating improvements, even if the backward looking data has not. But that could be dependent on a visible improvement in the data.

This morning UK Q1 2016 GDP has just been published, it’s a slightly better than forecast, and the same 2.1% growth we saw for Q4 2015.  But the quarter on quarter number is actually weaker that the Q4 2015 one, albeit in line with expectations. The Chancellor, George Osborne, has already weighed in blaming Brexit fears for the quarterly weakening. He probably has a point. The pound recovered some of its early morning losses on the back of the announcement. At the moment I tend to pay little attention to UK economic data because it’s not really driving the currency. Brexit and the well known Bank of England stance that rates aren’t going up at all in the near future are the dominant themes for now. It wouldn’t surprise me if fears about Brexit start to recede as the government and the ‘Stay’ campaign ramps up, the big boys are starting to get involved and when you have heavyweights like the US President on your side, it provides a sort of a headwind. But we still have a long way to go, as the say…”a week is a long time in politics”.

The recovery in the oil price continues, personally I’ll only start to get excited if we see prices exceed the last reaction high which is at 54.30. Looking at that weekly chart below we are still very much in a bear trend, and a higher high is a prerequisite if the dominant trend is to be called into question. I remain sceptical as the fundamentals don’t really support a sustained lift in the oil price. The price recovery has at least reduced the risk of further systemic damage from indebted oil companies, but a recent report does suggest that the ratings agencies are behind the curve in terms of downgrades for oil dependent sovereigns.

Still, the recovery has been beneficial for economies like Nigeria, at least in so far as the wild depreciation we saw at the start of the year has stopped and we are seeing definite signs of stability. It’s worth pointing out that if the Nigerian government’s search for loans is successful they will use the dollars (or other currencies) they’ve borrowed to purchase naira, this could provide a short term boost and see USD/NGN lower at some point in the year, but don’t count on this being the start of something longer term. No doubt there is pent up demand for imported goods in Nigeria now, even though the emptier ports belie the fact. The 300 level is here to stay and we should get used to it!

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As we head into this week’s FOMC, the chief economic adviser at Allianz SE, Mohamed El-Erian, has suggested that the meeting will most likely set the scene for a June rate hike. Not everyone agrees though, with quite a few economic strategists suggesting that the data since the last FOMC meeting has shown evidence of weaker domestic growth and softer inflation. So why hike so quickly? On balance, I tend to side with the former view, not the latter. This is because I suspect that normalisation is still a key priority for Fed Chair Yellen and being able to achieve this with the lowest possible terminal rate level means that you hike more proactively. The bottom line is that disappointing though the data has been it hasn’t been terrible. Global risk sentiment has recovered strongly since the beginning of the year; Chinese data has stabilised and in some cases shown signs of improvement; and throughout it all the US labour market continues to grow at a solid pace. It wouldn’t take much for inflation pick up, and central banks hate having to chase inflation. The only problem is that there’s one thing central banks hate more than being behind the curve, having to admit they were wrong and reverse their policy trend. That’s the risk on the other side that some FOMC members fear… the doves will say that to hike too soon could result in having to make cuts if the global economy turns out to be much weaker than feared. Everyone remembers the ECB’s embarrassing retreat at the onset of the global financial crisis, and no one wants that.

So what does this all mean for currencies, and specifically the dollar? From the recent price action it’s clear that the market doesn’t think the Fed will hike this week, in fact it looks like long dollar positioning is being unwound in front of the announcement. There are other factors involved though, in the case of cable (GBP/USD) the market got very short sterling and looks to be in retreat now, and as I mentioned recently, USD/JPY has bounced in the face of the dual threats of a dovish FOMC and the BoJ meeting to follow. Looking at GBP/USD I’m not sure we go much higher than where we are. Perhaps we get up to 1.48, but the case for a weaker pound sterling remains with Brexit risk looming. From a technical standpoint we could be doing an ‘A-B-C’ higher, equality in the move takes GBP/USD up to 1.4680. It is clear from the weekly chart below that GBP/USD remains in a bear trend and we are currently experiencing a counter-trend move. We would need to see GBP/USD climb much higher than this to call that into question…

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This is a big week for data with the central banks of both US and Japan making interest rate decisions. As the Financial Times characterises it, you could think of it as yet another episode of the ongoing global currency wars, with a race to see which central bank can manage their currency down. Obviously it’s a zero sum game, as for one currency to weaken another needs to strengthen. It’s interesting to note that the FOMC will actually be on Wednesday with the BoJ following on Thursday morning, which should give the Japanese a chance to react to the decisions and statements made by FOMC officials. This becomes particularly relevant when Kuroda the BoJ governor recently pointed out that the Federal Reserve’s less hawkish stance this year might be part of the reason for the swift appreciation of the Japanese yen so far this year. No doubt the BoJ will be hoping that the more positive risk environment of the last few weeks will give the Federal Reserve the room to sound more upbeat about the US and global economies, and thus put interest rate rises back on the agenda. This would probably do as much to halt the collapse in USD/JPY than almost anything the BoJ will be able to do. I say this because explicit attempts to halt yen appreciation would not be politic given discussions between Japanese officials and their US counterparts in a recent meeting in Washington. Given Governor Kuroda’s ability to surprise market watchers it’s not surprising that this week will likely see a lot of volatility and perhaps it started on Friday’s (see chart below) big jump in USD/JPY. The fact that equities are just a bit softer at the start of this week is a further sign that some caution is creeping in before the big announcements.

Elsewhere EUR/USD has made lower lows and lower reaction highs which could be taken as a sign of an imminent decline, but I wouldn’t want to be the boy who cried wolf too often. At the very least the 1.1050 area needs to be breached before things get interesting in my view. For now the dollar looks to be in retreat, and only a significant change in FOMC opinions is likely to alter the short term trend in my view. I guess we’re all waiting to see what they say on Wednesday.

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Risk on is the name of the game, and the tone seems to be strengthening. Over the last year positive risk sentiment has meant a stronger dollar, and I still believe that should be the case, but right at this moment the dollar doesn’t seem to be getting much traction, even against the Brexit infected pound sterling. It’s easier to understand what’s going on with a currency like the Australian dollar which is up over 14% since the year-to-date lows in mid-January (see below), the recovery in commodities and risk assets generally is all the explanation you need for AUD/USD.

The question has to be… is further positive risk sentiment going to adversely impact the dollar? I rather suspect at some point the greenback will regain leadership, but only after the market comes to believe that the global recovery is sustainable and the world can cope with higher interest rates. Perhaps it will take a few months of solid data in the United States and no disastrous data out of China, before the market starts to assign higher probabilities to more rate hikes sooner, thus allowing the dollar to start appreciating again. The bottom line is that risk should continue to rally as long the Federal Reserve keeps pace with the assumptions the market is making. Should the time come when the FOMC indicates that they have a more aggressive hiking cycle planned than the market believes, then risk sentiment will turn negative again, but first the dollar will probably spike. For now this is more to do with recovering risky assets than the greenback.

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