Dollar Broadly Lower, Fed Powell and UK May to Watch This Week

Dollar weakens broadly as another week starts rather quietly. On the other hand, Aussie and Kiwi stage a strong come back. Canadian Dollar doesn’t follow as weighed down by concerns over the NAFTA talks that resumed this week. Euro is also mildly softer ahead of Italy election and outcome of German SPD vote on grand coalition this weekend. Technically, as noted before, dollar remains limited comfortably below near term resistance against others. It remains to be seen whether new Fed chair Jerome Powell’s testimony would make or break the greenback.

BoJ Kuroda dismissed review on policy framework

BoJ Governor Haruhiko Kuroda, recently reappointed for another five year term, dismissed the request by an opposition lawmaker to review the policy framework. Kuroda told the parliament that "it’s unfortunate that achievement of our price target has been delayed. But thanks to the effect of our powerful monetary easing, Japan’s economy is no longer in a state that can be described as deflation." He also pointed to recovery in the economy and said "things are proceeding smoothly". And therefore, "I don’t have any plan at this stage to conduct another comprehensive review."

Fed Powell’s testimony unlikely to deviate from the monetary policy report

The week ahead is very busy. New Fed chair Jerome Powell’s testimony will be a major focus. As a prelude, Fed released its semi annual Monetary Policy Report last Friday. The report noted that "with inflation having persistently run below the 2% longer-run objective the Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal". It appears that similar reference had not been revealed in previous FOMC statement or minutes.

The Fed also warned of the elevated valuation of asset prices. As suggested in the report, "valuation pressures continue to be elevated across a range of asset classes even after taking into account the current level of Treasury yields and the expectation that the reduction in corporate tax rates should generate an increase in after-tax earnings. Leverage in the nonfinancial business sector has remained high, and net issuance of risky debt has climbed in recent months".

Powell’s message in the testimony will likely not deviate much from the report regarding monetary policy. He’s expected to reiterate the gradual path of monetary policy normalization. Yet, his comments about the growth outlook in light of the tax reform plan would be closely watched.

UK PM May to make high profile speech on Brexit again

Another focus is UK Prime Minister Theresa May’s high profile speech on Brexit on Friday. May is expected to lay out an "ambitious" vision of future relationship with EU. That came after the Cabinet’s Brexit "war committee" has finally reached a consensus on the stance last week. May said that "the deal we negotiate with the EU must present an ambitious future for our great country".

And, she added " I will present the committee’s conclusions to an additional session of the full Cabinet before travelling to the North-east on Friday to give a speech setting out this Government’s vision of what our future economic partnership with the European Union should look like."

May also emphasized that "delivering the best Brexit is about our national future, part of the way we improve the lives of people all over the country. So I concluded the meeting by reminding the committee that the decisions we make now will shape this country for a generation."

It should be reminded that there are expectations of a BoE rate hike as early as during the meeting in May. But that’s heavily tied to the assume for an agreement with EU for the transition period after Brexit. Such expectation could change drastically depending on what markets would expect after PM May’s speech.

On the data front

Here are some highlights for the week ahead:

• Monday: UK BBA mortgage approvals; US new home sales
• Tuesday: German CPI; Eurozone M3; US durables, trade balance, wholesale inventories, house price indices, consumer confidence, Fed Powell’s testimony
• Wednesday: Japan industrial production, retail sales, housing starts; New Zealand business confidence; UK BRC shop price, Gfk consumer confidence; China PMIs; Swiss UBS consumption indicator, KOF economic barometer; German Gfk consumer sentiment; Eurozone CPI flash; Canada IPPI and RMPI; US GDP revision, Chicago PMI, pending home sales
• Thursday: New Zealand terms of trade; Japan capital spending, consumer confidence; China Caixin PMI; Swiss GDP, retail sales; Eurozone PMI manufacturing final, unemployment rate; UK PMI manufacturing, M4, mortgage approvals; UK ISM manufacturing, construction spending
• Friday: New Zealand building consents; Japan household spending, unemployment rate, monetary base, Tokyo CPI core; German retail sales, import prices; UK construction PMI; Eurozone PPI; Canada GDP

AUD/USD Daily Outlook

Daily Pivots: (S1) 0.7811; (P) 0.7829; (R1) 0.7853; More…

AUD/USD recovers today but it’s staying in range of 0.7758/7988. Intraday bias remains neutral at this point. On the upside, above 0.7988 will extend the rebound to retest 0.8135. On the downside, below 0.7758 will resume the fall from 0.8135 and target 0.7500 key near term support. At this point, there is no strong case for a range breakout yet and 0.7500/8135 could hold for a while.

In the bigger picture, medium term rebound from 0.6826 is seen as a corrective move. It might still extend higher but we’d expect strong resistance from 38.2% retracement of 1.1079 to 0.6826 at 0.8451 to limit upside to bring long term down trend resumption. On the downside, break of 0.7500 support will now be an important signal that such corrective rebound is completed.

Economic Indicators Update