Today, the key event will be the US employment report for April. The forecast is for NFP to have risen by 185k, a strong number that is consistent with further tightening in the labor market. The unemployment rate is forecast to have ticked up, while average hourly earnings are expected to have accelerated slightly in monthly terms. Despite a potential uptick in the unemployment rate, this looks like another solid report overall, which could amplify speculation regarding a June rate hike by the Fed. The probability for such action currently stands at 78% according to the Fed funds futures. Strong jobs data could drive that number higher and thereby, support the dollar.
Having said that though, in order for us to become as confident as the market that such action will indeed take place in June, we would first like to see clear signs that GDP growth and core inflationary pressures are regaining speed. Besides the data, comments by FOMC members will be critical to monitor too, as they usually provide a good indication of whether an action is imminent. In that respect, we will hear from both Chair Yellen and Vice Chair Fischer today.
USD/CAD traded higher yesterday and during the Asian morning today, it managed to overcome the resistance (now turned into support) barrier of 1.3760 (S1). The price structure on the 4-hour chart suggests a short-term uptrend and therefore, we would expect the rate to continue trading higher and perhaps target the 1.3850 (R1) hurdle. Despite expectations of a decent Canadian jobs report (see below), we believe that strong US employment data today could overshadow their Canadian counterparts and may prove the catalyst for the aforementioned rally. As for the bigger picture, on the 27th of April USD/CAD escaped from the sideways range it had been trading since early September, between the 1.3000 and 1.3600 key territories. This turns the medium-term outlook positive as well and increases the likelihood for the pair to continue trading north in the foreseeable future.
Second round of French elections in focus
On Sunday, French citizens will head to the polls once again, for the second and final round of their Presidential election. The two candidates are Emmanuel Macron and Marine Le Pen. Given the massive market reaction after the 1st round, when both the euro and European stock indices surged, we think that much of the “Frexit” risk has been already priced out of European assets. This is evident by the narrowing spread between the yields of French and German 10-year bonds.
As such, we think that the risks surrounding the euro’s reaction from the second round may be asymmetrical, and tilted to the downside. A win by Macron is already expected and thus, any further upside in EUR in this case may be relatively modest. On the other hand, a potential Le Pen victory would come as a major surprise for markets, and is likely to lead to significant downside in EUR.
EUR/JPY continued trading north yesterday, but the advance was stopped at 123.70 (R1) and then the rate slid somewhat. The short-term outlook of the pair is to the upside, but we see signs for a setback today due to profit taking ahead of Sunday’s election. We expect the rate to test 123.00 (S1) soon, where a clear dip could aim for the next support of 122.60 (S2). Now, in the aftermath of the election, a Macron victory could cause the pair to open with a positive gap above 123.70 (R1) and perhaps test the next resistance level at 124.10 (R2). On the other hand, if Le Pen wins, the pair may collapse back below the prior downside resistance line taken from the peak of the 15th of December. Sellers may take the opportunity to drive the battle towards the 120.50 territory, marked by the low of the 28th April.
As for the rest of today’s highlights:
During the European day, the economic calendar is very light. The only indicator that could attract some market attention is Sweden’s industrial production for March.
Besides the US jobs report, we get employment data for April from Canada as well. The forecast is for the unemployment rate to have held steady and for the net change in employment to have remained in positive territory. Even though this would be another piece of encouraging data, we doubt that it will have much effect on the BoC’s dovish stance. The Bank made it clear at its latest meeting that it will remain dovish until the uncertainties surrounding trade clear up. Therefore, even though CAD could gain somewhat on solid jobs data, any such reaction may remain short-lived.
Besides Fed Chair Janet Yellen and Vice Chair Stanley Fischer, we have one more speaker on the agenda: San Francisco Fed President John Williams.
USD/CAD
Support: 1.3760 (S1), 1.3700 (S2), 1.3650 (S3)
Resistance: 1.3850 (R1), 1.3910 (R2), 1.4000 (R3)
EUR/JPY
Support: 123.00 (S1), 122.60 (S2), 122.00 (S3)
Resistance: 123.70 (R1), 124.10 (R2), 124.65 (R3)
