US data to take centre stage
The FOMC meeting minutes that released last week has cemented expectations for a rate hike 14th June. While second estimate for 1Q GDP growth came in higher at 1.2%, the number remains subdued. Incoming soft data (especially disappointing inflation data) has lower our expectations for quicker economic momentum.
This week’s inflations and labour data, and most importantly wage growth, will be key in pricing the Fed next moves. However, the last two consumer price inflation reports highlighted a persistent weakness in core inflationary pressure. This lack of price growth may put the Federal Reserve back on the sidelines, forcing Janet Yellen to slowdown the ongoing tightening cycle. April’s PCE deflator is due for release on Tuesday and is expected to ease further to 1.5%y/y, down from 1.6% a month earlier. A weaker reading could seriously jeopardize the pace of rate normalization beyond the June meeting.
Draghi speaks before European Parliament
The ECB 8th June meeting has become a critical event. With EU economic data continuing to outperform and French legislative elections further removing political risk, the ECB has additional freedom to adjust policy. Traders are listening for the slightest less dovish monetary guidance language from Draghi and the committee. German Chancellor Merkel’s recent complaining that the euro is “too weak because of ECB policy’ has publicly increased German dissatisfaction with inflation levels. While it’s significantly too early for actions, we could get a shifting of forward guidance by removing the bias for lower interest rates or additional QE. This shift would be significantly bullish for the single currency.
EUR/USD was moving sideways at around 1.1170 this morning. The economic agenda is very light today; however Mario Draghi’s speech before the European Parliament may trigger some volatile moves later this afternoon.
Political jitters drive ZAR
Anyone that that traded ZAR for an extended period of time should be numb to political and social instability. While the headlines of No Confidence vote against Zuma might have made splash news, we suspect most traders will thinking around the event risk. In our view the current political instability is a binary event both ending with higher ZAR. Should Zuma get impeached, a new and potentially better president will be elected, ZAR positive. If Zuma stay in power, then its business as usual and low volatility and higher interest rates environment will drive speculators back into ZAR.
This morning, USD/ZAR was up 0.35% to 12.9250 as Jacob Zuma apparently survived an attack from ANC’s members to remove him.
