USD (aka the 'good') staged a comeback at the start of the new week and the upcoming US data releases today could help it extend its gains. Ahead of US trade data CA economists are looking for a sharp contraction of the trade deficit in March to -USD33.6bn. This compares with -USD39.4bn expected by consensus and ca. -USD45bn implied by BEA's own assumption used for the calculation of the preliminary Q1 GDP print which was released last week and suggested that the US economy all but stalled at the start of the year. If confirmed, a March trade data outcome which is in line with CA expectations should fuel expectations that the weak Q1 GDP print will be revised significantly to the upside. In turn, the data could help support USD even if many investors may see it as dated and thus prefer to focus on more recent or forward looking data.
One such forward looking release will be the ISM non-manufacturing index for April. Ahead of the data, CA economists are loking for a pick up to 56.6 against market expectations of small decline. Investors will focus on the prices paid and employment component index looking for more evidence of growing price pressure and tightness in the labour markets following the weakness in Q1. Positive data surprises could help USD regain more ground today. It remains to be seen whether the gains will be sustained ahead of Friday's NFP, however. Indeed, CA economists are looking for softer payroll print than consensus as well as unchanged unemployment rate and still underwhelming earnings growth. We maintain our view that it would take more positive data surprises out of the US to see the USD rally back in full swing.
On the day, risk correlated currencies like AUD (aka the 'bad') appreciated, regardless of the RBA easing monetary policy further. This is mainly due to the notion that the central bank may have reached the lower end of its rate easing cycle. However, when it comes to the currency it must still be noted that it was indicated that a further depreciation is necessary in order to support the economy. This in turn suggests that any tightening of monetary conditions on the back of a stronger currency will still not be tolerated. As such we expect longterm currency downside risks to remain intact.
Elsewhere, the GBP (aka the 'ugly') could remain under pressure as the general election draws near. On the day, focus will be on the April construction PMI. Given that weaker construction was among the main culprits for the disappointing Q1 GDP result (despite its small weight), evidence that the weakness extended into Q2 could erode investors' demand for GBP. Tomorrow's services PMI need not change the pound sentiment dramatically.
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