3 rate decisions, GDP & earnings marks busy FX week

For most of the major currencies and USD/JPY in particular, consolidation was the primary theme this week. The trading range for USD/JPY was less than 80 pips and, on most days, less than 50. February, March and early April was marked by thousand point swings in stocks but as these moves subsided, trading ranges in FX narrowed. But volatility should return in the week ahead with three central bank rate decisions, first quarter GDP reports from the US and Eurozone, Chinese PMIs and a very busy earnings calendar. Many big names like Apple, Amazon, Google, Facebook, Microsoft, Exxon, Shell, Pepsi, Starbucks, General Electric and 3M will release their latest results along with guidance. 

Earnings are expected to be ugly across the board and very few companies will have anything positive to say about the rest of the year. First quarter GDP growth for the Eurozone should be very weak as the first lockdowns in Europe began in late February. The US numbers on the other hand may not be so bad because most lockdowns did not begin until the second week of March, the very end of the first quarter. However it won’t take much to worry investors because with most of the US and Eurozone expected to remain in lockdown or modified lockdown through the end of May, second quarter growth will be even weaker. For all of these reasons, we expect stocks to fall next week, leading to risk aversion and gains for the Japanese yen and Swiss Franc. The US dollar could also catch a safe haven bid but USD/JPY in particular is vulnerable to a deeper slide below 107.00.

Considering that soft data and weak earnings is a given, the main uncertainty in the week ahead is what central banks will do. The week kicks off with a meeting by the Bank of Japan. There have been reports of 2 potential announcements – a shorter 1 day meeting and unlimited bond buying. The first has no real impact on the market but the second could send the Japanese Yen sharply lower. According to the Nikkei, the BoJ will discuss shifting to unlimited bond purchases in response to a deepening economic slump and increasing its purchases of commercial paper and corporate bonds.  If the debate doesn’t yield an official announcement, USD/JPY will fall but if the BoJ makes unlimited bond buys official, we will see a sharp rally that can take the pair well above 108.   After that, the focus for USD/JPY turns to Q1 GDP and FOMC which we’ll discuss later this week. 

As reported by our colleague Boris Schlossberg, Europe is a mess after European leaders failed to reach an agreement to provide comprehensive economic relief for the Eurozone. Data is weak with business confidence dropping to a historic low but unlike ZEW, the expectations component of the report did not improve. Yet the euro recovered earlier losses to end the day in positive territory. The single currency shook off a lot of bad news this week but the path of least resistance is still lower ahead of next week’s Eurozone GDP report. Growth across the region will be very weak leading everyone to wonder if the ECB will boost stimulus on Thursday. ECB President Lagarde believes the economy could shrink as much as 15% this year.  Unfortunately they are not expected to do more than broaden the types of collateral they accept to include junk bonds, which would pave the way for ongoing purchases of Italian debt.

Meanwhile the commodity currencies with less data on the calendar could outperform. Oil has put in a bottom and the Canadian GDP numbers that are due next week are for February. For the Australian and New Zealand dollars, Chinese PMIs will be the main focus as Australian inflation data has little impact on the currency. Australia and New Zealand will begin reopening their economies which could also help their currencies.