Explosive start to next week as first round vote in France overshadows the market

An explosive start to next week as Sunday’s first round election vote in France overshadows the market. EUR looks pretty relaxed in the run up; complacency? GBP resilient firm despite weak spending numbers, but the CAD suffers another blow as inflation softens – CAD takes out 1.3500 again.

Looking into next week it is hard to see past Sunday’s key first round vote in the French elections, where there is much at stake for Europe and the single currency union as a whole.  Many are already discussing whether it is even feasible to generate an exit from the EUR as proposed by far-right contender Le Pen, but for the purposes of looking at the immediate price action ahead, poll-watching and the general suspense into the late weekend result is what drives trade for now. 

Many have pointed out the lack of risk premium in the EUR going into the event, evidenced by a EUR/USD rate still trading (just above) mid-range when considering the broader 1.0340-1.0900 limits since December of last year.  The prospective currency reactions have been widely covered, suffice it to say that Macron and Fillon will be positive, while Le Pen and Melenchon (less so the latter) will be distinctly negative. The various combinations leading to a second round vote suggest there will be further confusion to contend with on Sunday night, but if Le Pen fails to make it through, we have a relief rally on our hands, though perhaps not as aggressive as some anticipate.  1.0900 is still a major level on the topside, and while some are calling for 1.1000 in a market friendly result, we look to levels on the downside from 1.0400 to 1.0200 initially.  Parity is still an outside call for some, but not outside the realms of reality. 

From an economic perspective, lower levels against the USD still look justified when looking at the yield differentials, which should continue to widen before the ECB are comfortable with discussing tapering with firm intent.  Next Thursday’s ECB meeting has been completely overshadowed by Sunday’s global focus, but in light of recent comments from the governing council, there is little to suggest Draghi and Co are ready to communicate any material change in policy - especially so after the ‘overreaction’ to the early March (ECB) meeting.  Fresh inflation data towards the end of the week, but Monday’s German IFO will likely be overlooked.

A beneficiary of the some of the safe haven flow out of Europe has been the Pound, but much of the turnaround we saw this week was squarely on the decision by UK PM May to call a snap election.  With the polls highlighting Labour’s weakness (in their leadership), this was widely acknowledged to be a tactical move.   Nevertheless, the market assumes the PM will have a stronger hand going into the EU-UK negotiations, but we see little to suggest either a ‘hard’ or ‘soft’, as some ‘go for’ the latter. On the data front, the Mar retail sales figures came in much worse than expected on Friday, reflecting the worst Q1 performance since 2010.  Despite this, the initial hit on the Pound was largely contained, predominantly through the Cable rate as impulsive bids in the mid 1.2700’s repelled a number of waves of selling interest.  Should we break lower however, 1.2615-40 is now a key support zone given this week’s range break out.  EUR/GBP flow will also have been impacted to some degree given obvious near term drivers, but the cross rate is looking overstretched on the short term time frame, and ahead of some key support levels ahead of 0.8300.  Friday offers the only notable data release in the form of Q1 GDP, seen rising from 1.9% to 2.25, but this may be revised in light of the above.

Fading into the background of late has been the dampened rate hike expectations at the Fed, where a recent run of softer US data releases have taken the edge off the USD already on the wane. Given president Trump’s plans for fiscal stimulus have taken a firm knock emanating from the failure on the healthcare bill, tax reforms have also been pushed further out on the horizon and discarded completely in some quarters.  However, Treasury Sec Mnuchin still feels confident that reform can be brought forward, and this has provided some stability to Treasuries.  Little follow-through in USD/JPY however, where the pair continues to languish in a tight range around 1.0900 for now, but this is largely down to a lack of conviction as the cross rates have been driving spot trade for the most part. 107.00-108.00 continues to provide a support zone for dip buyers here, but there seems to be little on the horizon to instigate a fresh retest on 110.00.   Q1 growth is also the only noteworthy release, and is also due out on Friday.

The ECB is not the only central bank risk event ahead, as we have the BoJ meeting on Thursday.  In similar fashion however, we expect this to be another non-event, and this has been underlined by familiar comments from governor Kuroda that the accommodative stance remains firmly in place in the quest to reach its inflation target.  We will get more light on this the day after as we get CPI stats for March, alongside the Apr read for Tokyo. Industrial production and retail sales also due.

USD/CHF has been getting some attention since the dip below parity this week, but it will be EUR/CHF in the line of fire this weekend.  Given the perceived SNB presence in the market, it is no surprise to see many traders shying away from these pairings.  Out of Switzerland we get the Apr KoF leading indicators on Friday, but the March trade balance makes for interesting reading given the central bank’s concerns over CHF strength.

Notable weakness in the CAD looks set to continue as Canadian inflation continues to lag.  Whilst the GDP data since Q4 has been impressive (Feb due on Friday), alongside recent employment reports, there looks to be limited follow through in asset prices, and what is perhaps more worrying is the high level of household indebtedness.  As such, Canada may be in the same situation as the UK, but with wage growth softer and house prices (still) rampant, it is no surprise to see the BoC content with maintaining a low rate policy for the foreseeable future.  As such, upside traction for the CAD is unlikely, with the market still pressing (for) USD/CAD through 1.3500.  Strong interest to sell at these levels, but dip buying has been strong this week, with price action suggesting a test on the key 1.3600-75 area at some point.  Oil prices are having less of an impact these days, but with WTI contained by WTI45.00-55.00 for now, the correlation has been fading for some time now.

Finally, AUD and NZD trade has dwindled of late, with base metals dictating the former, and to the extent that it brushed off the dovish RBA minutes early on this week. Copper is a major benchmark for AUD, and with prices stuck in a range, so is the AUD.  The data slate is completely bare in Australia, but in NZ we have the March trade data to consider on Thursday.  This week’s inflation beat only had a brief positive impact on NZD/USD, as the sectoral gauge suggested more stable levels.  We also saw AUD/NZD testing down to the low 1.0600’s in response, but we saw strong buying at these levels to return the cross rate back into the mid 1.0700’s.  Spot NZD is back in a tight range around 0.7000, and along with the AUD just above 0.7500, will likely take its next lead from the USD.  Broader risk sentiment has also been influential in the past, but as we have seen across all major equity markets, there is a distinct sense of apathy in the air!

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