FOREX News Today

European Outlook: Asian stock markets are mixed, with Japan outperforming and Nikkei and Topix posting solid gains. U.S. and U.K. stock futures are also moving higher, and oil prices are also higher, although the front end WTI future remains below USD 50 per barrel. The eyes of the world are on the U.K. today, although while the day of the U.K.’s EU referendum is finally here, polling stations won’t close until 21:00 GMT so the result won’t be known until the early hours of Friday. Brexit poll trackers suggest a very tight outcome that could either way, but it seems markets are running with bookmakers who are giving better odds for the “Bremain” camp. This makes a “Brexit” vote even more of a risk and while central banks have stressed that they stand ready to deal with any possible turbulence in markets, the longer term risks for the U.K., but also the rest of the EU are more difficult to predict. The data calendar focuses on preliminary PMI readings for the Eurozone, but will be overshadowed by the referendum datable. Meanwhile the ECB finally reinstated the waiver on Greek bonds once again last night, which means Greek banks will no longer have to rely on ELA funds.

Fed’s Yellen’s Testimony Day II: There were no fresh insights from yesterday’s testimony, which was largely centered on regulation and racial inequality issues rather than pure monetary policy. She remained cautiously optimistic on rising growth and inflation, but continued to note various headwinds too. The Fed is monitoring and assessing the recent loss of momentum in job growth and softness in business spending, as well as the weakness in productivity. On Brexit, the Fed is also monitoring and will act if necessary, but an emergency meeting has not been scheduled for Friday or Saturday. There’s been nothing in the two days of testimony, or last week’s FOMC to suggest the Fed will hike rates as soon as the July 26, 27 policy meeting. But if there are indications the recent slowdown in the economy and especially jobs has been an anomaly, we expect the Fed to tighten in September.

U.S. existing home sales rose 1.8% to a 5.530 mln in May: This was a third straight monthly gain, following April’s 1.3% increase to 5.430 mln (revised from 5.450 mln) and March’s 5.7% surge to 5.360 mln. And, it’s the fastest pace since February 2007. Single family sales were up 1.9%, with condo/coop sales rising 1.6%. The months’ supply of homes was steady at 4.7. It was as low as 3.9 in December. The median sales price climbed to a record high of $239,700 from $230,900 (revised down from $232,500), and is up 4.7% y/y.:

Canada retail sales grew 0.9% in April: As expected, after the revised 0.8% drop in March sales values (was -1.0%). The ex-autos sales aggregate expanded 1.3% in April, much better than projected (median +0.6%), after slipping a revised 0.1% in March (was -0.3%). Higher prices were the driver of nominal sales gains in April: total retail sales gained just 0.1% on a “real” (price adjusted) sales basis. But that is enough to not contradict our expectation for a modest growth resumption in April GDP. We expect April GDP to rise 0.1% after the 0.2% drop in March.

Main Macro Events Today

• UK EU Referendum Polling Day; One side likely to reach 50% by 04:00 GMT Friday 23rd – Official results expected between 06:00-08:00 GMT

• Eurozone Preliminary PMI’s No real change expected. French numbers, which continue to underperform, could improve slightly, but German readings continue to come off highs. This is expected to show the overall Eurozone manufacturing PMI falling to 51.5 (med 51.4) from 51.5 and the services reading steady at 53.2 (median same). Brexit concerns mean confidence indicators come with a wider error margin than usual and will in any case already been outdated, should the U.K. vote to leave the EU in today’s referendum.

European Outlook: Asian stock markets were mixed, with Japan underperforming amid Brexit jitters, with the Yen vulnerable to safe haven inflows. U.S. and U.K. stock futures are moving higher though and it seems markets are going with betting companies, which giver higher odds to a victory for the “Remain” camp than the polls. Bund and Gilt futures closed mixed yesterday, with Bunds outperforming, although the future already lost gains in after hour trade yesterday and with stock futures underpinned is likely to open lower. Today’s calendar only has Eurozone consumer confidence data, which we expect steady at -7.0 (median -7.1), leaving the focus fully on tomorrow’s vote on the U.K.

Fed’s Yellen’s Testimony: Fed Chair Yellen repeated the Fed will continue raising rates cautiously, in her prepared testimony before the Senate Banking Committee. She’s optimistic on further growth but noted there are still considerable uncertainties over the outlook. The Fed is monitoring the job market carefully to see whether the weakness in the May report was transitory, she said, and added it is important not to react to one or two reports (isn’t that what the FOMC did, however?). On the positive front, she said spending has picked up smartly while housing is recovering. But she cautioned that the Fed can’t dismiss the slow productivity growth. Brexit could have significant economic repercussions. Yellen cautioned the recent weakness in jobs is a loss of momentum, not an erosion in the labor market. She and the FOMC expect further improvement in the labor market in the coming year and look for other measures of unemployment to come down. And while the last couple of months of data were quite disappointing, it’s her hope and expectation that it is a temporary development. Other job metrics suggest improvement, including the unpublished LMCI numbers. She added though, that with the economy near full employment, job creation may naturally slow. The Fed will be monitoring the situation closely.

ECB’s Draghi’s Testimony: ECB’s Draghi leaves door open to act again saying that policy makers, “stand ready” if necessary. Draghi highlighted Brexit risks saying “in particular the ECB is ready for all contingencies following the U.K.’s EU referendum”. The Brexit risk aside, which would clearly mean all forecasts for Europe have to be rewritten, Draghi was clearly eager to keep the door to further action wide open and assure markets that the ECB hasn’t run out of tools yet, but there was no sign of the need to act again if the U.K. decides to stay.

BOJ Kuroda: “FX, stock markets sometimes move too much” this could easily be interpreted as the BOJ are preparing for intervention. Many analysts assumed USDJPY below 105.00 would trigger this move, no evidence that this is the case so far.   He also empathized that the deflationary mindset was deeply rooted in the Japanese mindset and with a note of irony also said that both fiscal and monetary policy do not always turn out as expected.

Main Macro Events Today

• Canada Retail Sales: Retail sales values are expected to rise 0.7% in April (median +0.8%) after the 1.0% drop in March. The report is due Wednesday. The ex-autos sales aggregate is seen expanding 0.6% in April (median same at +0.6%) after dipping 0.3% in March. Gasoline prices increased 8.9% in April after expanding 5.7% in March, according to the CPI . Hence we should see the gasoline station sales component exert a boost to total and ex-autos sales. But vehicle sales remained elevated though April, so we may see another positive performance from the vehicle component. The consumer has been quite resilient in so far in 2016. An as expected gain April retail sales that is accompanied by a rise in the “real” (price adjusted) sales basis would further underpin our expectation for a rebound in April GDP. We expect April GDP to rise 0.1% after the 0.2% drop in March.

•  Yellen Testimony:  Fed Chair Yellen’s Monetary Policy Report to Congress continues today as she concludes her testimony.

Janne Muta

Chief Market Analyst

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