The first quarter has come to an end and it was a tough one for the U.S. dollar. Even a rate hike by the Federal Reserve failed to stem the slide in the greenback, which lost approximately 5% of its value against the Japanese Yen and Australian dollar. The lack of urgency among U.S. policymakers to follow up the March hike in June was the main cause of the weakness but the failed health care bill, tax reform uncertainty and mixed data also contributed to the move. On Friday we learned that personal income and spending growth slowed in the month of February with inflationary pressures easing according to core PCE. Manufacturing activity in the Chicago region accelerated which along with healthier data Monday to Thursday helped USD/JPY end the week higher. This included stronger GDP growth, narrower trade deficit and a sharp rise in the Conference Board’s consumer sentiment index. Its also worth noting that the greenback managed to shrug off a report that President Trump is studying ways to “penalize currency manipulators” as part of his goal to fight unfair trade. These measures would be aimed at pressuring other countries to strengthen the value of their currencies at the expense of the U.S. dollar.
Looking ahead USDJPY has resistance at 112 and support at 111. It will be a big week for the U.S. dollar with ISM reports, minutes from the most recent FOMC meeting and nonfarm payrolls scheduled for release. If the minutes confirm that the Fed is in no rush to raise interest rates again, the dollar could retreat but if they contain a general tone of optimism, we could see 113 in USD/JPY. With that in mind, NFPs is the most important piece of data to watch because economists are looking for slower job growth. If they are right, it could be a nail in the coffin for the dollar, leading to lower trading in the next few weeks.
The British government invoked Article 50 of the Lisbon Treaty, the E.U. responded and sterling did not experience an ugly demise. Instead, U.K. financial markets acted quite orderly with GBP/USD ending the week within 50 pips of where it started. There were intraweek swings but given the historical significance of this week’s developments, the swings could have been far greater. We knew this day would come but its inevitability does not minimize its significance, the U.K. is leaving the European Union and investors, businesses and individuals are bracing for the fall-out. So far, the pain has been minimal with GBP/USD recovering part of its recent losses. Friday morning, the EU submitted its response to the Article 50 and they gave the U.K. 1 year after they leave the Union to work on a trade deal and only if they settle their financial commitments. Its not the worst case scenario because they are willing to talk trade but its not the best case scenario because Britain needs to first “show sufficient progress” on their settlement of the Brexit bill, a payment they have previously refused to pay. Scotland also officially requested a referendum. While we believe that all of these developments are negative for GBP, the currency is trading well and we have to respect the price action as a result. Sterling traders are taking the Article 50 trigger, EU response and Scotland’s call for a referendum in stride and if that continues GBP/USD could squeeze up to 1.26. U.K. fundamentals will return to focus next week with the March PMIs scheduled for release. The recent hawkishness dissent in the Bank of England leads many to believe that the economy continued to improve last month.
It was a tough week for the euro. Although more than 30K people fell off German unemployment rolls and retail sales in the Eurozone’s largest economy grew strongly according to the most recent reports, inflation is moving in the wrong direction with CPI growth slowing to 1.5% from 2%. A number of ECB officials have talked about the possibility of a rate hike but we think that will be very difficult until inflation starts to rise. The first round of the French election will be a key focus in the month of April and so far it appears that Emmanuel Macron holds a comfortable lead over Marine Le Pen. As April 23rd nears, the euro’s sensitivity to the polls will increase significantly. In the meantime, the account of the most recent ECB meeting, German industrial production and trade along with U.S. data will drive EUR/USD flows. Technically EUR/USD appears weak but there is also support near 1.0650.
Meanwhile there was very little consistency in the performance of the commodity currencies this past week. The Australian dollar ended the week unchanged (though it performed well in the first quarter), the New Zealand dollar weakened and the Canadian dollar strengthened. AUD was supported by stronger Chinese data while faster growth in Canada and higher oil prices lifted the loonie. CAD GDP growth accelerated to 0.6% in the month of January, driving year over year growth to 2.3% from 2.1%. AUD and CAD remain in play with the Reserve Bank of Australia’s monetary policy announcement and Canadian employment plus trade data scheduled for release next week. Business activity appears to have slowed a bit in Australia since the last monetary policy meeting but we’ll get more clarity with the release of retail sales and PMIs. Iron ore prices have also fallen which means the Reserve Bank has less to be optimistic about in the month of April. If they shrug off these reports and remain positive, AUD will continue to outperform. However if they finally admit that the outlook may not be so bright, AUD/USD could come off its highs. CAD employment was very strong in February and is likely to retreat a bit in March. There are no major economic reports scheduled for release from New Zealand and no explanation for the underperformance of NZD versus other currencies over the past week outside of possibility of month/quarter end flows.