Daily Forex Market Roundup 04.28.18

End of week profit taking prevented the U.S. dollar from extending its gains on Friday despite stronger than expected first quarter U.S. GDP growth and an upward revision to the University of Michigan’s consumer confidence index. With that in mind, steady growth and rising inflation expectations should foster further gains in the dollar next week as investors are convinced that the Federal Reserve will use the May meeting to prepare the market for a June hike. Every U.S. policymaker who has spoken this month was in favor of more tightening. Traders should expect the dollar to continue to drive currency flows in the week ahead. There’s a Federal Reserve meeting on Wednesday and non-farm payrolls report on Friday. Having just raised interest rates at their last meeting, the Fed has no plans to follow up in May but Fed fund futures show a 93% chance of a quarter point rate hike the following month when economic projections are updated and Jerome Powell holds a press conference. U.S. policymakers have been vocal about their desire to raise interest rates at least 3 times this year and the data improvements since the last policy meeting gives them the confidence to take action in the summer. Central bankers always prefer to minimize volatility on the day that a policy change is made, so if the Fed is serious about a June hike, they will signal their intention at Wednesday’s meeting which would send the dollar even higher.
However if they don’t commit to a rate hike and instead express concerns about the rise in yields and its impact on financial market conditions, the dollar will fall quickly and aggressively as investors are heavily positioned for hawkishness. USD/JPY, which could hit 110 before the rate decision would sink back to 108. Since there is no press conference, for the dollar to hold onto and extend its gains, the FOMC statement needs to be unambiguously positive. Meanwhile don’t expect as big of a reaction to this month’s non-farm payrolls report because it will be released after FOMC and only be used to confirm or challenge the central bank’s guidance. Investors should also keep an eye on U.S. yields as they will determine if the dollar extends its gains ahead of the Fed meeting.
The euro simply couldn’t overcome the dollar’s strength this past week. The single currency closed in on its 4 month low on Friday despite stronger Eurozone confidence, healthy German labor data and optimistic comments from European Central Bank President Mario Draghi. The problem for the euro is that the ECB is expected to trail behind the Fed so if the U.S. central bank is hawkish, the EUR/USD could break 1.20. While the euro will its cue from the market’s appetite for U.S. dollars investors will be eager to see if the inflation and GDP reports show the improvement that Draghi is noting.
Meanwhile sterling fell to a 1 month low against the U.S. dollar on Friday following a softer first quarter GDP report. The U.K. economy expanded by only 0.1% on the first quarter causing year over year growth to slow to 1.2%, its weakest level in 5 years. This report validates Bank of England Governor Carney’s concern that the market was getting ahead of itself with their expectations for a May rate hike. Since his speech just over a week ago, the odds of tightening in May have fallen from 90% to 24%. In the week ahead, investors will be watching the PMI reports to see if there have been any improvements that could validate the 2 dissenting votes that favored a rate hike at their last meeting. If the PMIs continue to miss, GBP will fall further but if the tide starts to turn and manufacturing or service sector activity recovers, sterling will rebound as rate hike expectations adjust again.
After selling off sharply this past week, all 3 commodity currencies rebounded on Friday with the Australian dollar leading the gains. AUD shrugged off a weaker producer price report, which wasn’t a surprise after Monday’s lower CPI report. The New Zealand dollar stabilized despite an unexpected trade deficit caused by a jump in imports and a surprisingly large drop in consumer confidence. The Reserve Bank of Australia also has a monetary policy announcement and in contrast to the Federal Reserve, the latest inflation reports give the RBA reason to remain dovish. There’s no RBNZ meeting but data has taken a turn for the worse since the last policy meeting with inflation falling to the bottom of the RBNZ’s target so the downtrend for both currencies should remain in tact.
In contrast the Canadian dollar could experience further gains in the week ahead. Although USD/CAD hit a high of 1.29 this week, it rejected that level on the prospect of a NAFTA deal and less dovish comments from the Bank of Canada. At their last policy meeting, BoC Governor Poloz and Deputy Governor Wilkins outlined their dovish bias but their tone seems to have changed this past week. In a speech to the Financial Committee, Poloz said inflation is on target and the economy is close to potential. With a NAFTA deal imminent, we expect the Canadian dollar to outperform in the week ahead as long as GDP, the trade balance and IVEY PMI reports don’t disappoint in a significant way. USD/CAD will be affected by the U.S. dollar’s reaction to FOMC and NFP but on a relative basis, it should outperform EUR, AUD, NZD and possibly the JPY.
Friendly Weekend.

 

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Posted in Fx Market

Euro 1,20 after BCE ?!?

Investors continued to buy U.S. dollars, sending the greenback to fresh multi-month highs against many of the major currencies. USD/JPY is trading at its strongest level in 2 months, the New Zealand dollar is at its weakest in 3 months and the Australian dollar has fallen to its lowest level in 4 months. With ten-year Treasury rates breaking 3%, yield spreads are shrinking quickly and after a year of divergence, interest rates and currencies have finally recoupled. We expect this trend to continue as other central banks plan to keep their monetary policies easy. No U.S. economic reports were released on Wednesday and Thursday’s reports on jobless claims, trade balance and durable goods orders aren’t expected to have a significant impact on the currency. Instead, yields, equities and the European Central Bank’s monetary policy meeting will be the main focus of the day.
Euro is trading sharply lower ahead of the European Central Bank’s monetary policy announcement. The ECB meeting is the most important event risk this week and while no policy changes are expected, the euro is bound to move on the back of Mario Draghi’s comments. Over the past 6 weeks there’s been widespread deterioration in business activity prompting investors to position for a dovish outlook. Even Germany’s Bundesbank head said recent indications for Germany in the first quarter were “not so brilliant.” However we can’t assume overwhelming dovishness from Draghi because last Friday he also said their confidence in the inflation outlook increased as the growth momentum is expected to continue. Taking a look at the table below, inflation has been on the rise, labor market conditions improved and equities stabilized in April. So underneath the weakness there are positive developments. In fact, when the ECB last met in March, they removed a line in their policy statement that referenced the possibility of increasing stimulus but euro tanked because Draghi emphasized the downside risks, strong, protectionist threats and the need for policy accommodation.

The question for Thursday is whether these threats overshadow the uptick in inflation and positive growth momentum. We know that the ECB is not ready to raise interest rates and they certainly don’t want to see EUR/USD back above 1.24 because that would offset the improvements in prices. Yet they also want to end QE purchases this year – so Mario Draghi has quite the balancing act to do on Thursday. We think Draghi will remain cautious and emphasize patience, which in an environment of a rising U.S. dollar could send EUR/USD down to 1.21 and eventually 1.20. However if the tone of his press conference is a bit more optimistic, EUR/USD could bounce back up to 1.23.

After rebounding for the first time in 6 trading days, traders returned to selling sterling. However unlike some other major currencies, today’s move did not take GBP/USD below any support levels. For the time being losses are still limited to 1.3900 but with the pair below the 50-day SMA and the downtrend firmly intact, it may only be a matter of time before we see further weakness. With no UK data released today and nothing significant on the calendar tomorrow, EUR/GBP flows will most likely drive sterling the next 24 hours. Brexit will also be in focus as there’s a big customs union debate and vote in the Parliament’s lower house on Thursday. Prime Minister May was dealt her third defeat in less than week in the Upper House over her Brexit plans. Although the Lower House could overturn these decisions, they highlight the ongoing resistance to May’s Brexit strategy and raises the odds of a soft Brexit.
The currency hit the hardest by the rising dollar continues to be NZD. Not only was it the day’s worst performer but today’s slide marks the seventh consecutive day of weakness for NZD/USD. This is the longest stretch of losses for the pair in more than a year and the move is driven entirely by a shrinking yield spread. The spread between 10 year New Zealand and U.S. bond yields have fallen to their lowest level since January 2000 and it may be longer than that as our data only goes back that far. There’s support at .7050 but it may only be a matter of time before 70 cents is tested. The same dynamics are driving AUD/USD, which fell to a 4 month low – support is at 75 cents. Of the commodity currencies the Canadian dollar is the most resistant to gains with USD/CAD backing off 1.29. Steady oil prices, rising Canadian bond yield spreads and the prospect of a NAFTA deal have limited the slide in the loonie.
Regards All.

 

Posted in Fx Market

Daily FX Market 04.25.18  

It is becoming very expensive to be short U.S. dollars. For the first time since January 2014, ten-year Treasury yields rose above 3%. This move triggered widespread short covering in USD/JPY and drove the pair to its strongest level in 2 months. The U.S. dollar also traded higher against the Swiss Franc and the New Zealand dollar but the lack of gains versus other currencies like euro, sterling the Australian and Canadian dollars tells us that some investors are still wary of going long dollars. There’s a difference between short covering and buying so while all of today’s U.S. economic reports beat expectations with confidence rising in the month of April and new home sales increasing in March, there’s concern that the rise in yields poses a threat to the recovery in stocks and the economy. With that in mind, the rise in yields is driven by the rise in inflation and rate hike expectations. At the beginning of this month, investors saw only a 79% chance of a hike in June but those odds sit at 93% today. The modest sell-off in stocks in response to the rise in yields reflects an optimistic outlook that has translated into demand for risk assets. The yen crosses look particularly attractive and could see further gains in the days ahead.
Meanwhile the euro completely shrugged off this morning’s weaker German IFO report and the rise in Treasury yields because German bund yields rose sharply in the first part of the NY trading session. However by the London close, German rates receded, putting EUR/USD’s rally at risk. With manufacturing and service sector activity slowing, it was no surprise to see German business confidence fall in the month of April. The declines were significant with the business climate index slipping to its weakest level in nearly 8 years and the expectations component falling to its lowest level since October 2014. This will make it difficult for the European Central Bank to be optimistic when they meet on Thursday. EUR/USD found support today at 1.22 but if U.S. yields continue to rise and Mario Draghi emphasizes the need for caution, the next stop for EUR/USD could be 1.20.
After falling for 5 consecutive trading days, sterling finally rebounded against the U.S. dollar on the back of stronger fiscal finances. For the first time since 2000, the government reported a fiscal surplus. While this report drove GBP higher against all of the major currencies, it doesn’t offset the weaker economic reports and dovish comments from the Bank of England last week. According to a separate report from the Confederation of Business Industry, business optimism turned negative in the month of April, a trend that is probably a better reflection of the general performance of the U.K. economy.
The worst performing currency today was the New Zealand dollar, which continued to come under heavy selling. NZD/USD has fallen 7 out of the past 8 trading days with the latest decline taking the pair to its weakest level since January 4th. There were no New Zealand economic reports released but the rapidly shrinking 10 year New Zealand – U.S. yield spread along with the trigger of stops below .7150 prompted speculators to unwind their long positions. Unlike the U.S., recent data from New Zealand has been weak, and investors believe the central bank will keep rates on hold throughout 2018. New Zealand inflation dropped to the bottom of the RBNZ’s target last week, which will be a key concern when they meet next month. The Canadian dollar on the other hand rebounded against the greenback following reports from Mexico’s Kalach that a NAFTA deal could be reached in the next 10 days. However shortly after these comments were made, Mexico’s economy Minister and NAFTA Chief said there are no guarantees that a deal can be reached as President Trump looks to tie Mexican immigration control to the NAFTA deal. The Australian dollar also remained under pressure following a mixed inflation report. Although CPI growth slowed more than expected to 0.4% in the first quarter, the year over year rate held steady at 1.9% and the trimmed mean rate accelerated. This suggests that there are small signs of rising price pressures even though the rate is below the Reserve Bank’s target band.
Regards All.

 

Posted in Fx Market