17 May 2017. Daily Market Updates

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Markets in Detail
FX:
Overnight USD is lower vs all of its G-10 peers, with the steepest drops vs the Norwegian krone, the Swiss franc and the shared currency. The decline amounts to 0.5% as measured by the Bloomberg dollar index, the biggest drop since April 24
EUR is higher vs most of its G-10 peers, gaining most vs the greenback and the New Zealand dollar as economic data in the euro area continue to improve.
EUR/USD rose to 1.1089 before offers ahead of 1.1100 capped gains, after supply was absorbed earlier around 1.1050
USD/JPY extended its losses below 113.00 as UST yields fell to their lows of the session and as U.S. stocks reversed early gains.
USD/CAD fell to a fresh low at 1.3590, the lowest since April 27, as the Canadian dollar continued to be underpinned by strength in oil; WTI crude rose as high as $49.38 before paring gains
GBP/USD initially rose after U.K. CPI data m/m beat estimates, however it snapped back to trade below 1.2900
AUD/USD was little changed at 0.7428, remains near week’s highs ahead of 1Q wage data
NZD/USD climbs 0.1% to 0.6890, trading back at levels seen after GlobalDairyTrade auction index rose 3.2%
RATES:
New Zealand 10-year bond yield -2bps to 2.91%
Yield on Aussie’s 3-year government note slips ~2bps to 1.76% while 10-year declines 3bps to 2.56%; curve flattens
US Treasuries saw small gains across the curve, yields ending 1bp-2bp lower
EQUITES:
U.S. stocks were little changed, with the S&P 500 Index at a record as defensive shares advanced. S&P 500 was down 0.1% to 2,401 and Dow Jones adds less than 0.1% to 20,999
COMMODITIES:
WTI crude rose as high as $49.38/bbl before retracing gains to decline 0.3% to ~$48.69/bbl
Gold was up 0.5% to $1,237/oz (range $1,230-$1,240)
Regards All.
Posted in Fx Market

USDollar Holds its Ground

Good Evening All;
The dollar rebounded in early European trade after selling off hard yesterday in North American and Asian sessions as traders reacted to dovish FOMC minutes and the turmoil in Washington DC.
The Fed minutes were surprisingly dovish with most officials focusing on the low rate of inflation rather than the steady rate of growth in jobs and wages. Still, odds of another rate hike by December improved to better than 50% as yesterday’s US Retail Sales finally showed the consumer opening up his purse strings.
Yet while the economic landscape in the US appears to relatively sound, the political turmoil in Washington DC is taking its toll. As Trump administration lurches from one scandal to another investor are losing hope that the Administration will be able to pass any legislation in Congress, much less the ambitious tax code overhaul that Mr. Trump promised the voters. Much of the investor enthusiasm has been based on the idea that lower taxes would provide a boost to US growth in 2018, but so far any hopes of fiscal stimulus lie in vain as the Administration appears to be in total disarray.
For now, however, the organic growth of the US economy appears to be good enough to keep the Fed on tightening path and that has put support behind the dollar which held the 109.50 level against the yen and rebounded through the 110.00 figure by morning London dealing. If the pair makes another run at the 111.00 level that would suggest that a double bottom is firmly in place for the pair.
On the other hand, the euro has failed once again to take out the 1.1800 figure and has turned sharply lower probing the 1.1700 level once again. Some analysts suggested that option barriers may have been the cause of the whipsaw in overnight trade, but whatever the reason the pair is displaying all signs of momentum exhaustion as its multi month rally looks ready to correct. Yesterday’s leak that Mario Draghi does not plan any policy shift announcements at next week’s Jackson Hole meeting has become the prime catalyst for profit taking in the pair and if US data proves positive today it could provide the impetus to push EURUSD below 1.1650 as the day proceeds.
Regards All.
Posted in Fx Market

How Far Could USDJPY Fall if US Attacks North Korea?  

Good Morning;
the biggest driver of currency flows this past week had nothing to do with monetary policy or economic data. Instead, the escalation of tensions between the U.S. and North Korea sent USD/JPY sharply lower as investors worry that this heated exchange could result in military action. Although we firmly believe that the threat of war, let alone nuclear war is slim, this has been one of the most unpredictable eras in history so we have to be prepared for the impossible.  Many of our readers are asking how far the dollar could fall if the U.S. goes to war with North Korea but before discussing this, we want to point out that while the dollar is down sharply this week versus the Yen, it strengthened against other major currencies such as sterling, the Australian and New Zealand dollars.  So while there’s no question that war is negative for USD/JPY it can initially drive the dollar higher against high beta currencies such as AUD and NZD.  As a rule of thumb, the Japanese Yen and Swiss Franc perform best during times of war, which means all of the Yen crosses including USD/JPY will weaken.

Taking a look at some of the major military conflicts over the past 3 decades, the Dollar Index suffers greatly when there is war. Not only does the cost of war require an expansion of money supply, commodity prices also tend to rise during this time putting additional pressure on the U.S. economy.  In the 2 months from when the conflicts in Libya started the dollar index dropped nearly 5% and in the first 3 months of the second Gulf War, the dollar index fell more than 9%. We saw similar weakness after the first Gulf War and then later when there were missile attacks on Baghdad.  U.S. stocks also tend to perform poorly but generally the month before war begins rather than the month after.  This time around, how currencies behave depends largely on how China responds.  If China stays neutral and doesn’t provide any support to North Korea, the Yen, Australian and New Zealand dollars would have a smaller reaction (although still a big one) than if China inserted themselves in the middle. Since there’s no doubt that North Korea will lose and lose quickly, as the tensions grow the dollar will suffer and the actual announcement of war could take USD/JPY to 105 but if it’s a swift victory the pair would also recover quickly. The bottom line is that the outlook for USD/JPY is grim and 108.50/108.00 is probably the next stop for the pair.

Aside from the threat of war, U.S. data has been far from impressive with jobless claims rising as inflationary pressures remain subdued.  Monetary policy committee members aren’t happy with the current state of inflation and their feelings are reinforced by the weaker than expected consumer and producer price reports.  According to Fed President Dudley it will take some time for inflation to rise to 2% as the weaker dollar affects import prices.  As a result, year over year price measures will be depressed for a while and the economy may be a bit more sluggish on the margin. Dudley is one of the main architects of Fed policy and his cautious views confirm that the central bank is in no rush to raise interest rates.  This sentiment is shared by FOMC voter Evans and Fed President Bullard. Looking ahead, the most important releases on the U.S. calendar will be the FOMC minutes and U.S. retail sales.  Although consumer spending could be supported by the rise in wages and rally in stocks, the Fed minutes are likely to be less hawkish as the central bank doesn’t seem to want to commit much beyond September balance sheet normalization.

Meanwhile the risk aversion created by U.S./North Korea tensions also put significant pressure on commodity currencies. The New Zealand dollar was the worst performer and more losses are likely in the coming week. According to Governor Wheeler, the Reserve Bank is not happy with the value of the currency because he brought up the possibility of intervention after this month’s monetary policy announcement.  The RBNZ left interest rates unchanged at 1.75% and said inflation could decline further in coming quarters.  Wheeler also talked about how currency intervention is always an option. Assistant Governor McDermott emphasized the significance of Wheeler’s comments by saying the RBNZ changed the NZD language to signal their unease and this is the first step towards possible intervention.  The RBNZ opened up a can of worms and next week’s PMI services, retail sales and producer price reports probably won’t lend much support to the currency especially after the slowdown in manufacturing PMI index. We see NZD/USD falling back to 0.7250 and possibly even 0.7200.

Unlike the New Zealand dollar, the Australian dollar quietly drifted lower this past week and that’s because the threat of war is positive for gold and commodity prices which helps AUD.  U.S. Treasury yields also fell more aggressively than Australian bond rates and this change in the yield spread helped to limit the slide in AUD/USD.  With that in mind, the Australian dollar is still a high beta currency and for that reason it will not be able to escape the pressure of risk aversion.  The only hope is next week’s Australian employment report because according to the latest PMI numbers, solid job growth was seen in the manufacturing and service sectors.  But before we get to that, the RBA minutes will be released and given the central bank’s downgrades, the tone isn’t expected to support the currency.  AUD/USD traders should also be watching China’s latest retail sales and industrial production numbers and resistance at 0.7950.

It was a week of recovery for USD/CAD, which experienced its first down day in 10 trading days on Friday.  No major economic reports were released but for most of the week the pair was lifted by short covering, the sell-off in risk currencies and $50 resistance in oil.  However fundamentals still support a stronger currency and we think there could be a recovery for the Canadian dollar and a sell-off in USD/CAD this coming week. The only piece of Canadian data worth watching will be Canadian CPI and the data is expected to be positive for the currency as the price component of latest IVEY PMI report increased sharply over the previous month.  If inflation and employment conditions strengthen, loonie traders will start to argue for another Bank of Canada rate hike this year.

Sterling also drifted lower this past week but the losses have been limited with 1.2950 holding as support, which is surprising given the unambiguously dovish Bank of England monetary policy statement and Quarterly Inflation report. Next week will be an important one for the British pound. We still think GBP is headed lower but how sterling trades now hinges on next week’s economic reports. Of all the G7 nations, the U.K. has the busiest data calendar.  Inflation, employment and retail sales numbers are due for release and while inflation and spending is likely to be weaker, labor market conditions appeared to have improved significantly according to the PMI reports.  The levels to watch for GBP are 1.3060 on the upside and 1.2930 on the downside.

No news has been good news for the euro.  Of all the major currencies, the euro has been the most resilient.  It outperformed the U.S. dollar, sterling and all the commodity currencies. With no major economic reports released, it was riding on the momentum of last month’s stronger releases and the ECB’s optimism but at times it also struggled under the pressure of risk aversion.  Looking ahead, Eurozone industrial production, GDP, trade and inflation numbers are due for release.  German data has been relatively healthy but there’s been weakness in France so the regional reports could be mixed. Aside from CPI, most of these reports are not expected to have a significant impact on the euro.  As such we continue to look for the euro to outperform the USD, GBP and NZD but weaken against the JPY and possibly the CAD.

 

Regards All.
Posted in Fx Market

Why the U.S. Dollar Can’t be Saved by CPI Alone  

Good Friday;
The most important event risk for the U.S. dollar this week is Friday’s inflation report but consumer prices alone won’t be enough to save the dollar.  USD/JPY is falling because of geopolitical risks and less hawkish comments from Federal Reserve officials.  This morning FOMC voter Dudley joined the chorus of U.S. policymakers expressing concern about low inflation.  He said it is going to take some time for inflation to rise to 2% as the weaker dollar affects import prices.  He believes that year over year price measures will be depressed for a while and that the economy may be a bit more sluggish on the margin. He also felt that sluggish productivity could dampen wage growth despite job gains.  As one of the main drivers of Fed policy, Dudley’s cautious views confirm that the central bank is in no rush to raise interest rates especially after this morning’s producer price report.  Prices took an unexpected -0.1% dip in the month of July, causing the year over year rate to slow to 1.9% from 2% and jobless claims rose to 244K from 241K.  The drop in PPI signals potential weakness in CPI but even if consumer prices tick higher like economists anticipate, it won’t be enough because the Fed doesn’t feel good about inflation and more importantly, geopolitical tensions between the U.S. and North Korea continue to grow. So until the threat of war diffuses, USD/JPY could have a difficult time responding to positive data.  With that in mind, stronger CPI could send pairs like EUR/USD to 1.1700 as it exacerbates the pressure on high beta currencies that have been hit hard by risk aversion.

The worst performing currency today was the New Zealand dollar which fell hard after Reserve Bank of New Zealand Governor Wheeler raised the possibility of currency intervention. What’s interesting about his comment is that it was not made during his post monetary policy meeting press conference but rather during his testimony to Parliament.  As expected the RBNZ left interest rates unchanged at 1.75%. They expressed concerns about inflation and the possibility of a further decline in coming quarters.  During the press conference, Wheeler didn’t say much. He expressed confidence that the economy will expand more than 3% over the coming years, said house price inflation could pick up after the election and a lower NZD would help.  But he used much stronger words during his testimony to Parliament, he said he would like to see a lower exchange rate, talked about how currency intervention is always an option and how they are always assessing the criteria.  Shortly after, Assistant Governor McDermott went one step further by confirming that the RBNZ changed NZD language to signal unease and this is the first step towards possible intervention.  So while NZD bounced off its lows during the NY session, it remains a sell on rallies against most major currencies regardless of how tonight’s business PMI index fares.  The Canadian and Australian dollars also ended the day lower although their moves paled in comparison to NZD.  Canada’s new housing price index slowed, oil prices unwound its earlier gains while consumer inflation expectations in Australia eased.

The euro ended the day unchanged and its resilience continues to be a testament to the market’s demand for the currency.  Sterling rose above 1.3000 in the hours that followed the country’s industrial production and trade balance reports.  Manufacturing activity rebounded 0.5% in the month of June, which was much stronger than the market’s 0.1% forecast and that upside surprise completely overshadowed the lack of improvement in manufacturing production index and the trade balance. Yet by the end of the European trading session, sterling sank from its highs as the data failed to draw away from the sluggish growth in the economy and the uncertainties that lie ahead.
Regards All.
Posted in Fx Market