Dollar Receives Little Support from Stronger Data

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Daily FX Market Roundup 03-25-14

Dollar Receives Very Little Support from Stronger Data

EUR: Hit by Negative Deposit Rate Talks

GBP: Steady Prices Pressures, Stronger Activity Expected in April

AUD Hits 3 Month Highs Versus Dollar

USD/CAD: Fourth Consecutive Day of Losses

NZD: Oil and Gold Flat

JPY: Small Business Confidences at Highest Level Since 1989

Dollar Receives Very Little Support from Stronger Data

This morning’s better than expected U.S. economic reports lent support to equities but provided very little benefit for the U.S. dollar. The greenback ended the North American session unchanged versus the euro and Japanese Yen, slightly higher against the Swiss Franc and lower against the British pound, Australian, Canadian and New Zealand dollars. Fixed income investors were equally unimpressed as Treasury yields increased modestly. This muted reaction should not be a major surprise for our readers because we said this week’s Tier 2 economic reports would not have a significant impact on the dollar and would most certainly not affect the central bank’s monetary policy plans. Nonetheless Janet Yellen will be pleased to see that the economy improved further. For equity investors, stronger U.S. data means the economy is better positioned to withstand a reduction in asset purchases.

According to the latest economic reports, consumer confidence hit a 6-year high in March. After a harsh winter, it appears that the promise of spring boosted the moods of consumers, which will hopefully translate into stronger demand. The Conference Board’s consumer confidence index rose from 78.3 to 82.3, exceeding the forecast of every economist surveyed by Bloomberg. Stronger job growth combined with increased activity in the housing market drove the gains and as incomes continue to grow, we could see a further improvement in sentiment. House prices also rose 0.85% in the month of January according to S&P CaseShiller. New home sales declined but not as steeply as economists had anticipated manufacturing activity in the Richmond region contracted further this month. The market had been looking for an improvement but unfortunately certain pockets of the U.S. economy are not experiencing the same pace of recovery as others. Fed President Plosser will be speaking later this evening and as one of the more hawkish voting members of the FOMC, we do not expect his comments to pose a risk to the dollar. Durable goods orders are scheduled for release on Wednesday. This typically volatile release rarely has a lasting impact on the greenback. We continue to look for USD/JPY to range trade rallies with capped at 103.50 and a sell-off limited to 101.

EUR: Hit by Negative Deposit Rate Talks

Unlike many other major currencies, the euro failed to benefit from today’s risk rally. The decline in the German IFO report contributed to the weakness but the primary catalyst was talk of negative deposit rates by European policymakers. The first mention of the possibility of additional stimulus came from Bundesbank President Jens Weidmann who spoke hypothetically about other tools at the central bank’s disposal. Although Weidmann did not immediately suggest that he supports negative rates, our colleague Boris Schlossberg pointed out that as one of the more hawkish members of the ECB, “his evolving position on the issue indicates that German policymakers are becoming concerned with the rising EUR/USD exchange rate. Over the past several days the market has seen several pieces of data that suggest the high EUR/USD is beginning to take its toll on German economy.” ECB members Visco and Liikanen also said the central bank is open to the idea of negative deposit rates. While this option is not new, the cohesive message from European policymakers suggests they are taking this possibility more seriously. However despite the talk of negative rates, euro ended the day off its lows after ECB President Draghi’s lecture in Paris. He said the central bank is ready to take additional measures if needed but unlike his peers, stopped short of mentioning negative deposit rates. He indicated that short-term real rates could become more negative but this would be a function of rising inflation. We believe that EUR/USD is headed lower in the longer term because of rising U.S. rates and falling short term Eurozone rates but in the near term the currency pair remains bid and could remain so until U.S. yields experience stronger gains.

GBP: Steady Prices Pressures, Stronger Activity Expected in April

An increase in inflationary pressures during the month of February drove the British pound higher against the U.S. dollar and euro. Consumer prices rose 0.5% last month after falling 0.6% in January. On an annualized basis, CPI growth slowed to 1.9% from 1.7% but core prices grew at a slightly faster 1.7% year over year pace. The Bank of England will be happy to see that inflation did not fall further last month. At the same time, it remains muted enough to give the central bank very little reason to rush to raise rates especially with other economic reports being less encouraging. The British Banker’s Association reported a decline in mortgage approvals last month while the Confederation of British Industry reported a steep drop in sales volume this month. Although a pullback was expected after the previous month’s sharp rise, economists had not anticipated such a steep decline. However the impact on sterling was limited because spending is expected to recover in April. According to CBI, “The pace of growth has slowed, likely in part due to the later timing of Mother’s Day and Easter this year – conversely, this is the same reason many retailers are looking forward to more robust growth next month.” GBP/USD appears to have stabilized above 1.65 but if Thursday’s retail sales report surprises to the downside, we could find the currency pair dropping through this level again.

AUD Hits 3 Month Highs Versus Dollar

The Australian dollar rose to its highest level in 3 months today as the commodity currencies continued to rebound against the U.S. dollar. With no data released from Australia, New Zealand or Canada over the past 24 hours, the moves were driven entirely by the improvement in risk appetite. The AUD in particular is benefitting from the unwinding of short positions and speculation of accelerated stimulus from the People’s Bank of China. According to the CFTC’s latest IMM report, short AUD/USD exposure has already been cut by 34% and we suspect that there has been a further reduction now that the currency pair is closing in on 92 cents. For our technically savvy readers, there’s a very clear inverse head and shoulders pattern on the AUD/USD daily chart that signals the potential for an even stronger rally. If AUD/USD breaks through 92 cents, we could see the currency pair climb as high as 94 cents. RBA Deputy Governor Lowe spoke this evening but he did not touch on the economy or monetary policy. Further strength also appears likely in the Canadian and New Zealand dollars. With no economic reports scheduled for release from any of the 3 commodity producing countries over the next 24 hours, the market’s appetite for risk will determine if these gains continue.

JPY: Small Business Confidences at Highest Level Since 1989

With U.S. equities extending their gains, the Japanese Yen traded lower against most of the major currencies. The latest economic report from Japan was also strong, with small business confidence hitting its highest level since April 1989. The Shoko Chukin Index moved from 50.6 to 53.5 in the month of March. Both manufacturing and non-manufacturing businesses grew more confident this month with the highest level of confidence seen in the steel and lumber industries. While this improvement is great news for Japan, the sentiment index is expected to drop back to 46.6 from 53.5 when the sales tax is increased by 3% next month. Small businesses won’t be the only ones feeling less confident. We believe that consumers and large businesses will experience a similar deterioration in sentiment. The corporate service price index is the only piece of Japanese data scheduled for release this evening. Price pressures will hold steady or rise slightly in the month of February, moving inflation closer to the central bank’s 2% target.

Kathy Lien
Managing Director

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