Firmer US Data Fails to Impress Dollar Bulls

Posted on

Daily FX Market Roundup 03-27-14

Firmer US Data Fails to Impress Dollar Bulls

EUR/GBP Crashes on Strong UK Retail Sales

Will EUR Break 1.37?

NZD: Soars to Highest Level Since August 2011

AUD: Extends Gains Above 92 Cents

USD/CAD Closing in on 1.10

JPY: Busy Night in Japan

Firmer US Data Fails to Impress Dollar Bulls

Once again, there was very little consistency in the performance of the dollar today. The greenback strengthened against the euro, Japanese Yen and Swiss Franc but weakened against the British pound, Australian, New Zealand and Canadian dollars. This morning’s economic reports failed to provide much momentum for the buck even though the releases were mostly positive for the U.S. economy. Weekly jobless claims dropped to its lowest level since November, a sign of continued improvement in the labor market. Fourth quarter GDP growth was revised up to 2.6% from 2.4%. While this was weaker than economists projected, personal consumption was revised sharply higher to 3.3% from 2.6% and exports rose by the strongest amount since 2010. Pending home sales however failed to recover last month, falling by another -0.8% after dropping 0.2% the previous month. Despite the pullback in housing market activity the Federal Reserve will be happy to see the overall improvement in the economy. Friday’s personal income and spending reports are expected to show continued growth, reinforcing the central bank’s brighter outlook for the U.S. economy. Unfortunately FX traders were not impressed by today’s reports and the lack of enthusiasm was also seen in equities and Treasuries. As mentioned a few times this week, these secondary economic reports are not expected to have a significant impact on the dollar. If traders want to see a breakout in USD/JPY, they will have to wait for Tier 1 economic reports such as next week’s ISM and non-farm payrolls reports.

A number of Federal Reserve officials have also been speaking this week. Earlier this morning we heard from FOMC voter Sandra Pianalto who expects growth to accelerate and the unemployment rate to fall this year. She believes that monetary policy remains very accommodative and while she didn’t share any specific insights into her views on tapering, her comment that “progress returning inflation to 2% may be slow” suggests that she may lean towards reducing stimulus gradually. Fed Presidents Evans, Tarullo and George are scheduled to speak over the next 24 hours and among these 3 officials, Tarullo is the only FOMC voter.

EUR/GBP Crashes on Strong UK Retail Sales

Stronger than expected consumer spending last month drove the British pound higher against the euro and U.S. dollar. Over the past 72 hours, EUR/GBP has seen steep losses driven by the combination of euro weakness and sterling strength. We expect this sell-off to continue ahead of next week’s central bank meetings. According to our colleague Boris Schlossberg, “UK Retail Sales blew past estimates rising more than three times more than forecasts lifting cable to fresh weekly highs today as the unit pierced the 1.6600 level. UK Retail Sales came in at 1.7% versus 0.5% eyed – a much stronger than expected reading that reversed most of the sharp decline the month prior. Food sales were responsible for nearly half the rise in the headline number and fuel and auto related sales also rose by 0.9%. Spending on household goods actually dropped by 1.1%. The sharp rise in UK Retail Sales may have partly due to the rebound of better weather, but overall the number suggests that UK consumer spending remains robust and will likely keep pressure on the BOE to consider hiking rates this year.” For the central bank to accelerate its tightening cycle, wage growth and inflation needs to rise at a faster rate. Next week’s PMI reports will give us a first look at current price pressures. Consumer confidence and revisions to Q4 GDP are scheduled for release tomorrow. Given the rise in retail sales, we expect consumer confidence to improve.

Will EUR Break 1.37?

The euro traded lower against the U.S. dollar for the third consecutive trading day. With no economic reports released from the region, the move represented nothing more than a continuation of the recent liquidation in the currency. EUR/USD is now trading below its former breakout point of 1.3825 and appears poised for a test of 1.37. The recent decline in U.S. stocks added to the pain. The European Central Bank meets next week and the slide in the euro suggests that investors believe the central bank will grow more cautious on the outlook for the economy given the recent deterioration in German data. It is not unusual to see the euro fall before the ECB meeting but whether the weakness is sustained will hinge on ECB President Draghi’s comments. Based on all the talk of negative interest rates, there is no question that policymakers are open to increasing stimulus. The bar for negative rates is high but there are plenty of other options at the central bank’s disposal. All it would take for EUR/USD to drop below 1.37 is Draghi’s acknowledgement that taking rates to negative levels is an option on the table. The last time we heard from Draghi, he was encouraged by the data improvements but given the recent economic reports, he may feel differently. German consumer prices are scheduled for release on Friday. Inflation is expected to rise but a downside surprise would accelerate the losses in euro.

NZD: Soars to Highest Level Since August 2011

The best performing currency today was the New Zealand dollar, which rose to its strongest level against the greenback since August 2011. Last night’s better than expected trade numbers kept the currency bid but the main catalyst for the move were the comments from RBNZ Deputy Governor Spencer. Like the Australian dollar, currencies are responding more to comments from policymakers than economic data. Spencer said the lack of loan limits “may have prompted monetary policy tightening to have started somewhat earlier.” He believes the central bank is happy with the current policy framework and while NZD/USD appreciated more than 7% over the past 2 months, Spencer did not express any renewed concerns about the currency. Instead he said exporters have adjusted to the high exchange rate, which suggests that they don’t plan to slow tightening or intervene in the currency as a result of NZD strength. If NZD/USD ends the day above its April 2013 high of 0.8676, there is no major resistance for the pair until its 2011 high of 0.8842. The Australian and Canadian dollars also extended their gains against the greenback. There are no economic reports from the 3 commodity producing countries over the next 24 hours.

JPY: Busy Night in Japan

The Japanese Yen traded lower against all of the major currencies today with the exception of the euro and U.S. dollar. USD/JPY continues to struggle, which is not surprising considering the persistent slide in U.S. yields. The Ministry of Finance’s weekly portfolio flow report was the only piece of Japanese data released today and it showed that foreign investors continued to dump Japanese stocks and bonds. Last week’s liquidation was the largest amount ever and the magnitude led many investors to believe that foreigners are growing concerned about the central bank’s nonchalant attitude on the risks posed by the increase in the consumption tax. Bank of Japan officials are confident that their economy will be able to withstand the higher rate, snapping back strongly after an initial dip but we can’t see that happening in an environment of slow global growth without additional stimulus. Tonight will be a busy one in Japan with overall household spending, the jobless rate, consumer prices and retail sales scheduled for release. Inflation is expected to inch closer to the central bank’s 2% target. In January, CPI was growing at an annualized rate of 1.4% and is expected to rise to 1.5% in February. Spending on the other hand is expected to slow after a strong January, which would raise concerns for consumer appetite.

Kathy Lien
Managing Director

Leave a Reply

Your email address will not be published. Required fields are marked *