US Dollar Pulls Back on Softer Data, Pre-Holiday Flows

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US Dollar Pulls Back on Softer Data, Pre-Holiday Flows

Daily FX Market Roundup 12.19.19

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management

The US dollar traded lower against all of the major currencies today following weaker than expected data. Existing home sales, declined more than anticipated in the month of November, manufacturing activity ground a halt while jobless claims ticked higher. Alone, none of these reports are exceptionally market moving but together ahead of the holidays they were enough to drive USD/JPY to a 5 day low. Reports that the US and China will sign the Phase 1 deal in January encouraged some who like a set timeline but discouraged others who hoped for more definitive action. At the end of the day, the Phase 1 deal has not been signed, President Trump is “impeached” and US data confirms the Federal Reserve’s worries about weak growth and low inflation. Fed President Bullard sees no reason for rates to change in 2020 and we believe most US policymakers share his view for steady rates next year. These are all reasons why USD/JPY is under pressure and could slip below 109 before the end of the year. Q3 GDP revisions are scheduled for release tomorrow along with personal income and spending numbers.

The currency that benefitted the most from US dollar weakness was the Australian dollar which traded sharply higher on the back of stronger labor data. Despite reports of weaker job growth from the PMIs, Australia added nearly 40K jobs in the month of November. Increases were seen in part and full time work which helped to drive the unemployment rate down to 5.2%. Between the PMIs and the RBA’s dovishness, investors had been bracing for softer labor data so when this number came out, they were pleasantly surprised and bid A$ higher. Unfortunately the New Zealand dollar did not see the same fate. Although NZ$ also ended the day up against the greenback, it started the NY session lower despite stronger Q3 GDP growth. NZD had been trending higher throughout the month of December, reaching a 4 month high in the process. Part of this weakness can be attributed to softer trade data but having run up so much in the past few months, the underperformance of NZD vs. AUD and other currencies could be nothing more than profit taking.

USD/CAD consolidated ahead of Friday’s Canadian retail sales report. Although the loonie caught a bid this week from a stronger inflation report, between the drop in the wholesales sales index and the staggering 71K job loss in November, which happened to be the largest decline in a decade, the risk is to the downside for spending and the Canadian dollar.

Meanwhile the worst performing currency today was sterling which tumbled for the third day in a row versus euro and US dollar.
Retail sales, which had been forecasted higher unexpectedly turned lower in November with spending falling the most this year. On an annualized basis, retail sales growth slowed to its weakest level since April 2018. Numbers such as these show the strain Brexit has on the economy. So it was no surprise that the Bank of England lowered its growth forecast. The central bank voted 7-2 to leave rates unchanged with dissenters calling for an early move to support growth. The number of dissents did not change from November but following such a weak consumer spending report, investors will be looking for the central bank to ease early next year. Euro also extended its losses after the ECB’s staff forecasts show a potential need for further stimulus.

Last but not least, the Bank of Japan held rates steady and unlike the BoE, the BoJ statement was laced with optimism. The central bank expects growth to accelerate next year as trade uncertainty abates and government stimulus starts to take effect.

Kathy Lien
Managing Director

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