USD/JPY Verticalizes Ahead of Trump & Bank of Canada
Daily FX Market Roundup 02.28.17
It was another topsy-turvy day in the foreign exchange market with the U.S. dollar spending most of the day trading lower. However at the close, comments from Fed Presidents Dudley, Williams and Harker sent the greenback soaring. Harker and Dudley are voting members of the FOMC and the former said 3 rate hikes this year is appropriate while the latter said the case for a rate rise is more compelling. As we mentioned on countless occasions this past week, Fed speak has been very consistent and it’s only a matter of time before the dollar responds appropriately. But the greenback isn’t out of the woods because President Trump will be speaking this evening and he could certainly derail the currency. Investors are worried that Trump who addresses a joint session of Congress tonight will disappoint by failing to unveil an infrastructure spending program large enough to satisfy the market. Yesterday President Trump took some of the excitement out of tonight’s speech by saying that a tax plan will not be introduced until the healthcare revamp is worked out so instead, he’ll be sharing details on his infrastructure spending plans and the question is will that be enough? Traders should be prepared for a volatile Asia trading session that should probably be avoided as there will be plenty of trading opportunities on Wednesday. Meanwhile the U.S. economy continues to perform well with most of today’s U.S. economic reports surprising to the upside. House prices increased in the month of December, manufacturing activity in the Chicago region expanded at its fastest pace since January, activity in the Richmond region expanded at its fastest pace since April 2010 and consumer confidence reached its highest level since 2001. Although the trade balance widened and fourth quarter GDP was not revised higher like economists anticipated, personal consumption at the end of the year was stronger than initially reported. So all in, today’s reports confirm that the U.S. economy is improving and validate the Federal Reserve’s calls for tightening. The odds of a rate hike increased to 54% from 40% on Friday. This means the U.S. dollar should be trading higher but clearly political concerns are overshadowing economic fundamentals and monetary policy direction.
There are many major economic reports scheduled for release on Wednesday, one of which will be the Bank of Canada’s monetary policy announcement. USD/CAD traded sharply lower today ahead of the rate decision, indicating that investors do not expect optimism from the BoC. The last time the central bank met, they raised their GDP forecasts for 2016 and 2017 and said inflation will return to target in the months ahead. However, instead of rising, the Canadian dollar crashed because Bank of Canada Poloz said a rate cut remains on the table. Since then, the performance of Canada’s economy has been mixed. Retail sales weakened as shown in the table below but consumer prices, oil, housing, employment, and trade increased. If these improvements cause the central bank to refrain from talking about easing, USD/CAD will fall but if rate cuts are mentioned again, the currency pair will extend its gains. The New Zealand dollar on other hand traded sharply higher despite last night’s terrible trade numbers. The Australian dollar saw very little action versus the U.S. dollar today but that will change this evening with manufacturing PMI, fourth quarter GDP and Chinese PMI numbers scheduled for release. The recent consolidation in AUD/USD signals a potential top but the economy has been performing well and tonight’s reports could confirm that.
Although euro has yet to break 1.06 in a meaningful way, it held onto its recent gains versus the U.S. dollar. The only European economic reports released today were from France – we learned that inflationary pressures rose less than expected but consumer spending rebounded. Investors are also finding some relief from ongoing reports that Macron is gaining a greater lead over Le Pen. Tomorrow is a busy one for Europe with German labor and inflation data scheduled for release. Job creation was the strongest since June 2011 according to the PMIs and producer prices rose sharply, pointing to higher inflationary pressures. Revisions to Eurozone PMIs are also scheduled for release and our bias for positive numbers all around suggests that euro should outperform non-dollar currencies.
Sterling traded lower against all of the major currencies today. The losses comes on the back of Charlotte Hogg’s appointment hearing where she highlighted uncertainties and painted a less than optimistic picture of the UK economy. Hogg stated today that there is still a lot of uncertainty in regards to Brexit and see both downside and upside risk. Hogg further stated that she would only be willing to give UK banks 12-18 months post-Brexit to make transitional agreements. Taking a hard line, Hogg said that banking regulations should be firm even after Brexit. The timeline seems to be a lot quicker than what many banks were hoping for. Scottish First Minister Sturgeon also added to the political muddy waters which surround Brexit in an op-ed today saying that PM May was to blame if a second independence referendum were to come to pass. Sturgeon went on to say that there is still time for May to reconsider her position on a Hard Brexit for the whole UK but that time was running out and an independence vote looks more like a necessity. Yesterday, GfK Consumer Confidence survey painted a grim picture as it posted another drop, seeing a print of -6 in February. Although it was in line with expectations, this number is slightly lower than the -5 the previous month. UK manufacturing PMI numbers are scheduled for release tomorrow and after last month’s disappointing figures, investors are looking for a recovery.