Dollar Rebounds, Uninspiring U.S. Data

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Daily FX Market Roundup 05-22-14

Dollar: Uninspiring U.S. Data

EUR to Drift Lower Ahead of June Meeting

GBP: Hit by Rise in Public Sector Borrowing

CAD Shrugs Off Decline in Retail Sales

AUD: Shakes Off Stronger Chinese PMI

NZD: Decline in Inflation Expectations Boosts Odds of June Pause

Japanese Demand for Foreign Bonds is Positive for USD/JPY

Dollar: Uninspiring U.S. Data

Thanks to the rebound in U.S. yields, the dollar traded higher against most of the major currencies today. For the most part, it has been extremely quiet week for U.S. data and even though a number of economic reports were released today – they were uninspiring and do nothing to alter the Federal Reserve’s monetary policy plans. This explains why the market’s reaction to the data was so modest but after days of losses, it is encouraging to finally see the dollar rebound. Unfortunately the greenback is trapped by the back and forth in U.S. rates and while 10-year yields have found support at 2.5%, it is far too early to call this a bottom for yields and for the dollar. Nonetheless, it is consistent with our view that USD/JPY would remained trapped within its 100.75 to 103 trading range for the time being and with no major U.S. economic reports scheduled for release on Friday or most of next week, we expect the range to hold. Like the latest economic reports, tomorrow’s data on new home sales and durable goods orders should not have much impact on the dollar. Today’s increase in jobless claims from 298k to 326k was widely expected. In fact, if claims continued to fall, that would be the big surprise because they dropped to their lowest level in 7 years the previous week. Even with today’s rise, the overall trend is encouraging for the labor market. Manufacturing activity is improving according to the PMI index released by Markit Economics and the Kansas City Fed Manufacturing Activity report. Existing home sales on the other hand rose 1.3%, which was less than expected and while leading indicator growth met expectations of 0.4%, it slowed from last month’s levels. The U.S. economy is moving in the right direction but the pace of recovery is disappointing in the eyes of many policymakers who want to keep monetary policy accommodative for a longer period of time.

EUR to Drift Lower Ahead of June Meeting

You can tell that the euro is under significant selling pressure because the currency extended its losses despite relatively benign PMI data. For the month of April, activity in the Eurozone slowed only marginally with the PMI Composite index falling from 54 to 53.9. This was in line with expectations and kept the overall index near its 3-year high. At first glance, the report should not have done much damage to the euro. However looking beneath the headline number, we see that manufacturing activity slowed while service sector activity strengthened. The big area of concern was in France – where manufacturing and service sector activity contracted. The rest of the region saw improvements suggesting that the recovery in the periphery remains on track according to our colleague Boris Schlossberg. While it can be argued that the EZ PMI services reports complicates matters because there was no clear signal of economic slowdown except for France, today’s release does not alter our view that the central bank will ease next month and the EUR/USD will drift lower ahead of the announcement. The PMI report was not weak enough to drive EUR/USD to 1.36 but the currency pair could hit this level if Friday’s German IFO report surprises to the downside. The final first quarter GDP report is also scheduled for release but no revisions are expected.

GBP: Hit by Rise in Public Sector Borrowing

After five consecutive days of gains, the British pound ended the North American session lower against the U.S. dollar. As initially estimated, the U.K. economy expanded by 0.8% in the first quarter. On annualized basis, this equated to GDP growth of 3.1%. There were no revisions to the headline numbers but the details of the report showed slightly stronger consumer consumption, weaker government spending and exports. The decline in external demand is disappointing and validates the central bank’s decision to maintain a dovish monetary policy bias this month. The weakness of the British pound was driven by a sharp increase in public sector net borrowing. Economists were hoping for borrowing to decline to 3.4B from 4.9B but instead it jumped to 9.6B in the month of April from 6.1B. These disappointing numbers deal a blow to the Treasury’s attempts to reduce the deficit to 11% of GDP over the next 12 months. Nonetheless the outlook for the manufacturing sector is bright with the Confederation of British Industry’s total order book balance rising to 0 in May from -1 in April. While this increase was smaller than anticipated, it is still consistent with an upward trend. It is not unusual to see a correction in GBP/USD after 5 days of consistent gains and the uptrend remains intact as long as the currency pair holds above 1.67.

CAD Shrugs Off Decline in Retail Sales

What is interesting about the moves in the commodity currencies today is that they were completely at odds with fundamental data. The Canadian dollar for example strengthened against the U.S. dollar despite an unexpected decline in retail sales. The Australian and New Zealand dollars weakened despite acceleration in Chinese manufacturing activity. It was not as if fundamentals did not matter at all because the CAD sold off initially after retail sales and AUD and NZD jumped after Chinese PMI but the moves did not last. While the weakness in AUD/USD and NZD/USD can be explained by the rise in U.S. yields, rally in the greenback and continued concern about the outlook of Australia and New Zealand, there was very little explanation for the rebound in CAD. According to HSBC’s Chinese Flash manufacturing PMI report, Asia’s largest economy is bottoming. This is good news for countries like Australia who count China as their number one trading partner. Unfortunately recent domestic concerns have driven AUD/USD sharply lower and so far, the downtrend remains intact. While NZD primarily fell in sympathy with AUD, the slowdown in inflation expectations in the second quarter increases the chance of a pause by the RBNZ next month. In Canada, retail sales fell -0.1% in the month of March against expectations for a 0.3% rise. Excluding autos, spending was positive, rising 0.1% but still much weaker than the market’s 0.3% forecast. The decline in consumer demand is not a major surprise considering the drop in employment last month. Canadian consumer prices are scheduled for release on Friday and a decline in CPI may halt the rally in the Canadian dollar because then we would have a decline in employment, spending and inflation.

Japanese Demand for Foreign Bonds is Positive for USD/JPY

The Japanese yen traded lower against most of the major currencies today with the overnight rally in the Nikkei lending support to USD/JPY. The improvement in manufacturing activity failed to help the currency because even though the PMI index rose to 49.9 from 49.4, it remains in contractionary territory. Furthermore the details of the report also show a drop in export orders which is a cause for concern because other countries in the region have been experiencing stronger export growth. It is too early to tell but this weakness could be a consequence of a stronger Yen. The Bank of Japan also issued its latest economic report and they made a small change to their assessment. Back in April, the BoJ said the “economy has continued to recover moderately as a trend, albeit with some fluctuations due to the consumption tax hike.” This month, they kept the first line unchanged but instead of talking about fluctuations in the economy, they acknowledged that there was a “subsequent decline in demand following the front-loaded increase” prior to the tax hike. While this may be construed to be slightly less optimistic, it does not mean that the central bank has moved any closer to easing. The latest portfolio flow report from the Ministry of Finance is worth noting because Japanese investors bought the largest amount of foreign bonds since August of last year – if this trend continues, it could create a floor under USD/JPY.

Kathy Lien
Managing Director

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