Kathy Lien is the Managing Director of FX Strategy for BK Asset Management.
- EUR: My 5 Main Takeaways from ECB Press Conference
- AUD: Bracing for Chinese Trade Data
- CAD: Nice Improvement in IVEY PMI and Building Permits
- NZD: Stabilizes as Sellers Turn to AUD
- Dollar: Yields Continue to Fall Despite Good Data
- Sterling Hangs Tight after BoE Leaves Policy Unchanged
- JPY: No Surprises Expected from the BoJ
EUR: My 5 Main Takeaways from ECB Press Conference
While investors sold euros after the European Central Bank’s monetary announcement and press conference, the single currency did not fall to fresh lows against the U.S. dollar. Nothing Mario Draghi said was particularly surprising but a few important takeaways explain why Thursday’s speech was more bearish than bullish for the EUR/USD:
1. ECB is Getting Serious about ABS purchases – Mario Draghi said the ECB intensified preparatory work related to outright purchases of asset-backed securities (ABS), which indicates that they are still looking to increase stimulus. They will be hiring a consultant and focusing their efforts on a simple and transparent program and they want to be ready to take action regardless of what ABS regulators say.
2. Draghi Says ECB and Fed Rates will Diverge for a Long Time – Draghi also reminded everyone that ECB and Fed rates will move in opposite directions for a long period of time. Considering that the Fed is gearing up to end Quantitative Easing and raise interest rates next year this can only mean that the ECB has no immediate plans to reduce stimulus or raise interest rates.
3. ECB is Worried about Geopolitical Risks – The ECB is growing concerned about the economic impact of geopolitical tensions. Thursday morning, Russia banned food imports from the European Union in reaction to the financial sanctions announced by the EU last month. While it is too early to tell what the exact implications will be, Russia is the world’s 5th largest food importer. The prospect of rising energy prices is also a worry but right now crude is on a downtrend and not an uptrend.
4. ECB Waiting for June Stimulus Package to Hit the Economy – There is very little reason for the ECB to rush into announcing a raft of new measures when many of the programs introduced in June have yet to be implemented. The first Targeted LTRO is not being run until September with the second expected in December. The central bank is confident that these measures will provide sufficient support for the banking sector and the economy but they won’t know how successful the program is until the end of the year.
5. ECB Sees Recovery as Moderate and Uneven – The central bank is still not happy with the pace of recovery. While they expect the moderate recovery to continue, unemployment remains high with a sizeable amount of unutilized capacity. Inflation expectations may be broadly balanced but there are downside risks to the economy.
The bottom line is that the central bank remains dovish, is worried about geopolitical tensions and continuing to explore ways to increase stimulus – all of which is bearish for the EUR/USD. On top of that, German bond yields fell at a faster pace than U.S. Treasury yields with 2-year bund yields turning negative for the first time since May 2013.
AUD: Bracing for Chinese Trade Data
The Australian dollar sold off hard on the back of rising unemployment. The currency pair dropped to a 7-week low versus the U.S. dollar and would have probably experienced more losses if not for the uncertainty surrounding Thursday night’s Chinese trade balance. Chinese data has been good and if exports rise strongly, it could halt the decline in AUD. China’s economy has been experiencing a nice recovery with government stimulus and resurgent demand for Chinese exports expected to pave the way for a summer rebound. However according to the consensus forecast, export growth is not expected to grow at a faster pace but is expected to slow to 7%, driving the trade surplus down to $27.4B from $31.5B. If export growth weakened last month, it would deal a strong blow to the Australian dollar and could drive the currency pair towards 92 cents. The deep sell-off in the Australian dollar Thursday was triggered by a surprisingly large increase in the unemployment rate. The jobless rate rose to a 12-year high of 6.4% in the month of July from 6%. Only 300 jobs were lost with a rise of 14,500 full time positions offsetting a decline of 14,800 part time positions but investors cared little about the breakdown or the increase in the participation rate. Instead 6.4% unemployment was a sticker shock that left Australia’s jobless rate above the U.S.’ for the first time since 2007. While we doubt this will push the RBA to ease, investors anticipated a healthy number and were instead caught completely off guard. The Canadian and New Zealand dollars on the other hand ended the day unchanged against the greenback. USD/CAD should be nearing a top with manufacturing activity growing at a faster pace in the month of July and building permits rising 13.5% in June, against expectations for a 1.9% decline. The uptick in the IVEY PMI index bodes well for Friday’s employment report with job growth expected to return after a tough June.
Dollar: Yields Continue to Fall Despite Good Data
Forex traders continued to ignore the decline in U.S. yields. Even as 10-year Treasury yields hit 1-year lows, the dollar traded higher against most of the major currencies. The Dollar Index closed at its strongest level in 10 months, leading investors to wonder how long this divergence will last and which instrument is due for an adjustment. The primary driver of the demand for Treasuries is ongoing tensions in the Ukraine and weakening economic data abroad. Investors are looking to U.S. assets for safety and their demand for Treasuries has translated into demand for the dollar. Stronger U.S. data, disappointing Australian and New Zealand labor-market reports, talk of a long period of divergence between U.S. and Eurozone monetary policy and German two-year yields dropping below 0% for the first time since May 2013 can all be reasons for why investors are buying the greenback. Weekly jobless claims dropped below 300k for the second time in 2 months and with only 289k claims reported in the week ending on August 2, the 4-week moving average of claims hit an 8-year low, a sign of further recovery in the labor market. While external problems could keep investors interested in U.S. assets, we still think that if 10-year yields remain below 2.5%, the adjustment will be in USD/JPY. Watching yields and equities will be particularly important on Friday when there are no U.S. economic reports scheduled for release.
Sterling Hangs Tight after BoE Leaves Policy Unchanged
As expected, the Bank of England’s decision to leave monetary policy unchanged had very little impact on sterling. In Wednesday’s note, we said Thursday’s meeting was important but not because we anticipated an announcement from the central bank. Instead, policymakers are expected to discuss their central forecasts for the economy, which will be included in next week’s Quarterly Inflation Report. There’s been a lot of talk about the division within the central bank and the hawkish chatter that could make its way into next week’s report as well as into the BoE minutes due on August 20. Some policymakers believe that it would be prudent to raise rates early to ensure that the process is smooth and gradual. Although the manufacturing sector is losing momentum and wage growth has been soft, the service sector is performing well, house prices remain high and spare capacity within companies is declining. As a result, policymakers can argue that rates should rise soon in order to avoid being caught behind the curve and forced to deliver a larger hike in the future that could threaten the recovery. U.K. monetary policy should become clearer next week and in the meantime, we have the country’s trade balance scheduled for release Friday. Given the decline in the PMI index and slower industrial production growth, the odds favor a larger deficit.
JPY: No Surprises Expected from the BoJ
The Bank of Japan was scheduled to make a monetary-policy announcement Thursday night and it was widely expected to leave the size of its Quantitative Easing program and interest rates unchanged. More than a year has past since the last major change in monetary policy from the BoJ and while there’s talk that the central bank could increase stimulus again, it is still too early to expect any action. Economic data has taken a turn for the worse, raising concerns for a loss momentum in Japan’s recovery but one month of slower growth will not convince the central bank that it is time to consider new initiatives. Like Thursday’s BoE rate decision, the BoJ announcement should be a nonevent for the Japanese Yen but we will nonetheless be watching Kuroda’s statement closely for any fresh concerns. Aside from the rate decision, the June current account and trade balance reports were also scheduled for release Thursday evening. The big story in Japan Wednesday night came from Reuters, which “exclusively” reported that Japan’s Global Pension Investment Fund plans to raise the share of domestic stocks in its portfolio from 12% to more than 20% and lower the share of Japanese government bonds in its portfolio to 40% from 60%. Citing sources consulted on the fund’s plans, Reuters said the discussions will gain traction in late September but no date has been set for an official announcement. The Japanese government has been pressing the GPIF to invest in riskier assets for most of this year, so the Reuters story is not entirely unexpected but it reminds investors that a big player plans to buy Japanese stocks and sell JGBs in late 2014, early 2015.