By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
- Dollar: The Bulls Have Not Given Up
- EUR: Post PMI Gains Stripped by US Data
- GBP Crashes on Weak CPI
- AUD: Weaker Chinese PMI Fuels Talk of PBoC Stimulus
- NZD: Unchanged Ahead of Trade Data
- CAD: Oil Prices Stabilize
- NZD Bounces on Stronger Data
Dollar: The Bulls Have Not Given Up
Based on the price action of Tuesday's US dollar, the bulls have not given up. In the face of an initially mixed consumer-price report, the dollar fell sharply against all of the major currencies. Yet as the good news started to pour in, the greenback recovered ending the day near its highs versus the euro, British pound, Swiss franc and Japanese yen. Investors are looking at each piece of incoming data as evidence to confirm or deny the Fed's plans to raise rates and Tuesday morning's reports -- while encouraging -- fails to swing sentiment, one way or other. Consumer prices rose 0.2% in February, which was right in line with expectations. Excluding food and energy costs, price growth was slightly stronger and on an annualized basis, CPI growth rose to 0% from -0.1%. At first glance, this is positive for both the U.S. dollar and rate-hike expectations. But 0% yoy growth won't push the Fed into action, particularly since real earnings declined 0.1%. The Fed is very concerned about wage growth and based on Tuesday's report, wages are not moving in the right direction. When investors saw the wage data, they sold dollars. But shortly thereafter, they bought it back as they convinced themselves that the Fed will be encouraged that prices stabilized after falling for 3 consecutive months. Stronger than expected new home sales and a rebound in manufacturing activity as measured by Markit Economics helped the dollar recover its early losses to end the day in positive territory. We also heard from Fed Presidents Bullard and Williams. Bullard is not a voting member of the FOMC this year but Williams is and he believes that it would be appropriate for the Fed to start discussing raising rates in the middle of the year. Both Williams and Bullard believe that rates will start to rise in 2015. Interestingly enough, USD/JPY failed to participate in the move due in large part to the slide in U.S. rates. The ten-year Treasury yield dropped to its lowest level in more than 6 weeks, indicating that while equities are pricing in Fed tightening, bond traders are not concerned about rising rates.
EUR: Post PMI Gains Stripped by US Data
It was another volatile day for the euro, which traded as high as 1.1030 and as low as 1.0890 on the back of Tuesday's U.S. economic reports. As we anticipated, the PMI numbers surprised to the upside with Eurozone manufacturing and service-sector activity growing at a faster pace in March. Germany continues to lead the region's recovery with all three of its PMI indexes moving higher. Wednesday's German IFO report is likely to show similar strength. France on the other hand is struggling with service-sector activity slowing and manufacturing activity contracting. Europe may be growing at its fastest pace in nearly 4 years but we have yet to see widespread growth. However if the euro remains weak and quantitative easing keeps interest rates low, we should see a broader recovery soon. As the chief economist of Markit Economics, the agency that compiles the PMI reports said, the data indicates that ECB "quantitative easing has been started at a time when the Eurozone's economic upturn is already starting to gain traction. This augurs well for the region to enjoy further improvements in business conditions as the year proceeds, helping drive greater business investment and hiring, and thereby ensuring that the recovery becomes sustainable. Worries persist, however, in relation to Greece and Russia, which are a reminder that ongoing recovery is by no means assured." As long as these concerns remain in place and the ECB continues to increase stimulus, the EUR/USD will have a tough time rallying. So while the euro may break 1.10 against the U.S. dollar and perhaps even test 1.12, the foundation for tighter U.S. and looser EZ monetary policy means that EUR/USD will test and break 1.05 once again.
GBP Crashes on Weak CPI
Sterling continued to underperform on the back of weaker data. On Tuesday morning we learned that consumer prices rose 0.3% in February, which was right in line with expectations, and that would not have been damaging to the pound if not for stagnation in price growth year over year. With commodity prices moving lower, economists anticipated a slowdown in price growth but the 0% print was weaker than expected. Excluding core goods, price growth slowed to 1.2% from 1.4%, which is well below the central bank's 2% target. The trend of inflation growth clearly discourages the Bank of England from raising rates, but like the Fed, U.K. policymakers believe that the impact will be temporary. However the weaker CPI and PPI reports along with the slowdown in housing price growth reported by DCLG allows the central bank to delay a rate hike. While we continue to believe that the BoE will be the next major central bank to raise interest rates, recent data and dovish comments from central bank Governor Carney triggered a sell-off in the currency. It will be difficult for sterling to rally until data improves or MPC officials take a stronger stance on raising rates.
AUD: Weaker Chinese PMI Fuels Talk of PBoC Stimulus
Weaker Chinese manufacturing data prevented the Australian and New Zealand dollars from extending their gains. According to HSBC, the manufacturing industry in the world's second-largest economy contracted in March. While most economists anticipated a slowdown, few expected the index to drop to its lowest level in 11 months. If the government's official reading shows similar deterioration, the Chinese government may have to step in with more stimulus. Last month, the People's Bank of China cut the reserve ratio and downplayed the move as an ordinary policy operation to increase liquidity around the Chinese New Year holidays. At the time, they said it was "not the start of a strong stimulus." However if the data continues to disappoint, the central bank could cut interest rates, lower the reserve requirement ratio once more and/or introduce pro-growth measures. The Chinese government targets GDP of 7% this year and if growth falls to the lower limit of its range, Premier Li pledged to take action. In fact Chinese stocks are trading sharply higher on the prospect of easing by the PBoC while losses in AUD have been limited. New Zealand trade numbers are scheduled for release Wednesday and a larger surplus could revive the rally in kiwi. As for the Canadian dollar, there was little change on Tuesday with oil prices stabilizing. We continue to look for USD/CAD to trade between a 1.24 to 1.28 range with a move to the lower bound seen as an opportunity to buy the currency pair at lower levels.