Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
- Is the Dollar Nearing a Bottom?
- EUR Falls Sharply on Problems in Portugal's Banking Sector
- Why GBP/USD Refuses to Fall
- Will Canadian Employment Help or Hurt USD/CAD?
- AUD Hit Hard by Rise in Unemployment
- NZD: Commodity Currencies Pressured by Weaker Chinese Trade
- Broad-Based Weakness in Japanese Yen Crosses
Is the Dollar Nearing a Bottom?
The U.S. dollar may have traded higher against all of the major currencies Thursday with the exception of the Japanese Yen but taking a look at its one-month performance, the greenback lost value against all major currencies. Much of this has to do with the decline in Treasury yields because the 10-year bond yield for example is 10bp lower than where it was a month ago. At the beginning of the year, very few market participants would have expected yields to fall as much as they have over the past 6 months. In January 10-year bonds were yielding 3% and now they have a rate of only 2.5%. Throughout this period, the dollar has taken its cue from Treasuries. Although the low in 10-year yields this year is 2.44%, yields are nearing a bottom, which means the same could be true for the U.S. dollar. We have already seen a nice intraday recovery in U.S. stocks and a bounce in yields today that stemmed the slide in the greenback. Taking a step back, the case for lower yields is weak. Today's jobless claims report was better than expected and while the Fed is a long way from tightening, they plan to end their bond-buying program in October, which means the bond market will lose a major buyer who has artificially kept rates low for the past 5 years. Earnings and the problems in Portugal are a bit of a concern but as long as U.S. data moves in the right direction, U.S. yields should stabilize lending support to the greenback. Next week's U.S. economic reports are widely expected to show further improvement which reinforces our belief that the dollar is nearing a bottom.
EUR Falls Sharply on Problems in Portugal's Banking Sector
After 3 straight days of gains, the euro finally sold off against the U.S. dollar. Throughout the week, we've been skeptical of the EUR/USD's rally, especially with mixed Eurozone data validating the European Central Bank's dovish bias but it took a missed debt payment by Portugal's second largest bank and a deep slide in French industrial production to sap the rally in the currency. Portugal's problems bring back the dark memories of the Eurozone sovereign debt and banking crisis. If banks in Portugal start to default on their debt, it could be one of those exogenous shocks that push the central bank into action. 10-year Portuguese bond yields jumped 21bp today, dragging Italian and Spanish yields higher -- unfortunately this increase in yields is negative and not positive for EUR/USD. Also, French industrial production dropped by the largest amount since September 2012 and when combined with the slide in Italian industrial production points to softer Q2 GDP growth. The potential destabilization drove European stocks sharply lower today and further weakness is likely, leaving EUR/USD vulnerable to move a down to 1.35.
Why GBP/USD Refuses to Fall
Despite back-to-back disappointments in U.K. data the British pound refuses to break the 1.71 level against the U.S. dollar GBP/USD. This support level has held since the beginning of the month in the face of slower service sector activity, a surprise decline in manufacturing and industrial production, drop in house prices and a wider trade deficit. According to this morning's report, the country's trade deficit widened to 9.2 billion from 8.8 billion in the month of May. The details of the report showed that a small increase in exports was offset by a surge in imports. While an increase in domestic demand is encouraging, the rise was caused primarily by the imports of aircraft parts. As a result, the Bank of England left interest rates unchanged today and when the minutes are released they will most likely contain a more balanced tone. What is interesting about sterling's recent performance is that we have seen the currency weaken against the euro, British pound and Australian dollar but it refuses to fall versus the greenback for 2 main reasons. First and foremost speculative long positions in GBP/USD are at 7-year highs and based on the price action, there's clearly defense of stops or options barriers below 1.71. Secondly, even though weaker data has driven Gilt yields lower, Treasury yields are falling in lockstep, keeping GBP/USD supported.
Will Canadian Employment Help or Hurt USD/CAD?
For the past 2 weeks USD/CAD traded between 1.06 and 1.07. The drop in oil prices, surprise contraction in the IVEY PMI index and today's slower house price growth failed to hurt the currency but Friday we have the Canadian employment report and if job growth slows materially, it could finally drive USD/CAD above 1.07. Economists are looking for a relatively steady pace of job growth but according to the IVEY PMI index, the manufacturing sector experienced a further contraction in jobs so the risk is for a downside surprise in Friday's report. However bigger losses were seen in the Australian and New Zealand dollars. AUD was hit hard by weak labor market data and a surprise narrowing of China's trade surplus. As reported by our colleague Boris Schlossberg, "In Australia the jobs report showed a gain of 15K versus 12K eyed but the headline number hid many problems in the Australian labor market. The gain in the jobs number was due solely to a pick up in part time employment. Full time jobs actually declined by -3K. Unemployment rate also rose by more than expected hitting 6.0% versus 5.9%. As many analysts noted in reaction to the news, the latest CPI data out of Australia has been cooler than projected while the most recent jobs reports missed the mark suggesting that the RBA could surprise the market with another rate cut if such trends persist into the second half of the year. This would especially be true if the Australian dollar exchange rate remains highly elevated as the RBA continues to be concerned about the deteriorating terms of trade Down Under. Wednesday night's weaker than expected Chinese Trade Balance data which printed at 31B versus 37B eyed also pressured the Aussie as it indicated that Chinese demand is slowing faster than forecast." AUD and NZD were expected to remain weak ahead of Thursday night's Australian and New Zealand housing market reports.
Broad-Based Weakness in Japanese Yen Crosses
All of the Japanese Yen crosses sold off today on the back of the slide in USD/JPY and decline in U.S. equities. A number of Japanese economic reports were released overnight but risk appetite continues to be the primary driver of Yen flows. Although machinery orders dropped a whopping 19.5% in May, the decline was offset by a rise in consumer confidence and increase in producer prices. May was a more difficult month with both manufacturers and non-manufacturers reporting a decline in orders. We don't expect this pullback to faze the Bank of Japan who will be happy to see inflation and consumer sentiment move in the right direction. The central bank is widely expected to leave monetary policy unchanged next week. According to the Ministry of Finance's portfolio flow report, Japanese investors continued to buy foreign stocks and sell foreign bonds while foreign investors added to their holdings of Japanese stocks and bought Japanese bonds. While Japanese Yen crosses are vulnerable to additional losses, the decline in many of the currency pairs stalled above key technical levels. The move in USD/JPY for example stopped at 101, EUR/JPY ended the day near its June lows of 137.70 as CAD/JPY and AUD/JPY settled near 95. No Japanese economic reports are scheduled for release Friday.