- Talking Down The EUR
- Is the U.S. Dollar Losing Its Grip On The Forex Market?
- AUD: Ninth Straight Day Of Losses
- NZD: Shrugs Off Improved Budget And Business PMI
- CAD: CPI On Tap
- JPY: BoJ Policy Finally Affecting Investment Demand
- GBP: Potential Bottom In Sterling
The euro came under selling pressure Thursday against the U.S. dollar after European Industry Commissioner Tajani tried to talk down the currency. As the head of an agency whose goal is to protect the export sector, Tajani complained that the euro is too strong and called on the central bank to manage the currency in a way that would help exports. Considering that the euro has been in a downtrend since the beginning of the month and has lost over 5% since the beginning of February, some investors may be surprised by the timing of Tajani's comments. However it is clear that underperformance of the euro-zone economy, which is currently in recession is a big motivation for industry officials, politicians and central bankers to make overtures to weaken the euro now versus February. In addition, with the currency in a downtrend, comments such as these will have a greater impact on the euro. As the ECB considers whether to introduce negative deposit rates or purchases of asset backed securities, a weaker currency will provide additional support to the region's economy.
The euro zone reported a record trade surplus for the month of March. Thanks to a rise in exports, the region's trade balance rose to 18.7B, up from 12.7B. Unfortunately there was very little enthusiasm after the report because the details showed imports falling 1%. Domestic demand is a major problem for the Eurozone and a key factor in the 0.2% contraction the region endured in the first quarter so while the trade numbers improved, the impact on the euro was limited. Non-farm payrolls in France also fell 0.1% in the first quarter, a sign that the region's second largest economy continues to struggle. No euro zone economic reports are scheduled for release Friday so all eyes will be on comments from ECB officials -- Coeure, Asmussen, Praet and Mersch are scheduled to speak. If these four policymakers confirm that negative deposit rates or ABS purchases are on the table, the EUR could extend its slide.
USD: Day Two Of Weaker Data
U.S. economic data is taking a turn for the worse and the disappointments have prevented the greenback from extending its gains against the euro and Japanese Yen. This has led some investors to wonder if the dollar is losing its grip on the forex market. It is the second day in the row that U.S. data surprised to the downside and the consistent disappointments over the last 48 hours is now causing many investors to wonder if the market's enthusiasm for U.S. dollars were overblown. We had economic reports from almost every part of the economy and all of the releases surprised to the downside. Jobless claims jumped from 328k to 360k, the highest level in six weeks. According to the Labor Department the surge which was the largest since Hurricane Sandy last year was not caused by the filings of any specific state. In other words, the increase in job losses was broadly dispersed across the nation. Considering that claims have been at extremely low levels over the past few weeks, we feel investors shouldn't read too much into this release until it becomes a more consistent trend especially since continuing claims declined. The surprise was in housing starts, which dropped 16.5% to their lowest level in five months. This steep decline, the largest since February 2011 illustrates just how volatile housing market activity can be as starts rose 5.4% the previous month. However any concern about the sector was alleviated by the 14.3% rise in building permits. Not only was this the largest increase since June 2008, but the rise suggests that the housing market will regain momentum in the coming months.
Meanwhile the 0.4% decline in consumer prices confirm that inflation is not a problem and for the Federal Reserve this means room to delay changes in monetary policy. The real worry is manufacturing -- the Philadelphia Fed index turned negative in the month of May, dropping from 1.30 to minus 5.2. With manufacturing activity contracting in both the Philadelphia and NY regions, it is possible that the sector as a whole suffered in March. Based on the price action of the dollar, which has only given up part of its gains, investors are concerned but not overly distressed about the latest disappointments. A number of Federal Reserve Presidents were set to speak Thursday but the ones that we really need to pay attention to are FOMC voters Rosengren and Raskin. Rosengren has already spoken and as a well known dove, he was cautiously about the outlook for the U.S. economy. He said that while the labor market has undergone gradual improvement and consumer spending has been relatively robust, the fiscal drag could lead to tepid overall growth. Considering that there is still a "fair amount" of U.S. labor market slack, Rosengren feels that "it still makes sense to have accommodative policy," which suggests that doesn't support tapering asset purchases. Fed policymaker Raskin who spoke later in the day made very similar comments. Non-voting members of the FOMC including Fisher, Plosser and Williams were more vocal and made it clear they support varying the amount of bonds purchased as early as June -- William's comments caused stocks to extend lower and the dollar to rise at the end of the North American session. The University of Michigan consumer confidence report for the month of May is scheduled for release on Friday.
AUD: Ninth Straight Day Of Losses
The worst performing currencies were the Australian and New Zealand dollars. The AUD has now fallen against the USD for nine consecutive trading days and has lost more than 5% of its value over the last month. The NZD is performing just as poorly, although it managed to rebound on Wednesday. No economic data was released from Australia and believe it or not, New Zealand data surprised to upside with the country reporting an improved budget balance and an increase in the Business PMI. So what's behind the sell-off in the AUD and NZD? Commodity prices. The bulk of the selling in AUD and NZD happened during the Asian trading session when local investors woke up and saw how much commodity prices have declined. More specifically, gold broke below $1,400 an ounce to trade at its lowest level in more than a month. The decline in commodity prices only adds to Australia's problems, which include slower domestic and external growth. However the silver lining in all of this is that the recent weakness of the currency will help to stimulate Australia's economy, reducing the pressure on the RBA to ease again. There were no Australian economic reports scheduled for release Thursday night but China's leading economic index could affect how the currency trades. If there is further evidence of slower growth in Australia's largest trading partner, the AUD could extend its losses. Producer prices and consumer confidence numbers are expected from New Zealand and Canada will release its consumer price report. Inflationary pressures are not a primary problem right now so we do not expect this report to have much of an impact on the CAD, which ended the day unchanged against the greenback.
JPY: BoJ Policy Finally Affecting Investment Demand
It was a very busy night in Japan yesterday but despite the significance of the latest economic reports, Japanese economic data failed to have a meaningful impact on the Yen. Instead Thursday's rally in the Yen should be attributed more to deleveraging than optimism for Japan because the sell-off in USD/JPY and other pairs did not begin until the early North American trading session. The downtrend gained momentum after a series of disappointing U.S. economic releases. Still the improvements in Japan's economy are worth acknowledging. GDP growth hit 0.9% in Q1, up from 0.3% in Q4. This was strongest pace of growth in a year and continues the trend of improvement that we have seen over the past few months. Industrial production also rose 0.9%, which bodes well for the manufacturing sector. Most importantly, the Japanese were net buyers of foreign bonds for the second month in a row. At Y186.4B, their purchases have slowed from last week but the mere fact that the Japanese were net buyers for the third month in a row is enough to suggest that BoJ policies are finally affecting investment demand -- a necessary criteria for a stronger USD/JPY rally. As long as these flows remain positive, a deep correction in USD/JPY can be avoided.
GBP: Potential Bottom In Sterling
The British pound traded well against all of the major currencies despite the lack of U.K. data. The improvements that we have seen in the economy over the past few weeks and the optimistic tone of the Bank of England's Quarterly Inflation report has finally caught up to sterling and is lending support to the currency. We believe that this is the beginning of what could be a more significant turn in the currency but don't expect a move above 1.55 before Mark Carney gives his blessing. The new BoE Governor could still choose to start his term strong by easing monetary policy and if he brings up this possibility in July, the outlook for the GBP/USD could be very different. In the meantime, from a technical and fundamental perspective, the currency pair appears poised for further gains. The charts show a potential bottom in the GBP/USD above 1.52. With no U.K. economic reports scheduled for release Friday, we expect sterling to hold onto its recent gains.
Kathy Lien, Managing Director of FX Strategy for BK Asset Management.