The US dollar finally sprang back to life late yesterday. It was tough to find a catalyst for the move, with some pointing the finger at the Russian mobilisation of troops near the Ukrainian border, though the focus quickly shifted to a more than five-year high in US New Home Sales for January, a massive upside surprise of expectations. It’s interesting that this data point and the general mood saw equities recovering from an earlier sell-off, while fixed income remained strongly bid — a sign of rather cautious sentiment. This recovery looks technically significant (save for USDJPY) and now the weakest USD levels of the last few days mark an important line in the sand from here.
Chart: EURUSD
After posting the lowest ATR reading in nearly seven years, we finally got a sharper move yesterday out of EURUSD, which further underlines the low quality of the recent break higher above 1.3700. So now we have the 1.3700/25 area as resistance and lots of range to work with to the downside as we look ahead to the next set of event risks. The key levels after next week’s European Central Bank meeting will be the 1.3475/1.3500 zone, toward which the 200-day moving average is rapidly rising.
The Australian capital expenditures data out overnight showed a massive quarter-on-quarter drop on top of a downward revision to Q3 data and brings fresh worries to light about the state of the Australian economy without its reliance on the previous mining boom. The economy has seen tailwinds from the further Reserve Bank of Australia easing of the last couple of years, but this kind of data point suggests the RBA may tilt toward easing policy again sooner rather than later. Two-year Australian rates were off sharply overnight on this move by about 4 bps and are down some 15 bps and more from the highs of three weeks ago.
The Swiss GDP data this morning came up short of expectations, but failed to trigger a market reaction. EURCHF is trading near 10-month lows here and less than 200 pips from the 1.20 floor. Domestic economic weakness would eventually provoke an SNB response.
Emerging-market currencies were generally weaker versus the USD, one of the more significant and broad moves in EM after a long and grinding consolidation in recent weeks. The Russian ruble has been sold off the hardest among major EM currencies recently as the situation in Ukraine adds an extra twist on the situation there. Brazil’s central bank raised rates once again, but has switched to 25 bp increments from its previous 50 bp moves. The BRL has been one of the stronger EM currencies of late, though it nudged weaker yesterday as well.
Looking ahead
We’ve got a string of potential event risks from later in the day for Europe starting with the German CPI figures at 1300 and the ECB’s Jen Weidmann out at the same time. Weidmann has made a number of tone deaf comments in the past that are typical of the Bundesbank’s austere view on monetary and fiscal policy, so any softening of his antipathy for quantitative easing or any rise in worry expressed on deflation risks (he recently said there is very little risk of Eurozone deflation) would be taken as significant, otherwise we shouldn’t expect dovish signals from the Bundesbank. The German CPI figures could spark considerable short-term volatility as they will colour sentiment heading into next week’s ECB meeting. ECB president Mario Draghi is also speaking late in the day, but it’s hard to imagine him dropping any strong hints ahead of next week and his presence is in connection with the same event at which Weidmann will be speaking: a Bundesbank Symposium on Financial Stability and the Role of Central Banks.
Today’s Canada Current Account data is likely to provide support for USDCAD at current levels or higher as the long years of CAD strength and a private sector leveraging up have pushed Canada strongly into deficit territory to the tune of worse than minus 3 percent of GDP.
We also have US-based event risks today, most obviously in the form of Janet Yellen’s semi-annual testimony before the Senate, a repeat of the testimony of two weeks ago, but with a new question and answer session. I see few risks for USD weakness from this as the market expectations are about as dovish as possible.
Elsewhere, the durable goods orders and capital expenditure data for January are worth noting. Expectations are for some mean reversion higher after an ugly dip in the December data. It’s a choppy data series.
And then overnight we have the usual raft of late month data out of Japan, including inflation and spending data and the latest manufacturing PMI. But how does the market react? This latest JPY resilience has taken place during a bout of ugly Japanese data surprises.
Economic data highlights
- New Zealand Jan. Trade Balance out at +306M vs. +230M expected and +493M in Dec.
- Australia Q4 Private Capital Expenditures dropped -5.2% QoQ vs. -1.3% expected and vs. +2.6% in Q3
- Switzerland Q4 GDP out at +0.2% QoQ and +1.7% YoY vs. +0.4%/+2.0% expected, respectively and vs. +2.1% YoY in Q3.
Upcoming economic calendar highlights (all times GMT)
- Sweden Jan. Trade Balance (0830)
- Sweden Jan. Household Lending (0830)
- Germany Feb. Unemployment Change/Rate (0855)
- Euro Zone Feb. Economic/Industrial/Consumer/Services Confidence Surveys (1000)
- Germany Feb. CPI (1300)
- Euro Zone ECB’s Weidmann to Speak (1300)
- Canada Q4 Current Account Balance (1330)
- US Jan. Durable Goods Orders (1330)
- US Weekly Initial Jobless Claims (1330)
- Euro Zone ECB’s Liikanen to Speak (1415)
- US Weekly Bloomberg Consumer Comfort Survey (1445)
- US Fed Chair Yellen to testify before Senate (1500)
- US Feb. Kansas City Fed Manufacturing Survey (1600)
- Euro Zone ECB’s Draghi to Speak (1830)
- UK Bank of England’s Miles to Speak (1830)
- US Fed’s Lockhart, George to Speak (2015)
- New Zealand Jan. Building Permits (2145)
- Japan Feb. Markit/JMMA Manufacturing PMI (2315)
- Japan Jan. Overall Household Spending (2330)
- Japan Jan. Jobless Rate (2330)
- Japan Jan. National CPI (2330)
- Japan Jan. Industrial Production (2350)
- Japan Jan. Retail Trade (2350)
- New Zealand Feb. ANZ Business Confidence (0000)
- Australia Jan. Private Sector Credit (0030)
- Japan Jan. Housing Starts (0500)