- Why Currencies Are Still Trailing Equities
- EUR: Ends Day Near Its Lows
- What Crushed Tuesday's GBP
- NZD: Soaring On Hotter Export Prices
- AUD: RBA Has No Major Concerns About Currency
- CAD: Gold Down 1.5%
- JPY: Kuroda Sheds Light On BoJ Plans
U.S. stocks continued to climb to the record highs and some currencies followed but others didn't. The EUR, GBP and CHF fell victim to weaker economic data and persistent uncertainty while the AUD, NZD and CAD benefitted from the improvement in risk appetite. The JPY also declined but that was consistent with the rally in equities. While easy monetary policy continued to provide underlying support for the stock market, news that the government will increase payments to private Medicare advantage insurers drove health care stocks higher. This is a stock specific boost that doesn't really carry over to currencies but as long as stocks don't crash, the hope that the EUR/USD will recover will remain. The same is true for the hope that USD/JPY and AUD/USD will extend their gains.
Four Federal Reserve Presidents spoke on Tuesday. Fed President Kocherlakota believed that the central bank could ease further by clarifying their QE pledge. In general, he felt that monetary policy was not accommodative enough. Fed President Lockhart on the other hand was more optimistic. He saw continuing momentum in the U.S. economy and noted that unemployment declined faster than he forecasted. However he doesn't believe that the growth in the first quarter can be sustained for the rest of the year. Neither one of these Fed Presidents are FOMC voters. As of this writing, Evans and Lacker were scheduled to speak later Tuesday evening and while Evans is the only FOMC voter, we don't expect him to say anything different from last week. At the time, he said the outlook for the U.S. economy is "pretty good" but felt the Fed should continue buying bonds through the end of this year and warned they could increase QE if job growth falters.
The only pieces of U.S. data on the calendar this morning were factory orders and the IBD/TIPP Economic Optimism index. Factory orders rose 3% in the month of February. This was slightly stronger than expected and bullish for the USD especially since the previous month's report was revised up from -2% to -1%. According to IBD/TIPP, Americans grew more optimistic about the outlook for the U.S. economy in the month of April. The index jumped from 42.2 to 46.2 and this strength should be mirrored in the University of Michigan Consumer Confidence report due later this month.
With the ADP employment change and ISM non-manufacturing reports scheduled for release Wednesday, the market will start to focus on nonfarm payrolls and the potential for slower job growth last month.
EUR: Ends Day Near Its Lows
On the first fully participated trading day of the second quarter, the EUR/USD ended the day near its lows. The currency pair had been under pressure for most of the European trading session but when the news of Cyprus' Finance Minister resignation broke before the U.S. stock market open, the selling exacerbated. While the government quickly found a replacement in Harris Georgiades, the deputy finance minister, euro bears still took it as a reason to sell the currency. As for economic data, the euro zone's manufacturing PMI index for the month of March was revised up to 46.6 from 46.8 thanks to stronger activity in Germany and France. Unfortunately slower growth in Spain and Italy, the third and fourth largest economies in the euro zone raised red flags for investors who interpreted the overall data to be negative for the euro. According to ECB member Coeure, monetary policy is likely to stay very accommodative in advanced economies. He said the financial markets are still fragile but on the path to recovery and added that while the exchange rate is not a policy target for the ECB, It can be part of their overall policy assessment as it may offset policy actions. What he means is that if the euro is too strong, it could reduce the impact of their stimulus but a weak currency could add to stimulus. Meanwhile it is also worth noting that the Swiss Franc traded lower on the back of weaker manufacturing numbers. After growing for 2 months, manufacturing activity contracted in March. This decline caught many economists by surprise as they had anticipated a small decline that would still be indicative of expansion.
What Crushed Tuesday's GBP
The British pound took a big hit from weaker than expected economic data. The country's PMI manufacturing index increased from 47.9 to 48.3 but the improvement fell short of expectations and left the sector in contractionary territory for the second month in a row. In addition, mortgage approvals dropped to their lowest level since September 2012, raising concerns about the validity of the economic improvements reported at the end of March and the overall health of the housing market. What was particularly worrisome though was the decline in FLS lending. If you recall, the U.K. government's Funding for Lending Scheme was aimed at encouraging lending by U.K. banks by providing them with much cheaper loans. Since its inception last August, the uptake has been lackluster. Lending fell GBP 2 billion in February, erasing nearly all of the gains in January. Given the increase in net consumer credit and lending, there's a good chance the drop was caused by a decline in corporate lending. The country's PMI Construction report is scheduled for release Wednesday and economists are looking for an increase but given recent disappointments in housing data, there's room for a downside surprise.
NZD: Soaring On Hotter Export Prices
The Australian, New Zealand and Canadian dollars traded higher against the greenback after the Reserve Bank of Australia its monetary policy statement virtually unchanged. Despite a deeper contraction in manufacturing activity during the month of March, the RBA made no suggestions that easier monetary policy was needed in the near term. While they left interest rates unchanged at 3% and maintained the view that further easing is possible, they also said downside risks appear to be reduced and expressed no major concerns about the level of the currency. The AUD/USD initially rose on the announcement but has since tapered its gains. Trade numbers are due for release this evening along with China's non-manufacturing PMI report. Based on the improvement in manufacturing activity in February (not March), Australia's trade deficit is expected to narrow. Meanwhile the New Zealand dollar was the day's best performer, rising more than 0.6% against the greenback following hotter than expected inflation. Commodity prices jumped 7.4% in March as export prices soar. This should translate into stronger profitability for companies in New Zealand. No economic data was released from Canada but gold prices are down 1.5% while oil prices have fallen slightly.
JPY: Kuroda Sheds Light On BoJ Plans
After falling to a low of 92.57 during the Asian trading session, USD/JPY experienced an intraday recovery that took the pair above 93 and back into positive territory. The only piece of Japanese data released overnight was labor cash earnings, which surprised to the downside. On an annualized basis, earnings fell 0.7% compared to a forecast of -0.2%. January numbers were also revised down from 0.7% to 0.1%. Japanese stocks continued to tumble with the Nikkei slipping another 1% overnight. Over the past 1.5 weeks, the Nikkei has fallen approximately 5%. USD/JPY took a hit from the decline but recovered because the Nikkei which had been down as much as 2.7% at one point rebounded off its lows. Bank of Japan Governor Kuroda, Prime Minister Abe and Deputy BoJ Governor Iwata spoke last night. They reiterated their commitment to reaching the government's 2% inflation target but admitted that the BoJ could fail and if that occurs, the central will be required to provide an explanation (similar to the BoE). Kuroda also shed some light on their plans - he said the BoJ will consider scrapping the banknote rule, combine asset buys and riban and ease boldly in quantity and quality. We continue to believe that the Bank of Japan will ease this week but in order for the Yen to weaken further, they will need to over deliver by announcing an open ended program or plans to consider one.
Kathy Lien, Managing Director of FX Strategy for BK Asset Management.