- Spike in US Yields will be Good for Dollar
- CAD: Avoids Deeper Slide Thanks to Stronger CPI
- AUD: China Says No to More Stimulus
- NZD: Extends Losses Despite Rise in Consumer Confidence
- EUR Becoming a Bigger Problem for the ECB
- GBP: Rally Fizzles After Hitting Fresh 4 Year Highs
- JPY: Cabinet Lowers Economic Assessment but BoJ Not Worried
Spike in US Yields will be Good for Dollar
The spike in U.S. Treasury yields Thursday drove the dollar higher against all of the major currencies. 10-year yields rose 9bp, its largest one-day increase since the March FOMC meeting. There was no specific catalyst for the move in yields but Thursday’s better than expected economic reports, the increase in the S&P 500, stronger Chinese growth and the Fed’s optimism are all valid reasons for why yields are bottoming but a 9bp move on a low volume trading day is most likely caused in part by institutional positioning. Either way, the rise in yields is good for the dollar and while the gains in the greenback Thursday were limited, as long as yields do not suddenly reverse, it will encourage further gains in the dollar.
Meanwhile, Thursday’s jobless claims report confirms that unwinding Quantitative Easing is not hurting the economy. Exiting from a long period of ultra easy monetary policy is always tricky and if done carelessly could put the entire recovery at risk. This explains why the Federal Reserve has been so adamant about stressing that policy will remain extremely accommodative and reluctant to put timing on tightening. They want to make sure that rates stay low, providing continued support to the economy.
Unfortunately investors have not been impressed by the recent improvements in the labor market and part of the reason is because forward guidance is working too well. The Fed has done a fantastic job of convincing the market that rates will remain low for a very long period. The economy is also not improving as quickly as economists and investors would like -- there are still pockets of weakness in the manufacturing and housing markets. It is also important to remember that this month’s jobless claims reports are distorted by Passover and Easter holidays.
The number of Americans filing for unemployment benefits rose to 304k in the week ending on April 12th from 302k. These are the lowest levels that we have seen jobless claims at since the global financial crisis and the less volatile 4-week moving average also fell to its lowest level since October 2007. Fewer layoffs are starting to translate into more hiring but the pace of improvement has been slow and until wage growth picks up, policymakers will be reluctant to tighten. Earlier this week we learned that manufacturing conditions in the NY region grew at a significantly slower pace but manufacturing activity in the Philadelphia surged this month with the Philly Fed index rising to its strongest level since September 2013. More specifically the Philly Fed index jumped from 9 to 16.60 in April.
With U.S. markets closed Friday for Good Friday and no additional economic reports scheduled for release, we don't expect much momentum in the dollar, which will most likely end the week slightly stronger against the euro and Japanese Yen.
CAD: Avoids Deeper Slide Thanks to Stronger CPI
All three of the commodity currencies traded lower against the greenback Thursday but the Canadian dollar avoided a deeper slide thanks to a better-than-expected CPI report. Consumer prices rose 0.6% in the month of March compared to a forecast of 0.4%. On an annualized basis, this drove CPI growth up to 1.5% from 1.1%. Core prices also increased year over year but the rise was more modest. After the Bank of Canada’s comment yesterday that inflation this year is higher than they expected, Thursday’s stronger report did not catch many traders by surprise. Meanwhile the New Zealand dollar extended its losses after Wednesday’s weak milk auction. Traders completely ignored the increase in consumer confidence, choosing instead to focus on the strain on exporters and the smaller rise in job advertisements. The Australian dollar dropped to its lowest level in a week on the back of lower business confidence but the primary reason for the pressure on AUD and NZD has nothing to do with domestic demand but instead was caused by comments from China. Once again, Chinese Premier Li said they are not considering strong stimulus now because as long as growth is a little higher or lower than 7.5%, their fiscal and monetary policy stance can be kept unchanged. A large part of the rally in the Australian dollar in March was driven by speculation that China could accelerate stimulus and now that they are saying no, some traders are unwinding those positions.
EUR Becoming a Bigger Problem for the ECB
It has been 3 days since we have seen any meaningful price action in the euro. The single currency ended the day unchanged after giving up all of its earlier gains. The central bank is growing increasingly concerned about the level of the currency, making it clear that they do not want to see EUR/USD above 1.40. This afternoon ECB member Mersch said point blank that a continuation of FX developments would trigger action by the central bank. There is no question that he is referring to the strength of the euro, which is playing a big role in driving down inflation. Traders need to look no further than this morning’s German producer price report for evidence of falling price pressures. German producer prices dropped 0.3% in the month of March, leaving year over year inflation at negative 0.9%. However the euro refuses to fall and according to our colleague Boris Schlossberg, “the market is convinced that the ECB will do nothing in response to the deflationary pressures as it continues to rely on organic growth in the region to pull the EZ economy out of the deflation trap. To that end next weeks EZ flash PMI data will be key to shaping the near term policy response from Frankfurt. If the PMIs show some improvement, the ECB will have been vindicated in its hands off stance. However if the data continues to falter the pressure on Mr, Draghi and company to become more accommodative will increase markedly.”
GBP: Rally Fizzles After Hitting Fresh 4 Year Highs
The third time was the charm for the pound, which broke through 1.6822 to climb to its strongest level in 4 years versus the U.S. dollar. Unfortunately there has been very little follow through with the currency pair extending only 20 pips beyond its previous high. No U.K. economic reports were released Thursday and with U.K. markets closed Friday for the Easter holiday, sterling should be subjected to a relatively narrow trading range. The FTSE traded slightly higher, keeping GBP/USD afloat and if not for the rise in U.S. yields, sterling would probably be ending the week closer to its highs. According to the latest labor and housing market numbers, the U.K. recovery is on track but with low inflation, there is no real urgency for the Bank of England to raise rates. So further gains in sterling in the near term will hinge on the market’s appetite for U.S. dollars. We know that speculative long positions in the GBP/USD are at extreme levels which means everyone expects sterling to rise.
JPY: Cabinet Lowers Economic Assessment but BoJ Not Worried
Thanks to the sharp increase in U.S. yields, USD/JPY extended its gains for the fifth consecutive trading day and this strength drove most of the Yen pairs higher. AUD/JPY and NZD/JPY did not participate in the rally as China’s refusal to accelerate stimulus drove the Australian and New Zealand dollars lower. The Nikkei 225 ended the day unchanged after Wednesday’s 3% rise despite slightly weaker consumer confidence. This may be due in part to the sharp rise in department store sales in the month of March. Wage growth also appears to be increasing according to Nikkei, one of Japan’s largest newspapers. Higher wage growth is absolutely necessary if Japan wants to beat deflation but with the consumption tax expected to drive CPI up to 3%, the 2.39% increase expected by Nikkei is still below the rate of inflation. Nonetheless, the first print above 2% in 15 years is still a step in the right direction. As the Nikkei reported earlier this week, the government lowered its economic assessment in April. They now view the recovery on a moderate trend with weak movements seen which compares to their previous view that the economy is recovering at a moderate pace with a last minute rise in demand. This is the first downgrade since November 2012. The BoJ however stuck to their view that the decline in demand after the sales tax increase is in line with expectations.
Kathy Lien, Managing Director of FX Strategy for BK Asset Management.