FX Traders Should Ignore Fed Minutes

Based on the price action in the currency and equity markets, investors are feeling optimistic Tuesday as stocks rise to fresh record highs and currencies such as the EUR, GBP, AUD and NZD resume or extend their gains. The U.S. dollar traded lower against all of the major currencies including the Japanese Yen, which failed to make a run for 100 overnight. With no major news behind the pullback, this is likely a pause before further gains. The next 24 hours should get more interesting for currency traders with Chinese trade numbers and FOMC minutes scheduled for release.

While the Chinese trade numbers are worth watching especially with the AUD/USD hovering around 1.05, we believe FX traders should take the FOMC minutes with a grain of salt. The minutes will be from the Fed meeting held between March 19th and 20th. This was right after the huge jump in non-farm payrolls and the big rise in retail sales so the Fed will most likely be more optimistic with talk of varying asset purchases gaining traction. Since then, we have seen a huge pullback in job growth, decline in consumer confidence, slower manufacturing and service sector activity. The only unambiguously positive development has been the persistent rise in U.S. stocks. We believe that some FOMC voters may have grown less optimistic but based on Tuesday's comments from Fed Presidents, not everyone has been fazed by the softer NFP report. FOMC voter Bullard is a known hawk who did not sound overly concerned about the recent payrolls miss. He spoke early this morning to NPR from Berlin and said the March payrolls number could be revised (upwards). He also downplayed the labor participation rate, which fell to a 30 year low by saying that it has been falling since 2000. Bullard still believes the unemployment rate will drop to 7% and sees more willingness within the FOMC to make small adjustments in bond purchases. Fed President Lacker who is not a voting member of the FOMC this year said he has not changed his growth forecasts followin the jobs report. While we agree that the March payrolls report could be revised higher, we doubt that it will be revised enough such that labor market concerns are eliminated. The dollar did not rally on Bullard's comments, suggesting that others investors may concur with our skepticism.

EUR: Stronger German Data But Weakness Beneath The Headline
For the fifth consecutive trading day, the euro extended its gains against the U.S. dollar thanks in part to better than expected German data. The euro zone's largest economy reported a greater trade and current account surplus in the month of February. The trade balance rose to a high of 16.8B from 13.6B while the current account surplus rose to 16B from 9.7B. At first glance these numbers are very good and suggests that the pullback in Germany was temporary but a deeper look at the details show sizeable declines in exports and imports. Exports fell 1.5% against expectations for a drop of 0.3%. Weaker exports also hurt France who reported a larger trade deficit for the month of February. We expect the EUR/USD rally to stall at its resistance level of 1.3130, where the 50 and 100-day Simple Moving Averages converge. Meanwhile the Swiss Franc is trading lower against the euro and higher against the dollar following mixed economic data. Retail sales ticked up in the month of February but consumer price growth eased. For the Swiss National Bank, these inconsistent changes in Swiss data will leave monetary policy easy. No major euro zone economic reports are scheduled for release Wednesday.

AUD: Sustained Break Of 1.05 Hinges On Chinese Data
The Australian and New Zealand dollars soared on the back of stronger domestic demand and softer inflationary pressures in China. Consumer price growth in China slowed to 2.1% from 3.2% and this decline will most likely discourage the People's Bank of China from shifting to a neutral bias. The decline in price pressures will give the PBoC the flexibility to consider looser monetary policy. Whether that will be needed or not will hinge on this evening's Chinese trade numbers. If exports remain strong and the trade surplus increases, the AUD/USD could extend its gains above 1.05. If exports plunge and the surplus shrinks, this would mark the currency pair's third failed attempt to break through this key level. Stronger Australian business confidence also helped to lift the AUD but took a back seat to Chinese data. The same will be true for the Australian consumer confidence numbers, which should affect the AUD less than Chinese trade numbers. Meanwhile the New Zealand dollar rose to a six-week high against the U.S. dollar on the back of the CPI numbers with the move being helped by a stronger increase in New Zealand house prices. Up North the Canadian dollar held onto its gains after mixed housing market numbers. Housing starts increased more than expected to 184K from 183.2K but building permits dropped to 1.7% from 1.8%. The decline in Canadian job growth had only a temporary impact on the CAD, which is close to recapturing all of last week's losses.

USD/JPY: Still Poised For A Run To 100
USD/JPY failed to make a run for 100 over the past 24 hours but this does not mean the currency pair will not try again before the end of the week. We believe that it will only be a matter of time before this level is taken out. As indicated by our colleague Boris Schlossberg, the pullback in USD/JPY during the Asian trading session was caused by comments from Finance Minister Aso. He said "Excessive yen gain has been corrected", which traders interpreted to mean that Japanese officials may be trying to temper the rally, but Mr. Aso quickly changed his wording to "is correcting" suggesting that authorities in Japan are not yet fully satisfied with the exchange level. Just to reinforce the notion Koichi Hamada, an economic adviser to Prime Minister Shinzo Abe, said that a level of 98.00-100.00 for USD/JPY would be good for the economy. However, after failing to mount a run at 100.00 USD/JPY remained unmoved by Mr. Hamada's dovish rhetoric. The minutes from the March Bank of Japan monetary policy meeting was also released overnight and while a few members of the central bank expressed reservations about cutting overnight lending rates, these discussions were held under former BoJ Governor Shirakawa's watch and not Kuroda's.

GBP: Mixed Data Leads To Reluctant Rally
It was a mixed day for the British pound, which strengthened against the U.S. dollar but weakened against the Euro and Japanese Yen. This morning's U.K. economic reports were mixed with industrial and manufacturing production increasing but the trade deficit widening. For sterling, the overall news was good enough to prevent a deeper correction in the GBP/USD but still points to a subdued outlook for the U.K. economy. The 1% increase in industrial production and 0.8% rise in manufacturing production failed to completely offset the larger decline experienced the month prior. The trade deficit also rose to its highest level in 4 months from -GBP8.168 billion to -GBP9.416 billion and the details of the report showed a 2.1% decline in exports and 2.2% increase in imports. Weaker external demand is bad news for the U.K. but next month's report should be better as the decline in sterling during the months of February and March help to boost trade activity. According to the National Institute of Economic and Social Research, GDP increased 0.1% in the month of March, the same pace of growth experienced the previous month. While this is a well needed improvement, it has yet to offset the 0.3% decline in January. No major U.K. economic reports are schedule for release Wednesday.

Kathy Lien, Managing Director of FX Strategy for BK Asset Management.