Plenty of news out overnight, as we had the Reserve Bank of New Zealand hiking rates and raising growth forecasts, saw an insane outlier in Australia’s full-time payrolls growth, and saw disappointing data out of China. Then, we had EURUSD rushing higher through stops above 1.3900 on no news at all, apparently only driven by order flow.
The RBNZ hiked rates as expected, but the market managed to find upside surprise from the rather hawkish forward guidance and raising of growth and inflation forecasts. The RBNZ statement continues to bemoan the high exchange rate and says that it is unsustainable in the long run, but the market preferred to salivate over expectations of expanding carry differentials in favour of the kiwi for the foreseeable future. NZDUSD has cleared its late 2013 highs and is now taking aim at highs from April of last year at 0.8677. The all time high for NZDUSD was 0.8843 back in the summer of 2011.
CAD has ticked a bit higher again versus the US dollar as risk appetite recovered yesterday, but is weak in some of the other crosses after oil dropped heavily yesterday despite the face-off over Ukraine.
AUD was sharply stronger overnight after the Australian payrolls data mean-reverted from recent weakness and then some. The full time payrolls growth was an absurd plus 80,000, equating to something like a plus 800,000 NFP for the US on a per capita basis. There are clear problems with the data series on a month-to-month basis, so this data point must clearly be taken with a grain of salt. Because of an odd jump in the participation rate, the payrolls growth did not bring down the unemployment rate from its 10 pus-year highs. Forward Australian STIRs dropped several ticks by the end of the session, supporting the AUD rally.
China’s Industrial Production and Retail Sales data for February came in weaker than expected, adding to the recent worries on China’s growth picture.
Chart: AUDUSD
AUDUSD partially reversed the reversal overnight on the strong employment release, but it will need a follow-on move to fully reset the local expectations higher. We still have the upside-down head and shoulders formation potential to consider after the initial attempt up through the neckline was rejected. A break back above 0.9100 could threaten a move to 0.9250 or even 0.9500, though the latter looks like a bit of a stretch. A 100 percent Fibonacci extension of the late rally would see a move to 0.9320.
Ukraine
The US announced yesterday that it would “test” its strategic petroleum reserve system — an obvious manoeuvre aimed at the face-off with Russia over Ukraine. The reserve has approximately 700 million barrels equating to a mere 36-day supply of total US oil consumption, but the US gets little oil directly from Russia (It imported up to 750,000 barrels/day by 2010, but that amount has dropped to closer to 250,000 b/d now) and could use the reserve as a way to allow some of its imports from OPEC countries in the Middle East to go to Europe instead of to the US in the event of Russian sanctions. Outside of North and South America and Sub-Saharan Africa, of the US’ total import quantities of approximately 10 million b/d, only a little over 2 million b/d comes from OPEC countries in the Middle East so the US could go without this supply for almost a year if absolutely necessary.
The geopolitics surrounding Russia are heating up rapidly after the G7 issued a statement yesterday asking for Russia to leave the Crimea, that it wouldn’t recognise the result of the Crimean referendum this weekend on whether to align with Russia, and that failure to withdraw Russian troops from Crimea would have “grave consequences”. It appears the Russians have a deaf ear to all of this, as Russian troops are apparently massing on the Ukrainian border.
It is surprising to me to see EUR up here at new highs despite the situation in Ukraine. It is apparently more of a safe haven than I would have previously thought, with CHF receiving even more support. I would suspect at some point that the if the Ukraine situation heats up further, it becomes a distinctly negative factor for the euro. One thing is for sure, the multi-year lows in volatility are likely a thing of the past very soon. The JPY could get even more support from Ukraine if the US equity market stops its surreal assault on fresh highs, even with these events unfolding.
Looking ahead
The US February Retail Sales is up today, with the usual weather caveats that are dogging everyone’s visibility on the status of the US economy. Certainly, a strong number would be the “surprise side” for this one after a weak ISM non-manufacturing survey for the month and due to the obvious weather disruptions from multiple storms. And the disruptive weather has continued into this month, with yet another storm hitting the Northeast now.
The US dollar is really on the defensive again today after trying to make a stand late last week. The focus is now on next week’s Federal Open Market Committee, though I think the recent rhetoric of US Federal Reserve chief Janet Yellen suggests we get a no-surprise outcome there, with another USD 10 billion reduction in monthly purchases. It looks like the EURUSD wants to have a go at 1.4000, that GBPUSD has successfully survived a downside range test, and that the commodity currencies, possibly ex-CAD are ready for further gains until proven otherwise. This leaves the USDJPY as the sole pair where the direction in doubt, as that pair is leaning heavily on 102.50 area support now and will use risk appetite and the US retail sales data to either push lower or make a stand.
Stay tuned.
Economic data highlights
- New Zealand RBNZ raised the Official Cash rate 25 bps to 2.75% as expected
- Japan Jan. Machine Orders rose +13.4% MoM and +23.6% YoY vs. +7.1%/+18.9% expected, respectively, and vs. +6.7% YoY in Dec.
- UK Feb. RICS House Price Balance out at 45% vs. 52% expected and 52% in Jan.
- Australia Feb. Employment Change out at +47.3k vs. +15k expected and +18k in Jan.
- Australia Feb. Unemployment Rate out unchanged at 6.0% as expected
- China Feb. Retail Sales out at +11.8% YoY (YTD) vs. +13.5% expected
- China Feb. Industrial Production out at +8.6% YoY (YTD) vs. +8.6% expected
Upcoming economic calendar hghlights (all times GMT)
- Eurozone ECB’s Coeure to Speak (0815)
- Sweden Feb. Unemployment Rate (0830)
- US Feb. Retail Sales (1230)
- US Weekly Initial Weekly Jobless Claims (1230)
- US Weekly Bloomberb Consumer Comfort Survey (1345)
- US Fed’s Fischer, Brainard, Powell in Senate Hearing (1400)
- US Jan. Business Inventories (1400)
- Eurozone ECB President Draghi to Speak (1700)
- New Zealand Feb. BusinessNZ Manufacturing PMI (2130)
- Japan Bank of Japan Meeting Minutes (2350)
- UK Bank of England publishes quarterly bulletin (0005)