Yesterday's market movers:
- US and Chinese Currencies Strengthen Ahead of G20
- EUR Collapses on Rate Cut Speculation
- GBP – Beware of Weak Retail Sales
- CAD – Hit by Bank of Canada’s GDP Revisions
- NZD – CPI Ticks Higher in Q1
- AUD – Shrugs Off Rise in Leading Indicators
- JPY – Expect Further Improvement in Trade
US and Chinese Currencies Strengthen Ahead of G20
With the U.S. dollar trading higher against all of the major currencies yesterday, it is easy to attribute the move to the more positive Beige Book report. Many people feared that given the recent weakness of U.S. data, the Beige Book report would paint an ugly picture of the current state of the U.S. economy. Thankfully it did not.
According to a summary of the reports from the 12 Fed districts, consumer spending grew modestly while employment conditions remained unchanged or improved. This is good news because it suggests that the weakness experienced in March did not extend into April. Of course, it is early to draw any conclusions but the Beige Book report could have been far worse.
What is interesting though is that equities and bonds did not respond nearly as well to the report. The S&P 500 held onto its losses while the 10-year U.S. Treasury yield dropped to a year-to-date low. This indicates that investors in other markets are skeptical about the optimism from the Beige Book and are worried about the global recovery in general.
As a result, they have piled back into the U.S. dollar, which has become the preferred safe haven after the BoJ’s monetary policy decision increased the risk of holding the Japanese yen. Jobless claims, the Philadelphia Fed survey and leading indicators reports are are all scheduled for release later today. Based on the decline in the Empire State survey, we could be looking at the possibility of weaker data.
Meanwhile, with the sharp sell-off in the EUR and the focus on the ongoing developments in Boston, traders may have missed the big move in the Chinese yuan. The People’s Bank of China set the yuan at a rate of 6.1727 Tuesday night, its strongest level in 19 years. According to the Vice Governor of the central bank, they plan to increase the floating band of the yuan further and allow the exchange rate to be more market oriented going forward.
Nonetheless, the U.S. Treasury doesn’t seem to be pleased. Treasury Secretary Lew said yesterday that China’s move to more exchange rate flexibility has slowed. Part of the reason why we could be seeing unusual strength in the yuan is because the G20 Finance Ministers and Central Bankers meeting begins today and China is notorious for allowing its currency to strengthen before these key events.
EUR Collapses on Rate Cut Speculation
The worst performing currency yesterday was the euro, which dropped more than 1% against the U.S. dollar. No major economic reports were released but the combination of dovish comments from an ECB official and a more positive Federal Reserve Beige Book report was enough to drive the currency pair sharply lower.
While the euro began to sell-off 2 hours into the European trading session, the bulk of the move occurred around 10am NY time. Just when the Bank of Canada was delivering its monetary policy decision, the euro was hit hard by the decline in U.S. stocks and comments from ECB policymaker and Bundesbank President Jens Weidmann who said the central bank could cut interest rates if new information warrants it.
If the ECB is serious about cutting rates, it would be a significant enough catalyst for this sell-off in the euro to last. We know that economic data out of the eurozone has taken a turn for the worse and the simultaneous slowdown in the U.S. and China could hurt the region more by negatively affecting export demand. German stocks haven’t been holding up nearly as well as U.S. equities and this only adds to the ongoing pressure of austerity on the region’s economy.
The ECB is a central bank that likes to prepare the market for any potential changes in monetary policy which is why Weidmann’s comments are so important because it could be the first of many to follow. A rate cut is clearly on the table and if next week’s economic IFO and PMI reports confirm the need for additional easing, the ECB could start to lay a stronger foundation for cutting interest rates in May or June.
GBP – Beware of Weak Retail Sales
The British pound fell sharply against the U.S. dollar yesterday on the back of mixed U.K. employment numbers. According to the claimant count report, jobless claims fell for the fifth month in a row, which should have been good news for the GBP because fewer people were claiming jobless benefits but unfortunately the unemployment rate rose to 7.9% from 7.8%.
Average weekly earnings growth also slowed to 0.8% from 1.2%, which was the slowest pace of growth in 11 months. As indicated by our colleague Boris Schlossberg, “overall, the number of people out of work in the U.K. rose 70,000 in the three months to February-the highest increase since September to November 2011.”
The growing evidence of weakness in the U.K. economy increases the odds of more stimulus from the Bank of England this year. Retail sales are scheduled for release today and economists are already looking for a decline. Based on a survey conducted by the British Retail Consortium, consumer spending growth slowed significantly between February and March. If retail sales misses expectations, sterling should extend its losses against the USD and EUR.
Meanwhile, the Bank of England minutes provided no new insight into how soon the BoE could ease as concerns about inflation overshadowed worries about growth in the month of April. The committee voted 6-3 to leave monetary policy unchanged this month – Governor King, MPC members Miles and Fisher were the dissenters.
CAD – Hit by Bank of Canada’s GDP Revisions
The recovery in the Canadian, Australian and New Zealand dollars was extremely short-lived as these 3 currencies resumed their slide against the greenback. As expected, the Bank of Canada left interest rates unchanged at 1%. However, the CAD fell because the central bank downgraded their 2013 GDP forecast and upgraded their 2014 forecast.
The upward revision would have been good if not for the fact that their downward revision for 2013 from 2% to 1.5% far exceeded their 0.1% upward revision for 2014. As a result, the Canadian dollar sold off even as the Bank of Canada repeated that a modest withdrawal of stimulus would likely be required in the future. The central bank felt that there is “material slack” in the economy and for this reason, interest rates remain appropriate. The BoC has moved further away from a rate hike and this slight shift in stance was enough to drive USD/CAD to a high just shy of 1.03.
Consumer prices in New Zealand increased 0.4% in the first quarter but the NZD failed to benefit from the data because price growth fell short of expectations. Even if it exceeded the market’s forecast of 0.5%, we are not sure if it would have helped the NZD all that much considering that the AUD ignored an increase in leading indicators.
JPY – Expect Further Improvement in Trade
The Japanese yen traded higher against all of the major currencies yesterday except for the U.S. dollar. USD/JPY held steady while pairs like EUR/JPY and CHF/JPY dropped over 1%.
The resilience in USD/JPY is impressive and can be attributed to the Beige Book report, which did not sound as pessimistic as many had feared. The rest of the yen crosses on the other hand fell victim to the sell-off in risk.
Last night’s consumer confidence report was a bit of a surprise. While confidence increased in the month of March, the improvement was much smaller than expected and in fact nominal. Considering how much the weak currency, bold stimulus and rise in equities should be helping the economy, we expect to have a much larger improvement in sentiment. Unfortunately, the Japanese are still very worried about income growth and don’t think that their overall livelihood has improved all that much. Nonetheles we still expect trade numbers to show that certain areas of Japan’s economy is benefitting from the weak yen. The country’s deficit should continue to shrink after reaching a record high in the month of January.