Last week we told our readers to brace for big breakouts and while not every currency saw big moves, USD/JPY rose to its strongest level in two months, GBP/USD rose to its highest level in seven months and USD/CAD jumped nearly a percent on Friday.
What’s surprising is that the US GDP report, which is usually not a big market mover had a far greater impact on the dollar than China’s tariff extension or Federal Reserve Chairman Powell’s testimony to Congress. With USD/JPY hovering just under 111 for more than two weeks, investors were desperate for good news, which they found in Q4 GDP. However, that positive sentiment may not last with downside risks to the three monetary policy announcements and two key employment reports on the calendar. China may be close to a trade deal with the US but until an agreement is signed, sealed and delivered, central bankers will remain skeptical. The European Central Bank also cannot assume that when it comes down to the wire (and it has) UK Prime Minister May will forgo a no-deal Brexit. Caution will be the buzzword for all central bankers, especially the ECB and RBA who are the most sensitive to Brexit and Chinese trade uncertainties. With that in mind, sterling continues to be the best performer as the Australian and New Zealand dollars lag behind.
US Dollar
Data Review
- Housing Starts 1078K vs. 1256K Expected
- Building Permits 1326K vs. 1290 Expected
- S&P Case Shiller House Prices 0.19% vs. 0.3% Expected
- Richmond Fed Index 16 vs. 5 Expected
- Conference Board Consumer Confidence 131.4 vs. 124.9 Expected
- Conference Board Consumer Confidence Expectations 103.4 vs. 89.4 Previous
- Trade Balance -$79.5B vs. -$73.6B Expected
- Pending Home Sales 4.6% vs. 1% Expected
- Factory Orders 0.1% vs. 0.6% Expected
- Jobless Claims 225K vs. 220K Expected
- Q4 GDP 2.6% vs. 2.2% Expected
- Personal Consumption 2.8% vs. 3% Expected
- Chicago PMI 64.7 vs. 57.5 Expected
- Personal Income -0.1% vs. 0.3% Expected
- Personal Spending -0.5% vs. -0.3% Expected
- ISM Manufacturing 54.2 vs. 55.8 Expected
- University of Michigan Consumer Sentiment Index Revisions 93.8 vs. 95.9 Expected
Data Preview
- ISM Non-manufacturing index & new home sales - Potential for downside surprise given weaker manufacturing ISM and existing home sales
- ADP employment change – Potential for downside surprise given unexpected strength last month
- Trade Balance – Likely to remain weak given the softness of manufacturing
- Fed Beige Book – There have been some improvements in the economy but Fed districts could still report weakness
- Nonfarm Payrolls – Potential for downside surprise given last month’s unexpected strength
Key Levels
- Support 110.00
- Resistance 113.00
US dollar (Post-GDP high) – how much further can it rise?
The US dollar is coasting on a post GDP high and USD/JPY is enjoying one of the strongest rallies but better than expected growth was not the only reason for the pair’s gains. Here’s a quick look at the reasons why USD/JPY hit 112:
- Better-than-expected US Q4 GDP
- US 10-year Treasury yields hit 1-month highs
- Trump extends China trade deadline
- Tensions between India & Pakistan ease
- Fed Chair Powell expresses optimism on the US economy
- BoJ talks easing
Last week kicked off with President Trump’s decision to delay the next round of Chinese tariffs. Then came Fed Chair Powell, who could have focused on the red flags in the economy or the possibility of no rate hike this year, but he didn’t say anything damaging during his testimony on Capitol Hill. Instead, he highlighted the positive outlook for the economy and overall strength of the labor market. During the week the Bank of Japan talked about being open to additional stimulus, which hurt the Japanese yen and US Q4 GDP beat expectations driving the greenback higher. Tensions between India and Pakistan which could have escalated quickly eased with the return of an Indian pilot.
It was a busy week for US data and while other economic reports were not as positive as the Q4 GDP report, it was good enough for the Fed fund futures to price in a greater chance of a rate hike than a rate cut this year, something that we haven’t seen for a few weeks now. 10-year Treasury yields also rose to their highest level in a month. The fundamentals are not in favor of the dollar, at least in the near term. GDP growth did not slow as much as economists anticipated in the last three months of the year, but it still slowed and growth in the first quarter should be worse as it includes the impact of the government shutdown. We also can’t ignore the fact that many of the other economic reports released this past week reflected weakness in the US economy. This includes housing data, personal income, spending, the trade balance and the ISM manufacturing index and the revisions. The Conference Board Consumer confidence index was higher and manufacturing activity in the Chicago region improved but next week’s employment report won’t be so kind to the dollar. Job growth was unexpectedly strong in the month of January and as a result, could pare back in February and the January numbers could also be revised lower. If the ISM and ADP (NASDAQ:ADP) report flash warning signs for the labor market, USD/JPY could fall back quickly. However, if the job market continues to power on USD/JPY will make its way up to 114. Technically, 111 has been an important resistance level for USD/JPY for more than two weeks and finally on the back of slower but better than expected growth in the fourth quarter, the pair hit a high of 112, a level not seen since December of last year. This move is important because it also takes the pair above all major moving averages, opening the door for a move to 113 – 114 zone.
AUD, NZD, CAD
Data Review
Australia
- AU PMI Manufacturing 54 vs. 52.5 Previous
New Zealand
- Retail Sales ex Inflation QoQ 1.7% vs. 0.5% Expected
- Trade Balance -914M vs. -300M Expected
- ANZ Business Confidence -30.9 vs. -24.1 Expected
- ANZ Consumer Confidence -0.7% vs. -0.2% Expected
- Building Permits 16.5% vs. 5.4% Previous
- Terms of trade Q4 -3% vs. -1% Expected
Canada
- CPI 0.1% vs. 0.1% Expected
- CPI YoY 1.4% vs. 1.4% Expected
- Current Account balance -15.48B vs. -13.25B Expected
- Industrial Product Price -0.3% vs. 0.1% Expected
- Quarterly GDP 0.4% vs. 1% Expected
- GDP MoM -0.1% vs. 0% Expected
- GDP YoY 1.1% vs. 1.4% Expected
Data Preview
Australia
- RBA Rate Decision – RBA will be neutral but could comment on improved economic conditions
- AU PMI Services – Potential for upside surprise given stronger manufacturing activity
- Q4 GDP – Potential upside surprise given an improvement in trade and only slight weakness in spending in Q4
- Retail Sales & Trade Balance – Trade should be weaker given softer manufacturing activity, but spending rebound likely after the end of year drop
New Zealand
- No Data
Canada
- Bank of Canada Rate Decision – Beware of cautious comments from the central bank
- Trade Balance – Potential upside surprise given an improvement in IVEY PMI
- IVEY PMI – Job growth last month signals potential recovery
- Employment Report – Will have to see how IVEY fares but pullback likely after a strong month
Key Levels
- Support AUD .7000 NZD .6700 CAD 1.3200
- Resistance AUD .7200 NZD .6900 CAD 1.3400
Counting On Australia And Canada Rate Decisions?
Last week was a challenging one for all three of the commodity currencies. The Australian dollar led the decline, but the New Zealand and Canadian dollars also moved in a way that favors further losses ahead. This upcoming week will be an important one for the Australian dollar that could take AUD/USD out its 3-week .7057 to .7207 range. The manufacturing PMI index was the only piece of market-moving data on Australia’s calendar and the better than expected report should have helped the Australian dollar. However, with interest rate hikes by local banks and rate cut predictions by economists, the fundamental forces were skewed against gains in the currency. Underlying demand for the greenback was also strong and combined with the sell-off in gold prices, took AUD/USD to the bottom of its 3-week range. If the Reserve Bank ignores the improvements in the economy or GDP and retail sales falls short of expectations, we could see AUD/USD break 70 cents.
Looking ahead to the RBA, we recall that when they last met, Governor Lowe sent AUD/USD tumbling lower by lowering their growth and inflation forecast, highlighting the risks abroad, expressing concerns about housing market consumption and describing the interest rate outlook as more evenly balanced. These comments led investors to rule out a 2019 rate hike and left the RBA with a dovish slant. So, while the following table which compares data changes from the last meeting show an economy that is starting to improve, we believe that the RBA will remain cautious. Behind the scenes, they’ll be happy that the March 1st deadline passed with no additional tariffs on China but before a deal is signed, their economic assumptions won’t be changed. With a rate hike off the table for this year, the path of least resistance for AUD/USD is lower but there could be support at 70 cents if GDP growth or retail sales beat expectations.
The New Zealand dollar, on the other hand, has fundamental support for its decline. Despite the recovery in dairy prices, the country’s trade surplus turned into a deficit in the month of January. The balance was three times worse than expected and accompanied by a significant downward revision to the January figures. Although a large part of the deterioration was caused by higher crude prices blowing out the import balance, business and consumer suffered as a result. These numbers reinforce Governor Orr’s warning earlier last month that continued data deterioration could lead to a rate cut. NZD/USD erased all of its beginning of the week gains and is at risk of testing the February 22nd, .6758 low. With no New Zealand data on this week’s calendar, NZD should move in lockstep with AUD and take its cue from the market’s appetite for US dollars. Technically, ending the week at its lows is not good for the currency so while the 68 cent support still holds, for now, a move to .6750 is likely.
The Bank of Canada also has a lot to consider. The labor market is strong, but the rest of the economy is weak. When the central bank last met, they lowered their GDP and inflation forecasts. These changes were validated by the latest reports, which showed quarterly GDP growth slowing to 0.4% from 2%. Annualized CPI growth also dropped to its weakest level in more than a year. At the same time, oil prices are recovering and the Federal Reserve appears to be slowing their pace of tightening. We don’t expect the Bank of Canada to change their policy stance – which is no rate hikes at this time but eventually, they will need to move higher. What could be more important than the BoC will be the upcoming IVEY PMI and employment reports – given the strength of the last release, a pullback is likely. Technically, USD/CAD traded sharply higher on Friday and there’s a good possibility the pair will see 1.34 this week.
British Pound
Data Review
- BRC Shop Price Index 0.7% vs. 0.3% Expected
- GfK Consumer Confidence -13 vs. -15 Expected
- Nationwide House Prices -0.1% vs. 0% Expected
- Mortgage Approvals 66.8K vs. 63.4K Expected
- Manufacturing PMI index 52. Vs. 52 Expected
Data Preview
- PMI Services Index – Beware of weakness due to weaker manufacturing activity and impact of Brexit
Key Levels
- Support 1.3000
- Resistance 1.3300
Getting Down To The Wire – Sterling Rejects 1.33
At the start of last week, GBP/USD raced above 1.33 on the belief that Parliament will do whatever it takes to prevent a no-deal Brexit and if Jeremy Corbyn has his way, there will be a second referendum that could put the whole notion of Brexit behind us. And while these are still the two most likely outcomes, with less than a month to go, investors are getting more nervous than ever. Theresa May’s ongoing negotiations with the EU and other parties in the government have yielded very little. She’s promised another meaningful vote in Parliament on March 12 and she’s likely to concede to an extension of Article 50, which would delay Brexit. There’s already been talk of a 2-year extension in Brussels. Last week, the Trump Administration gave the UK a taste of the trade agreements they can expect when they leave the European Union. They want barriers on US exports to be removed, particularly on agricultural goods and warned that they could take “appropriate action” if they negotiate a trade deal with a “non-market country,” like China. This will certainly be problematic for the UK as it shows the challenges of negotiating from their weakened stance. The economy is also suffering from BoE Governor Carney's warning about a big hit to business investment. Manufacturing activity also slowed last month for the second month in a row. We expect this same weakness in next week’s PMI services report but the main focus will still be Brexit and any headlines on extending Article 50, a no deal Brexit or a second referendum.
Euro
Data Review
- German CPI MoM 0.5% vs. 0.4% Expected
- German CPI YoY 1.6% vs. 1.5% Expected
- German Retail Sales 3.3% vs. 2% Expected
- German Unemployment Change -21K vs. -5K Expected
- EZ Economic Confidence 106.1 vs. 106 Expected
- EZ PMI Manufacturing 49.3 vs. 49.2 Expected
- EZ Unemployment Rate 7.8% vs. 7.9% Expected
- EZ CPI Core 1% vs. 1.1% Expected
Data Preview
- ECB Rate Decision – We expect continued dovishness from the ECB
- German PMI Services – Revisions are difficult to predict but changes can be market moving
- German Factory Orders – Rebound expected weakness previous month
- EZ PPI – Potential upside surprise given a stronger German and French PPI
- EZ Retail Sales – Potential downside surprise given a sharp drop in German retail sales
- EZ GDP – Revisions are difficult to predict but changes will be market moving
Key Levels
- Support 1.1300
- Resistance 1.1450
Euro – German Yields Bottom But 1.14 Still Caps Gains
EUR/USD is being tugged in two directions and it may be up to this week’s European Central Bank rate decision to decide where the pair heads next. On the one hand, German bond yields are finally bottoming as inflation turns higher and retail sales recover. Unemployment rolls also declined further, fueling the improvement in confidence. But with a stronger US GDP report and the ECB talking about another targeted long-term refinancing operation (TLTRO), the rally has been capped at 1.14. If the central bank decides to provide another round of cheap loans, the stimulative action will extend the period of cheap money and delay a rate hike from the central bank. If they decide not to make a decision until June, which could be possible as they may want to avoid liquidity shortages from past TLTROs maturing, the market sees this as slightly positive for the currency. While there have been both improvements and deterioration in the Eurozone economy since the January meeting, the decline in inflation should keep the central bank dovish.
