While forex market volatility dropped to five-year lows this month, quiet trading also paved the way to big moves in currencies last week.
The US dollar ripped higher as the Euro dropped to its lowest level in nearly two years and the Swiss Franc hit its weakest level since January 2017. Other major currencies like the Australian, Canadian and New Zealand dollars also slipped to 2019 lows. It would be easy to attribute these moves to stronger US data but the latest economic reports were mixed. Treasury yields fell over the past week as stocks came off record highs. Instead the reason why investors are buying dollars is because weakness abroad makes other currencies less attractive. The Australian dollar was the worst performer while the Japanese yen was the best.
These days, nothing is more important than relative growth and monetary policy divergences and this should become even clearer in the week ahead with nonfarm payrolls and the Federal Reserve’s monetary policy announcement on the calendar.
- Existing home sales 5.21M vs. 5.3M Expected
- Richmond Fed Index 3 vs. 10 Expected
- New Home Sales 692K vs. 647K Expected
- Durable Goods 2.7% vs. 0.8% Expected
- Durable Goods ex transport 0.4% vs. 0.2% Expected
- Q1 GDP 3.2% vs. 2.2% Expected
- Q1 Personal Consumption 1.2% vs. 1% Expected
- University of Michigan Revision 97.2 vs. 97 Expected
- Federal Reserve rate decision – No changes expected but investors will be eager to see if they recognize data improvements
- Nonfarm payrolls – NFPs are hard to predict but extremely market moving especially since forecast does not call for much data deviation
- Personal income and spending – Spending should grow with rise in retail sales but incomes could be weaker given wages
- Consumer confidence – Rise in stocks and recovery in jobs should bolster sentiment
- ADP – Improvement likely to reflect last month’s uptick in jobs
- ISM Manufacturing – Tough call as stronger manufacturing conditions in NY region offset by weakness in Philadelphia
- ISM Non-Manufacturing – Could see some stability in service sector activity
- Support 111.00
- Resistance 113.00
Dollar – all eyes on FOMC and NFP
April has been a great month for the US dollar. Not only did the greenback appreciate against all of the major currencies but in many cases, it hit multi-month to multi-year highs. The dollar’s strength is driven by a combination of stronger US data and rising stock values. Investors are attracted to the record-breaking moves in US equities; their confidence is encouraged by better data and low interest rates.
The US economy grew 3.2% in the first quarter, which was significantly stronger than the market’s 2.3% forecast. While trade and inventory take most of the credit, consumer spending also picked up in March. The persistent strength of the labour market and the continued rise in stocks should keep demand supported.
How the dollar trades this week will be a question of how the Federal Reserve views these improvements – are they a sign that the prior slowdown is temporary, or should they be overlooked in favour of low inflation and sluggish global growth? The Federal Reserve meets this Wednesday and a press conference will follow the policy announcement.
When it met last March, the dollar crashed after the dot-plot forecast revealed the majority of US policymakers no longer believed a rate hike was necessary this year. At the time, Fed Chair Powell said the economy was in a good place but trade talks, Brexit, European tariffs, twin deficits and weaker global growth posed serious risk. Until some of these uncertainties are lifted, he felt that “it’s a great time for the Fed to be patient, to watch and wait.”
Since then, job growth, retail sales, manufacturing activity and inflation ticked higher. The Fed will be relieved to see these improvements, but the dollar will only rise if it indicates the market’s expectations for a rate cut are misplaced. Fed fund futures are pricing in a 67% chance of easing this year – but no Fed presidents have talked about rate cuts while many insist that if data improves, another hike may be warranted this year. So if Powell downplays the possibility of easing, the dollar will extend its rise, otherwise investors will move onto nonfarm payrolls.
With jobless claims hitting 50-year lows this month, steady job growth is expected because the labour market is strong. The upcoming 10-day holiday in Japan lowers liquidity, which means it could expand USDJPY volatility.
AUD, NZD, CAD
- Q1 CPI QoQ 0% vs. 0.2% Expected
- Q1 CPI YoY 1.3% vs. 1.5% Expected
- Q1 PPI QoQ -.4% vs. 0.5% Previous
- Q1 PPI YoY 1.9% vs. 2% Previous
- Credit Card Spending -0.1% vs. 0.3% Previous
- ANZ Consumer Confidence vs. 0.8% Previous
- Trade Balance 922M vs. 131M Expected
- Bank of Canada Leaves Rates Unchanged, Lower GDP Forecast, Drops Reference to Rate Hike
- Chinese PMIs – Chinese data is hard to predict but can be market moving
- AU PMI Manufacturing – Hard to predict but RBA dovishness suggests data weakness
- AU PMI Services – Will have to see how manufacturing PMI fares but weakness likely given RBA dovishness
- NZ Employment Report – Potential downside surprise as PMIs show weakness in job growth that is confirmed by lower Manpower index
- GDP – Likely to be stronger given uptick in retail sales and trade
- Support AUD .7000 NZD .6600 CAD 1.3400
- Resistance AUD .7100 NZD .6800 CAD 1.3600
AUD Sinks on CPI, USDCAD soars on dovish BoC
The Australian, New Zealand and Canadian dollars dropped to year-to-date lows last week and unlike other currencies, these moves were driven by concerns about easing. The chance is low, but AUD bears are hopeful as futures show a 70% chance of a rate cut next month. The Reserve Bank threw out this possibility earlier this month and with consumer price growth stagnating in the first quarter, traders put their bets on a rate cut. However, with initial signs of stability in China’s economy and talk of a signing summit for the US and China next month, further losses in AUDUSD should be limited. We could see a final push lower on this week’s PMIs and FOMC but after that, the Australian dollar should stabilise. We are beginning to see signs of a potential bottom in the New Zealand dollar thanks in large part to a much stronger than expected trade balance. New Zealand’s trade surplus grew to 922M in March, which was seven times greater than expected. Exports hit record highs on solid dairy demand from China. If this demand keeps up, the RBNZ won’t need to consider easing. Although in the near term, the New Zealand dollar could resume its slide because according to the PMIs, job growth slowed in the first quarter. If employment change stagnates or worse, turns negative, NZDUSD could slip back below 66 cents quickly.
USDCAD soared above 1.35 following the Bank of Canada’s monetary policy announcement, which completely ignored improvements in retail sales and trade. It kept interest rates unchanged at 1.75%, lowered its economic forecast and dropped their hawkish bias. Instead of growing 1.7% in 2019, they now expect only 1.2% growth due to weaker than expected housing and consumption. The central bank no longer feels its next move should be higher, according to policy statement that said the “Governing Council judges that an accommodative policy interest rate continues to be warranted.” They are worried about global growth, housing and even the oil sector, which should be benefitting from recovery in crude prices. Although Governor Poloz felt that if their forecast is right, rates are more likely to go up than down, the risk for USDCAD is to the upside.
- Public Finances 8.871B vs. 0.67B Previous
- CBI Total Trends -5 vs. 2 Previous
- Bank of England Rate Decision – No changes are expected but BoE won’t be happy with Brexit delays
- PMI Manufacturing – Potential improvement given rise in CBI
- PMI Services – Will have to see how manufacturing data fares but should be better
- Support 1.2800
- Resistance 1.3100
Will the BoE lower economic projections?
Sterling will also be in focus with the PMIs, Bank of England monetary policy announcement, and quarterly inflation report scheduled for this week.
GBPUSD fell to a two-month low as the greenback was higher against all of the major currencies. The UK economy has held up fairly well in the face of Brexit uncertainty, but the central bank has no reason to alter their neutral bias until the government decides on the terms of exit. Prime Minister May bought the country six-months but all options are still on the table, which is not palatable for the BoE. Sterling is finding it difficult to attract buyers because October 31st will roll around quickly and uncertainty will return well before that.
When the BoE last met in March, sterling rebounded following the rate decision because the central bank said “gradual, limited tightening is probably needed.” Since the unemployment rate dropped to its lowest level since the 1970s, wage growth increased, helping retail sales grow at a faster pace. Unfortunately, inflation remains low, GDP growth has weakened, service sector activity has contracted and the trade deficit widened. The BoE won’t be happy with these changes but the steadiness of spending and uptick in manufacturing could keep their economic projections steady. If the central bank maintains a positive attitude and views the Brexit delay as beneficial to the economy, GBPUSD should rally back above 1.3050. However, if they make small negative tweaks to their economic forecasts or join the chorus of policymakers emphasising the possibility of easing, the next stop for GBPUSD will be below 1.28.
- German IFO Business Climate 99.2 vs. 99.9 Expected
- German IFO Expectations 95.2 vs. 96 Expected
- German IFO Current Assessment 103.3 vs. 103.6 Expected
- EZ Confidence – Potential for downside surprise given weaker German IFO, mixed ZEW and PMIs
- German labor market data – Should be stronger as PMIs show faster job growth
- EZ Q1 GDP – Potential upside surprise given stronger EZ trade and retail sales
- German CPI – Lower PPI and lower price growth according to PMIs signal softer inflation
- EZ PMI Revisions – Revisions are difficult to predict but changes will be market moving
- EZ CPI Estimate – Potential downside surprise given lower German PPI but German CPI will be a great guide
- Support 1.1000
- Resistance 1.1200
Euro breaks down, heads towards 1.10
EURUSD finally broke 1.12 to fall to its lowest level since May 2017. For the past few weeks, we said that on a fundamental basis, there is very little reason to be bullish about euros and ultimately the pair is headed for 1.10. Even with the latest fall, we continue to expect a further decline especially after the drop in German business confidence.
The improvement in service sector activity last month failed to boost sentiment as it appears businesses share Bundesbank President Jens Weidmann’s concern that growth could slow materially in 2019. Tariffs are a risk and until EU-US trade tensions ease, euro is sell on rallies. There are a number of Eurozone economic reports scheduled for release this week from EZ Q1 GDP to German labour data and CPI but the direction of euro will most likely be determined by the market’s appetite for US dollars because of the market moving-ness of FOMC and US nonfarm payrolls. If EURUSD squeezes higher, the rally should fizzle between 1.1250 and 1.13.