Dollar Pops on Yellen, March Hike Still in Play
The U.S. dollar traded higher against all of the major currencies today after Fed Chair Janet Yellen said, "waiting too long to tighten would be unwise," adding later that "every FOMC meeting is a live meeting. Going into her testimony, some investors expected less enthusiasm from the Fed Chair in light of slower earnings growth and a higher unemployment rate but instead, Yellen remained committed to the central bank's plans for tightening and said rate increases (plural) in 2017 is appropriate. She felt that while it is too early to know what fiscal policies will be put in place, the economy has continued to make progress towards their twin goals of maximum sustainable unemployment and price stability. According to Yellen, wages have picked up and there has been widespread labor market improvement so she's clearly not worried about the recent slowdown in average hourly earnings. The tone of her semi-annual testimony was unambiguously positive and for that reason the U.S. dollar, U.S. stocks and U.S. rates moved sharply higher. Fed Presidents Lacker, Lockhart and Kaplan also spoke today and they all seem to agree that rates should be increased soon. FOMC voter Kaplan said the central bank should be raising rates sooner rather than later with non-voters Lacker saying he sees a compelling case for a March rate increase and Lockhart saying he could be easily persuaded to raise rates 3 times this year. While we don't expect any fireworks from day 2 of Yellen's testimony, we do believe that the dollar will extend its gains. Consumer prices, retail sales and the Empire State manufacturing indices are scheduled for release on Wednesday and given the rise in producer prices and the increase in spending according to Johnson Redbook, these reports should support further gains in the dollar.
Euro extended its losses today, falling for the 6th out of the last 7 trading days. Aside from the strength of the dollar, the euro was also pressured by weaker than expected data. German GDP growth rose 0.4 % in the fourth quarter, slightly below the 0.5% expected. Eurozone GDP saw similar results, showing the same 0.4% increase vs. 0.5% expected. GE CPI showed an expected decrease of 0.6% in January. Eurozone industrial production fell by -1.6% vs. -1.5% anticipated. The German ZEW survey of current conditions came in at 76.4, below the 77 reading and a drop from 77.3 the prior month. So as you can see all of today's reports were softer, validating the recent decline in the euro. The Eurozone trade balance figures are set for release tomorrow but the market's appetite for dollars will determine how the pair trades.
Sterling was fairly resilient in the face of broad based U.S. dollar strength. GBP/USD remained nestled in a 1.2550 and 1.2450 range for most of the day. Today's UK inflation reports were mixed - CPI came in line with expectations, showing a decline of 0.5% in January. RPI came in softer than expected showing a decline of 0.6% when a decline of 0.4% was expected for last month. The producer price index was the lone inflation bright spot with PPI input increasing 1.7%, far exceeding the 1.0% increase forecasted. PPI output also managed to beat expectations with a 0.6% increase vs. 0.3% increase expected. Core PPI output for the UK increased by 0.5% in January, better than the 0.3% expected. UK House Price Index also improved to 7.2% (YoY) better than the 6.5% increase expected. Labor data is scheduled for release tomorrow and given softer job growth reported in the manufacturing and service sectors, the risk is to the downside for this report.
The commodity currencies were mixed with the Canadian and New Zealand dollars ending the day lower against the greenback and the Australian dollar higher. The most interesting move for the commodity dollars came with the Australian Dollar. Prior to Yellen's speech, the Aussie managed to rise as close to the 0.77 handle, missing it by a mere 4 pips before taking a sharp turn downwars. The reason for the rise was due to a litany of positive data. NAB business confidence came in with a reading of 10 for the month of January, much higher than last month's reading of 6. Chinese CPI also managed to surprise to the upside showing growth of 2.5% for the month of January, better than the 2.4% increase expected. The Canadian Dollar touched above 1.31 today as Teranet/National Bank HPI fell short of the expected 1.50% increase, showing only a 0.5% increase for the month of January. The New Zealand dollar continued its downtrend after yesterday's disappointing housing data. There is nothing on tap for the commodity dollars tomorrow so the comm dollars will take their cue from the market's appetite for greenbacks.