By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
The U.S. dollar traded higher against all major currencies Wednesday but USD/JPY was hands down the best performer. It's easy to explain the pair’s outperformance when we can identify at least 5 reasons for the rally:
- Kim Jong-un visits China: On Tuesday night we got official confirmation that Kim Jong-un chose to visit China for his first-ever international trip as North Korea’s leader. This unannounced visit is monumental for a number of reasons. First, it highlights China’s importance to North Korea and its desire to seek approval and guidance in upcoming meetings with U.S. and South Korean leaders. According to China, NK is committed to de-nuclearization, which is essential to reducing tensions in the region and eliminating the risk of U.S. military action. President Trump was quick to applaud the visit by tweeting that he looks forward to their meeting, which will most likely be in May. Ongoing progress with North Korea is positive for the markets because it eases one of last year’s greatest geopolitical risks and has played a big role in the recovery of U.S. stocks and USD/JPY.
- Stocks Halt Declines: Thanks to the NK news, U.S. stocks did not extend their sell-off after Tuesday’s sharp decline despite weakness in Asian equities. USD/JPY was able to break above 106 at the start of the NY session because traders saw that futures pointed to a positive open. The FTSE and CAC, which had initially been down, also turned positive for the day.
- U.S. Q1 GDP Revision: While USD/JPY broke above 106 before Wednesday morning’s U.S. economic reports, stronger data secured the pair’s rally. First-quarter U.S. GDP growth was revised up to 2.9% from 2.5% on the back of stronger spending and a smaller inventory drag. This increase along with the rise in pending home sales was better than expected, allowing USD/JPY to break 106.50 and eventually test 107.
- Technical Break Above 106.07: USD/JPY’s rally gained momentum when the pair broke above the 20-day SMA and March 22 high near 106.07. This triggered a series of stops that took USD/JPY above 106.30 quickly and then after the London close, the pair extended its gains to 107.00
- End-of-Month And Quarter Flows: Last but certainly not least, the first quarter was a very difficult one for USD/JPY. The pair dropped from a high of 113.38 to a low of 104.57. Many investors profited from this move and as the quarter draws to a close, profit-taking flows also contributed to the recovery in USD/JPY. Japan’s fiscal year ends on Friday and it appears that most of the repatriation has been completed.
Looking ahead, Thursday is the last full day of trade before the Easter holidays. With the exception of Japan and China, all of the major markets are closed on Friday. U.S. and Canadian markets are back online Monday but Europe, Australia and New Zealand will remain closed until Tuesday. Aside from the holidays, it is also the last day of the month and quarter, so we could see unusually erratic trading. A flurry of U.S. data is scheduled for release, including personal income, personal spending and Chicago PMI as the risk is to the downside for most of these reports.
Euro and sterling sold off against the U.S. dollar for the second day in row. Stronger German consumer confidence failed to help the single currency hold 1.24 with late-day selling driving the pair below the 20- and 50-day SMA at 1.2340. If the dollar continues to rise, the next stop could be 1.2250. Sterling on the other hand was pressured by a significantly weaker-than-expected CBI Distributive Sales survey. This report, which measures consumer demand, fell for the first time in 5 months due to inclement weather. However the Bank of England also warned about “evidence of financial distress in retail and leisure.” German labor market and inflation data are scheduled for release on Thursday along with the U.K.’s current account balance, first-quarter GDP revision and mortgage approvals.
All 3 of the commodity currencies traded lower against the greenback with the New Zealand dollar leading the slide. Although activity improved in March according to ANZ, business confidence slipped slightly. This report contributed to NZD’s weakness but the selling really accelerated when the U.S. dollar started to rise, triggering stops once the pair fell below the 20-day SMA, near .7250. The Canadian dollar was fairly resilient in the face of sharply lower oil prices and reports of significant gaps between the U.S. and Canada from Canadian NAFTA negotiator Verheul. Hope for a stronger Canadian GDP report on Thursday is the only explanation for the loonie’s refusal to fall as stronger retail sales and trade activity point to a faster growth in January. AUD/USD hit a fresh 3-month low but its losses were more modest than NZD/USD allowing AUD/NZD to halt a 4-day slide and trade back above 1.06.