By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
Wednesday's U.S. dollar ended the day unchanged-to-lower against all of the major currencies. For many, this performance is surprising considering the strength of the latest U.S. economic reports, new highs in U.S. stocks and the rise in Treasury yields. Consumer spending, inflation and manufacturing activity in the NY region all beat expectations and the dollar responded appropriately with across-the-board gains when the data was released. USD/JPY even climbed within 5 pips of 115. However shortly after these reports came out, the greenback lost momentum, partly due to an unexpected decline in industrial production and a brief comment from Janet Yellen, who said “economic performance has been quite disappointing.” Investors latched onto these words even though she spent more of her Congressional testimony talking about solid consumer spending and the pickup in business and consumer confidence. While she was slightly more cautious, the overall tone of her comments was positive and more importantly, after all of Wednesday’s developments, rate-hike expectations increased with Fed Fund futures pricing in a 46% chance of a hike in March -- up from 34% on Tuesday. The 10-year Treasury yield also resumed its rise toward the end of the NY session, a sign that the U.S. dollar remains a buy on dips. For USD/JPY, anywhere between 113.50 and 114.10 is a good area to go long and for EUR/USD, the 1.06-1.0650 region is an attractive level to short. Housing starts, building permits, jobless claims and the Philadelphia Fed survey are scheduled for release on Thursday -- higher mortgage rates may have hurt housing activity but the impact of the dollar should be short-lived.
Wednesday's euro traded higher against the U.S. dollar for the first time in 5 trading days. The recovery was driven entirely by the pullback in the dollar as the single currency spent the first half of the North American trading session in negative territory. The Eurozone’s trade balance report was the only piece of data on Eurozone calendar and despite deterioration in Germany, the region’s total trade surplus was better than expected, coming in at 24.5B, versus 22B eyed. However even with this improvement, the European Central Bank is in no position to unwind monetary policy -- committee member Jazbec said Wednesday that talk of QE tapering remains a hypothetical at this point. The ECB releases the account of its latest monetary policy meeting Thursday and chances are it will echo the central bank’s cautious views.
Sterling has been remarkably resilient in the face of weaker data. Tuesday's GBP held firm despite lower consumer prices and on Wednesday, it recovered all of its earlier losses despite significantly weaker-than-anticipated wage growth. According to our colleague Boris Schlossberg:
UK claimant count declined by a whopping -42K vs, 1,1K eyed but the figure was based on a new measuring method by the ONS and was ignored. Unemployment remained the same at 4.8% but the weak link in the data proved to be wages. Average wages declined to 2.6% from 2.8% eyed with the weakest growth in the private sector which saw the pace decline to 2.8% versus 3.2% the period prior. Clearly, UK consumers are having a difficult time keeping up with cost of living increases and their indebtedness is now highest in Europe. All of this makes it much less likely that the BOE will even consider tightening rates in 2017 as the economic conditions are less robust than they appear.
There are no major U.K. economic reports scheduled for release on Thursday but the slowdown in wage growth points to weaker retail sales on Friday. Between soft U.K. data, a rise in U.S. rates and the change in Fed-fund expectations, we expect GBP/USD to retreat soon.
The Australian and New Zealand dollars ended the day sharply higher against the greenback while the Canadian dollar was unchanged. AUD/USD climbed to a 3-month high, thanks in part to the rise in consumer confidence and the decline in the U.S. dollar. Australian labor data was due Wednesday evening, which is tough call as stronger manufacturing employment is likely to be offset by weaker services employment this month. New Zealand manufacturing PMI and retail sales numbers scheduled for release end-of-day Thursday and while NZD is rallying strongly, Thursday’s reports are likely to be softer. The Canadian dollar’s move was hampered by weaker data. Canadian existing home sales took a dip in January with a decline of 1.3%, a stark contrast to the 2.2% increase the prior month. Oil also contributed to the loonie’s underperformance as US crude inventories reached record highs. The EIA reported that crude inventories rose 9.5m barrels, far outpacing the 3.5m barrel increase expected.