By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
Thursday's U.S. dollar traded lower against all of the major currencies with the exception of the British pound, which continues to march to its own beat. It has been a great month for the greenback and with Janet Yellen speaking on Friday, dollar bulls decided to take profits on part of their long positions. Investors shrugged off the latest round of stronger-than-expected U.S. data even as they validate the talk of a summer rate hike. Jobless claims dropped to 268K from 278K, durable goods orders rose 3.4% and pending home sales increased 5.1%. Fed President Powell, who doesn’t share his views on the economy often, said a rate hike may be appropriate “fairly soon". As a voting member of the FOMC this year, his views are worth noting. All of these developments should have driven the dollar higher but instead of rising, the greenback fell as investors worry about the downside risks to Janet Yellen’s speech on Friday and first-quarter GDP numbers. However given the uniformity of comments from policymakers, we don’t think Yellen will throw cold water on rate-hike expectations and could in fact reinforce them. Economists are also looking for first-quarter GDP growth to be revised higher so Thursday’s pullback in the dollar should be temporary. Even if the greenback fails to extend its gains Friday, it remains a buy on dips ahead of the June monetary policy announcement.
The decline in the dollar helped the euro enjoy its strongest one-day rally in 2 weeks. But even with Thursday’s move, EUR/USD remains in a downtrend as long as the May 23 high of 1.1243 is held. No major Eurozone economic reports were released Thursday but investors are finally recognizing this week’s stronger German data and the impact that it could have on next week’s European Central Bank monetary policy announcement. The ECB is widely expected to leave interest rates unchanged but improvements in Germany and France, the region’s 2 largest economies, could be enough for the central bank to repeat that it wants to give the economy more time to absorb stimulus before deciding what steps to take next. However the ECB may also indicate its willingness to increase stimulus if Brexit causes major disruptions to the financial markets.
All three of the commodity currencies ticked higher on Thursday with USD/CAD slipping for the third day in a row. Oil prices broke above $50 a barrel but ended the day below this key level. Yet between Wednesday’s Bank of Canada’s monetary policy decision and the recent increase in oil prices, CAD recaptured a good part of its recent losses. The New Zealand dollar experienced a roller coaster ride Wednesday night falling first on Fonterra’s warning about the impact of a strong currency and then recovering after the government posted a budget surplus. The rally continued in Europe as investors sold the U.S. dollar and near the U.S. close, sold off again after Finance Minister English said he is in discussions with the RBNZ on new macro prudential tools that are likely aimed at the housing market. The Australian dollar also rebounded despite a sharp drop in private capital expenditure. There were no Australian economic reports scheduled for release Thursday night but RBA Assistant Governor Debelle was slated to speak Thursday evening.
Speaking of roller coaster rides, there was quite a bit of volatility in sterling on Thursday. GBP soared to fresh highs at the start of the European session only to crash after softer GDP numbers. However investors shrugged off the news quickly with sterling bouncing before selling off again toward the European close. As our colleague Boris Schlossberg noted:
UK GDP printed in line on quarter on quarter basis at 0.4% but came in slightly lower at 2.0% versus 2.1% eyed on an annualized basis. However it was the underlying data that showed weakness. Exports were down and business investment was poor with only government spending and consumer spending offsetting the declines. In addition the housing data from BBA Mortgage approvals was shockingly low at 40.8K versus 45K the month prior. The number was the lowest reading since March of 2015 and indicates that Brexit’s greatest pressure may be on the housing market as house prices could fall triggering a slowdown across the whole UK economy.