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FX Update - The USD correction continues.

Written by Ian Dobbs on March 24th, 2015.      0 comments

Market Overview:
The foreign exchange market has been dominated the past week by volatility in the US dollar in the wake of Thursday’s FOMC rate statement. We have seen some big swings in price action, but ultimately the Fed’s downgraded economic assessment has seen the USD lose ground. The NZD and AUD in particular have been big benefactors of this USD weakness, making gains on many other crosses. This move has been driven as much by market positioning as anything else. Being long (bought) US Dollars has been the favoured play for much of the past year, and we are now see many of those positions getting squeezed out. With both the NZD and AUD breaking above key resistance levels in the past 24 hours, there is plenty of opportunity for further gains. US macro data this week will play a key role driving direction from here.

There has been very little in the way of economic releases from Australia over the past week. Reserve Bank of Australia (RBA) Governor Stevens spoke on Friday and he said the transition from the mining boom has not been as seamless as the central bank would like and that they would continue to lend what support they could to the economy. He added that although the decline in the exchange rate is assisting the transition, Australian firms and households are becoming less optimistic. He certainly sounded like a man prepared to cut interest rates again. The RBA’s Assistant Governor Edey is due to speak later this afternoon and tomorrow we have the RBA’s Financial Stability Review.

New Zealand
Last week’s 8.8% fall in dairy prices drew the majority of focus from the financial markets and saw the NZD come under some pressure, at least temporarily. The GDP result came in bang on expectation at 0.8% for the quarter and as such didn’t have much impact. On Friday we got the latest NZ migration data and this posted the highest single month gain, at 7101, since records began in 1978. For the year ended February NZ saw net migration of 55,121 people, also an all-time high. Economists expect migration to peak this year around the 60k mark, and with all these people needing to find places to live it only adds heat to the property market. Yesterday’s release of consumer sentiment data saw a solid jump to 117.4 from the prior reading of 114.8. The gains have been driven in part by cheaper petrol prices and strong house price increases. The only other data this week is the trade balance set for release tomorrow.

United States
Last week proved to be a volatile one for the US dollar, and this week could hold just as many fireworks. The USD came under all sorts of pressure in the immediate aftermath of the FOMC rate statement. With the Fed all but acknowledging that the economy is not in as greater shape as the employment data suggests, the market started to reassess the likelihood of a June rate hike, and as such the USD lost ground. Some significant volatility followed with the US dollar recovering a large part of the losses over the following 12 hours, only to turn around again and head back to its lows heading into the weekend. Key to whether the dollar continues to lose ground from here will be the outcome of inflation data tonight, and durable goods orders tomorrow night. A couple of soft results here could well spark another down leg for the USD as even more longs (bought USD positions) stop out. Later in the week we have the final reading of GDP and a speech from Fed Chair Yellen to digest.

United Kingdom
The UK Pound continued to struggle last week weighed on by softer than forecast wage data. The actual employment numbers weren’t bad and the unemployment rate remained stable at 5.7%, but without more in the way of wage pressure, the chance for a quick turnaround in inflation is very slim. The Bank of England’s (BOE) Chief economist recently said he sees the risks to inflation on the downside, and former MPC member Posen agreed in a weekend article. He said labour market tightness is overstated and there is not enough inflation pressure to raise rates. We get the latest reading of inflation tonight and it is expected to fall to its lowest reading on record, at 0.1%. On a more positive note Friday’s release of Public Sector Net Borrowing showed the government borrow less than expected in February. It seems improvements in the economy have finally started to flow through into a greater tax take. This combined with budget cuts made over the past couple of years, means the government borrowed about a third less this February than at the same time last year. Later in the week we have retail sales data and a speech from Governor Carney to digest.

Last week saw some further encouraging data from Europe, with Eurozone economic sentiment readings increasing, inflation a touch better than expected and the current account also coming in better than forecast. The EU Economic Summit failed to provide any fresh agreement on Greece. The next tranche of bail-out funds is still conditional on Greece presenting a comprehensive reform package, which then needs to be endorsed by EU finance ministers. Greece could be out of money by mid-April and desperately needs the EUR7.2bln bailout payment scheduled for the end of April brought forward. The new Greek government isn’t doing itself any favours though with their ‘confrontational’ style. A recent poll showed more than half of all Germans would like Greece to leave the Eurozone. That’s up more than 10% since February. This week to draw focus we have manufacturing and services sector PMI data, German IFO business climate, and German consumer climate readings.

The only release of note since last Tuesday’s Bank of Japan (BOJ) monetary policy statement has been the trade balance. This came in significant better than forecast at -0.64trln Yen. Compared with a year ago, the deficit has fallen by 47.3%. The improvement has been driven cheaper oil pushing down the value of imports, along with an improvement in exports, thanks in large part to a weak Yen. Governor Kuroda was on the wires this weekend saying “people’s perception of inflation has clearly changed.” He said “This is the first time ever for people in their 20s or younger to experience rising prices.” He added that the across the board wage increases now underway “represent landmark changes for Japan.” The key data this week all comes out on Friday when we get household spending, inflation, unemployment, and retail sales.

There was little in the way of support for the Canadian dollar in last week’s economic releases from the country. While core inflation came in right on expectation at 0.6%, we saw significant declines in manufacturing sales, wholesale sales, and retail sales. Low petrol prices certainly had an impact on the retail sales number with gasoline sales down 8.8%, the largest decline since November 2008, but weakness was more widespread than just that with seven of the 11 sectors tracked posting declines. This data is certainly consistent with the Bank of Canada’s pessimistic expectations for the first quarter of 2015. We only have a speech by Governor Poloz and the annual budget release to draw focus this week.

Major Announcements last week:
  • US Industrial Production +.1% vs +.2% expected
  • BOJ leave monetary policy unchanged as expected
  • European Inflation (YoY) +.7% vs +.6% expected
  • BOE leave monetary policy unchanged as expected
  • UK Ave. Earnings +1.6% vs +1.8% expected
  • US FED leave monetary policy unchanged as expected
  • NZ GDP +.8% as expected
  • Canadian Inflation 1.0% as expected
Canadian Retail Sales -1.7% vs -.7% expected