Is Dollar Vulnerable to Further Losses Next Week?
EUR: Struggling to Break 1.37 Despite Stronger GDP
GBP: Another Busy Week Ahead
AUD: Having Faith in the RBA
CAD: Hit by Weaker Data
NZD: No Major Changes in Inflation
USD/JPY Dragged Down by Nikkei
Is Dollar Vulnerable to Further Losses Next Week?
The U.S. dollar sold off against most of the major currencies today,
dropping to a 6 week low on a trade-weighted basis. This week Federal
Reserve Chairwoman Janet Yellen expressed her plans to continue tapering
asset purchases, a sign that the central bank feels comfortable with
the pace of the recovery. Over the past week however we have seen mostly
weaker data that raises questions about the Fed’s optimism and the
economy’s ability to handle less stimulus. Aside from softer payroll
growth in January, retail sales also fell for the second month in a row
while industrial production contracted by its largest amount in more
than year. Based on the simultaneous sell-off in the dollar, rally in
stocks and stable Treasury yields, investors believe that the only real
consequence of softer economic reports is a more gradual course of
tapering by the Federal Reserve. Of course the central bank has not
shown any indication of slowing their pace of tapering but if retail
sales or job growth fail to pick up in February, they may have to
rethink their current strategy of cutting bond purchases by $10 billion
at each meeting. One of the factors that the central bank may not have
considered when they first decided to unwind their Quantitative Easing
program is the extremeness of this year’s winter weather. The snowstorms
may be seasonal and temporary but still have a significant impact on
the economy. At bare minimum, the storms in February should lead to
another month of soft economic data.
As we look forward to the new trading week, many investors are
wondering if the dollar will see further losses and we believe this is
likely. Although we don’t have any tier 1 economic data scheduled for
release next week, the housing, manufacturing and inflation reports will
be impacted by the weather because we still haven’t gotten past the
January and February releases. However the minutes from the last FOMC
meeting will most likely lend support to the greenback because the
central bank will look to back up their decision to reduce asset
purchases last month. With a busy U.K., Eurozone and Japanese economic
calendars, the performance of the greenback won’t just hinge on U.S.
data. If we get additional upside surprises from other parts of the
world, the rallies that we saw at the end of this week could carry
through into the new trading week.
EUR: Struggling to Break 1.37 Despite Stronger GDP
Faster than expected Eurozone GDP growth drove the euro slightly
higher against the U.S. dollar today but the surprise was small and
offset by disappointing trade numbers. For the time being, the currency
pair continues to struggle with 1.37, a level that it failed to clear no
less than 3 times this year. EUR/USD temporarily rose above 1.37 after
the GDP report but has since dipped back below this key level. In the
fourth quarter, the Eurozone economy grew 0.3% compared to a forecast of
0.2%. This means that on an annualized basis, GDP growth rose to 0.5%
from -0.3% in the third quarter. The upside surprise was driven by
stronger growth in Germany and France, the region’s two largest
economies. While this pace of growth is significantly slower than what
the U.S. economy experienced at the end of last year, the fact that the
Eurozone is growing at all is good news for the euro. However the
region’s trade surplus also declined in December, taking some of the
excitement out of the euro. Whether or not EUR/USD clears 1.37 in a
meaningful way will hinge largely on next week’s Eurozone economic
reports. We know that the recovery gained momentum towards the end of
the year, but the real question is whether this pace is sustained in the
first quarter. The answer lies in the flash PMIs for the month of
February, which is due on Thursday of next week. If service and
manufacturing activity improve, the EUR/USD could rise to fresh yearly
highs.
GBP: Another Busy Week Ahead
The British pound rose to a fresh 2.5 year high against the U.S.
dollar today and could make a run for 1.70 if next week’s economic
reports surprise to the upside. Sterling enjoyed seven straight days of
uninterrupted gains, taking out its 2014 high in the process. Today’s
rally stopped short of the 2011 high of 1.6746. Inflation, employment
and retail sales numbers are scheduled for release next week along with
the minutes from the last Bank of England meeting. While inflation is
expected to ease, we expect the employment and consumer spending reports
to surprise to the upside. Aside from dropping the unemployment rate
threshold, the biggest change that the central bank made this week was
to upgrade its 2014 GDP forecasts. The year has just begun and they
probably wouldn’t have made this adjustment so quickly if the economy
wasn’t gaining momentum. Not only do we expect a tinge of hawkishness in
the BoE minutes, but we are also looking for some healthy economic
reports. The momentum in sterling is to the upside and we have every
reason to believe that this trend will continue. Above 1.6750, there is
no major resistance in GBP/USD until 1.70.
AUD: Having Faith in the RBA
The Australian and New Zealand dollars continued to rebound against
the greenback today in a way that suggests that investors have
completely forgotten about this week’s ugly Australian jobs number.
Market participants are clearly looking beyond this week’s release and
hoping that the Reserve Bank of Australia’s decision to drop their
easing bias means that brighter times lie ahead. According to RBA
Assistant Governor Kent who spoke last night, the RBA expects the terms
of trade to weaken and want the currency to provide more support to the
economy. In other words, they want to see a weaker currency. Next week
the release of the RBA minutes will provide us with a better explanation
of the central bank’s shift its bias and hopefully it will include some
insight into their outlook for their economy. Last night’s Chinese
consumer price report had very little impact on the AUD because price
pressures remain unchanged. Meanwhile weaker economic data prevented the
Canadian dollar from participating in the risk rally. Manufacturing
sales fell 0.9% in December erasing all of the previous months gains
while existing home sales fell for the fourth month in a row by a
whopping 3.3%. There are no major economic reports from Australia next
week aside from the RBA minutes but New Zealand has PMI services and
retail sales scheduled for release and from Canada we have retail sales
and consumer prices.
USD/JPY Dragged Down by Nikkei
There was very little consistency in the performance of the Japanese
Yen today, which weakened against the euro, Swiss Franc, U.S. and
Canadian dollars but strengthened against the British pound, Australian
and New Zealand dollars. The only piece of Japanese data that was
released overnight was the Ministry of Finance’s weekly portfolio flow
report. As we suspected, Japanese investors continued to sell foreign
stocks and bonds, choosing instead to take advantage of the country’s
newly launched tax-free investment program. The big story in Japan
overnight was the sell-off in the Nikkei. Since the beginning of the
year, the Nikkei has fallen approximately 12% and this has made it
incredibly difficult for USD/JPY to rally. Hopefully in coming week, we
will get some positive economic reports out of Japan that will
reinvigorate the rally in the Nikkei and in turn USD/JPY. The Bank of
Japan meets next week but they are not expected to change interest
rates. The more market moving release will most likely be the fourth
quarter GDP report due on Sunday. Economists are looking for a
significant pickup in growth towards the end of last year.
