Is Dollar Vulnerable to Further Losses Next Week?

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.