US Dollar – More Volatility Ahead
Euro – ECB Expected to Lift Interest Rates Next Week
Japanese Yen – Could Continue to Rise Ahead of Fiscal Year End
US Dollar - It has been quite a week in the financial markets with the fluctuation in currencies attracting far more attention than usual. The US dollar sold off 435 pips against the Japanese Yen, which is the widest weekly trading range we have seen in the USD/JPY pair in months. The last trading day of the week was suppose to be quiet with only the final release of the University of Michigan consumer confidence survey on the calendar. However traders did not seem to want to give up liquidating as they continued to sell the yen crosses. The British pound was also hit bad today and we will explore more of that in our British pound commentary. Even though there were as many upside surprises as there have been disappointments over the past week, the market is still looking for an interest rate cut in the second half of this year. According to the UMich survey, consumer confidence was revised lower in the month of February due to the rebound in oil prices. With US stocks seeing the worst decline in 4 years, we are sure that the move in the equity markets will take a further toll on consumer confidence. The savings rate in the US has remained in negative territory for the past 22 months which means that consumer spending is still being fueled by their paper wealth. Unfortunately when Americans look at the balances of their equity investments and then consider the potential erosion of their real estate holdings, they may manifest that frustration by paring back their spending. This would put a big drag on what is already expected to be weak growth in the months ahead. Even though the economic calendar next week is lighter than the past week's, the upcoming reports are just as market moving. We are expecting service sector ISM, the Beige Book report, Factory orders, Non-farm Payrolls and the Trade balance. Expect more volatility in the currency market as expectations for stronger service sector activity and a smaller trade deficit is met with forecasts for weak factory orders and non-farm payrolls.
Euro – The Euro slipped against the US dollar today on the back of much weaker than expected economic data. The market was expecting German retail sales to fall by 1.5 percent but instead, it dropped by a whopping 5.1 percent. It seems that negativity from the newly implemented VAT tax may finally be making its way through to the economy, forcing consumers to balk at big ticket purchases. The survey's results paint a negative outlook for the economy that will leave its mark on first quarter GDP. Producer prices were lower in the month of January due to softer oil prices that month. These figures are unlikely to deter policy makers from raising interest rates next week given the unambiguously hawkish comments from ECB officials. The economic calendar from the Eurozone is extremely busy next week with regional retail sales, service sector PMI and GDP due for release. The weakness in the German data today will begin to impact other reports on the health of the Eurozone's largest economy. Meanwhile Switzerland will be reporting GDP and unemployment next week, both of which are expected to be solid.
British Pound - The British pound finally fell victim to carry liquidation. After having held steady for most of the week, the demand for Japanese Yen and Swiss Franc against the British pound was too much for the currency to handle. The only piece of UK data released today was construction sector PMI which slipped from 57.9 to 57.3. This follows the robust manufacturing PMI report released earlier this week. Overall, the UK manufacturing and construction sector continues to perform very well, giving the Bank of England no reason to alter its current stance on interest rates. In the week ahead, the UK calendar continues to be busy with service sector PMI, BRC retail sales, and industrial production due for release. The Bank of England will also be holding a monetary policy meeting. Given the relatively tame comments on inflation from the members of the monetary policy committee along with the sharp moves in the global stock markets, the central bank is not likely to lift interest rates.
Japanese Yen – For five out of the past six trading days, the Japanese Yen strengthened against all of its other trading partners. Economic data was mixed, but encouraging words from Japanese officials helped to drive further gains in this week's best performing currency pair. Consumer prices were slightly weaker than expected but this isn't surprising given the softer inflation numbers that we have seen globally for the month of January. What was surprising was the jump in household spending and improvement in the unemployment rate. Japanese officials have also been fairly nonchalant about the moves in the Yen which suggests that they wont be doing anything to stop it. The economic calendar is extremely light next week with only leading indicators and machinery orders due for release. Carry trade liquidation will continue to be a theme in the markets as we edge closer to the March 31st fiscal year end in Japan. Although we could see a rebound in the Yen crosses, a new trend has emerged. More coverage on China and its recent impact on markets can be found in our new article "Is China the New Puppet Master of the Global Markets."
Commodity Currencies (CAD, AUD, NZD) – The Commodity Currencies are all weaker across the board on the back of mixed economic data. Even though Australia reported much stronger retail sales for the month of January, the current account deficit widened more than expected in the fourth quarter. Growth in Canada was the slowest since 2003. The stronger currency took a toll on exports while domestic demand remained tepid. Carry trade liquidation has taken a big toll on the high yielders with the New Zealand dollar bearing the brunt of the selling. NZD/JPY fell over 500 pips this week, erasing 2 months worth of gains. In the week ahead, there continues to be a lot of data from the members of the commodity bloc. Australia will be releasing inflation data, their trade balance and GDP. New Zealand is expected to lift interest rates mid next week while Canada will be reporting IVEY PMI, building permits, housing starts, their trade balance and employment figures. They also have a rate decision scheduled, but no changes are expected.