U.S. DOLLAR: EQUITIES LOSING MOMENTUM?
The mixed performance in the forex market and the tepid rally in equities suggest that risk appetite is fading. We previously said that as long as another country within the Eurozone is not downgraded, the relief rally should continue. Unfortunately contagion fears were enough to cause investors to sell euros. Standard & Poor’s downgraded Iceland’s credit rating from BBB+ to BBB- with a negative outlook which means a further downgrade is possible. The euro was also hit by weak demand for Greece’s 12 year bond auction. However the only currencies that the dollar traded higher against were the euro, Japanese Yen and Swiss Franc. The British pound and commodity currencies extended their gains against the greenback as the Dow inches a tad closer to 11,000. Since we expect the Dow to eventually reach this level, we also expect risk appetite in the forex market to hold up until this happens.
Month End, Quarter End, Good Friday and Payrolls
The consolidative price action that we are seeing in many of the major currency pairs is not unusual ahead of a key economic report such as non-farm payrolls. Although there has and will continue be U.S. data released before the jobs number, none of them are meaningful enough to alter the Fed’s course and the dollar’s outlook. However this is a unique trading week with both the month and quarter coming to an end tomorrow and payrolls being released on a day when equity markets are closed. Therefore we wouldn’t rule out choppy trading over the next few days. The month and quarter end are important because it is a time when international portfolio managers rebalance their positions. Given the rally in global equities and the strength of the dollar, any rebalancing flows should be dollar negative. As for payrolls, the last time that they were released on Good Friday was in 2007 and at the time, the better than expected NFP number triggered a 50 pip rally in the U.S. dollar against the euro and interestingly enough, when equity traders returned on the following Monday, they did not take the EUR/USD much lower.
Economic Data Preview and Review
Chicago PMI is due for release tomorrow along with factory orders. The acceleration of manufacturing activity in the Philadelphia region and the deceleration of activity in the NY region, make the Chicago PMI number particularly important in setting expectations for Thursday’s national ISM index. Continued strength in the manufacturing sector is critical to the sustainability of the U.S. recovery. Meanwhile consumer confidence recovered in the month of March, driving the U.S. dollar higher against all of the major currencies. The Conference Board index rose from 46.4 to 52.5, bucking the trend of the UMich and IBD reports. Thanks to improvement in the labor market and the rally in stocks, Americans have grown significantly more optimistic about present conditions and the outlook for the coming months. The labor index which measures the difference between people who thought jobs were plentiful versus hard to get rose to the least negative level since August. The improvement in confidence is in line with the improvement in the labor market expected this month and the prospect of stronger consumer spending. According to S&P/Case-Shiller house prices rose 0.3 percent in the month of January. It is always interesting to receive new reports on the housing market but this report in particular tends to be more dated than the existing and new home sales reports which are released with a one and not two month delay. Nonetheless, it is worthwhile to mention that on an annualized basis, the decline was the smallest in 3 years which suggests that the housing market is bottoming - but with the recent decline in existing and new home sales, we question the timeliness of this report.
EUR: GREECE BORROWING ABILITIES IN QUESTION
The euro fell victim to fresh concerns about Greece’s ability to borrow. After EU leaders announced a financial aid mechanism for Greece last week, they stressed that aid is not needed at this time. Prime Minister Papandreou concurred by saying that the country would first try its luck with the markets by raising money through bond auctions. Unfortunately weak demand has triggered many questions about the country’s ability to borrow. Greece’s surprise auction of bonds that mature in 2022 this morning raised only EUR 390 million, less than half of their EUR 1 billion upper limit. The government needs to raise EUR 10.5 billion by the end of May to avoid tapping the bailout plan put into place and resurrecting concerns about a fiscal crisis within the Eurozone. What the results of the bond auction tell us is that just because the Germans and French have agreed to provide support to Greece with the help of the IMF, it is still up to Greece to move forward with their austerity package and reduce their deficit. If they are unable to do so, they may be forced to ask for help. The good thing is that a mechanism for aid is in place, but the bad thing is that it would still be an embarrassment for the Eurozone. Meanwhile, even though Iceland is not a member of the Eurozone, S&P’s decision to downgrade their debt raises contagion fears because they borrow from banks within the region and it reminds everyone that many problems still exist in Europe. Eurozone and German employment numbers are due for release tomorrow along with EZ consumer price figures. With the manufacturing sector reporting job growth for the first time in 17 months and German consumer prices rising materially, we expect euro positive numbers.
GBP: BOOSTED BY STRONGER DATA
Stronger U.K. economic data helped to drive the British pound higher for the third day in a row. According to the U.K.’s largest building society Nationwide, house prices jumped 0.9 percent last month as home owners postpone listing their properties online, which has helped to boost average home values. Despite the drop in mortgage approvals, prices have held up, keeping the housing market afloat. Fourth quarter GDP was also revised up for the second time from 0.3 to 0.4 percent thanks to positive revisions in services, construction and agricultural sectors. Although 0.4 percent growth is still nothing to write home about, particularly when compared to 5.6 percent quarterly growth that the U.S. economy experienced in the last months of the year, it gives the impression that the economy is growing faster than previously thought. Despite weaker trade in Q4, the current account narrowed materially from a deficit of –GBP5.9 billion to -GBP1.7 billion. Consumer confidence numbers are due for release this evening and we expect Britons to grow less pessimistic following the dramatic improvement in the labor market and the rally in equities. Despite the rally in the GBP/USD, the currency pair is off its highs, which leaves the 1.50 level vulnerable to a retest.
CAD: GDP NUMBERS ON TAP
The Australian, New Zealand and Canadian dollars extended their gains against the greenback. The Aussie continues to lead the pack as comments from central bank officials confirm that the RBA remains on a tightening bias and are gearing up for another rate hike in April. Assistant Governor Debelle said last night that mortgage rates have not risen by as much as bank funding costs due to competition and funding costs for securitization have fallen. Since mortgage rates are a taken into considering in their monetary policy decisions, this comment suggests that the lack of pass through could encourage the RBA to raise interest rates sooner. There was no Australian economic data released last night but retail sales, building approvals and private sector credit are due for release this evening. Weak job growth last month and a decline in the sales component of service PMI puts the odds in favor of weaker consumer spending. However the market already expects retail sales to slow so it could take a very disappointing number to fall short of expectations. A larger than expected rise in building permits also helped to drive the NZD/USD higher while an uptick in raw material prices offset stagnated industrial product prices in Canada. January GDP numbers are due for release from Canada tomorrow. The rise in retail sales and trade signals stronger growth in the beginning of the year.
JPY: HOUSEHOLD SPENDING DROPS
The Japanese Yen traded lower against most of the major currencies with the dollar even reaching a fresh 2 month high against the Yen. Last night’s economic data were a big disappointment as household spending dropped 0.5 percent, when economists were looking for a 1.5 percent rise. Weak domestic demand has long been Japan’s primary problem and unfortunately even the additional stimulus may not help. Industrial production also fell 0.9 percent in February, after 11 months of consecutive gains. If this becomes a new trend, it would be serious problem for the Bank of Japan. The only silver lining was in the labor market where the job to applicant ratio increased from 0.46 to 0.47. The unemployment rate held steady at 4.9 percent, the lowest level since March 2009. Labor cash earnings, small business confidence and housing starts are due for release this evening and hopefully there won’t be similar disappointments. Meanwhile there is some chatter about the Japanese discussing Yuan revaluation with the Chinese in their meeting this weekend.
EUR/USD: Currency in Play for Next 24 Hours
The EUR/USD will be the currency pair in play for the next 24 hours. German unemployment numbers are due for release at 3:55 AM EST or 7:55 GMT followed by the Eurozone unemployment and CPI reports at 5:00 AM EST or 9:00 GMT. The U.S. will release Chicago PMI at 9:45 AM EST or 13:45 GMT followed by factory orders at 10:00 AM EST or 14:00 GMT.
The sell-off in the EUR/USD today has taken the currency pair into the Sell Zone, which we determined using Bollinger Bands. This suggests that the currency pair could be vulnerable to further losses with a possible move back down toward its March lows. However if the EUR/USD manages to rise back above 1.3450, the 10-day SMA and the rate at which the currency pair ended the day on Friday and Monday, we could see further gains towards 1.36.