Daily FX Market Roundup 04-23-14
By Kathy Lien, Managing Director
of FX Strategy for BK Asset Management
NZD Soars, RBNZ Hikes and
Maintains Hawkish Bias
CAD: Extends Gains as Retail Sales Growth Slows
AUD: Hit by Softer than
Expected CPI Report
Dollar: New Home Sales
drops to 8 Month Lows
Euro: Supported by Stronger
PMIs
Sterling Bulls Disappointed
by BoE Minutes
Yen Crosses Sink Despite
BoJ Optimism
NZD Soars, RBNZ
Hikes and Maintains Hawkish Bias
Today's decision by the Reserve
Bank of New Zealand to raise interest rates 25bp was widely expected but
investors were caught off guard by the central bank's continued concern
about inflation, which suggests they still intend to raise interest rates
in June. In a nod to the 20% drop in dairy prices and the
pullback in consumer demand, the RBNZ started their statement off by saying
that future rate rises will depend on economic data.
However this new condition was quickly forgotten when the central bank said
inflationary pressures are increasing and are expected to continue to rise
over the next 2 years. As a result, they felt that a rate hike was
necessary to keep inflation expectations contained. They tried to
talk down the currency by saying that they would assess how the high
exchange rate would affect inflationary pressure but actions speak louder
than words and until the rising currency stops them from raising rates, its
not a huge concern. So while the initial reaction in the New Zealand dollar
was modest and limited to only 45 pips, the fact that the statement
was more hawkish than most investors anticipated means there could still be
further upside in the New Zealand dollar. When the RBNZ
raised rates in March, NZD/USD appreciated only 50 pips in the first hour
after the rate hike but then gained another 150 pips over the next week.
At the end of the day, what
matters most is yield and even though the Reserve Bank of New Zealand said
future rate rises will depend on economic data, their decision to raise
interest rates by another 25bp to 3% makes the New Zealand dollar more
attractive to foreign investors. Lets not forget that the RBNZ pledged to
raise rates form 2.5% to 4.75% by the first quarter of 2016 and today's
statement does little to take them off track. Yet the central bank
has given themselves a bit more flexibility and if inflation continues to
ease in the second quarter, they could pause but for the time being, they
are not expected to do so. Either way, we don't expect this month's rate
hike to have the same affect on the New Zealand dollar as the one in March,
when the currency pair rose from .8460 to 0.8745 over a one-month period
with very little retracement. Their terms of trade has most likely
peaked and with overstretched long positions, there are fewer buyers in the
market.
Commodity currencies in
general were on the move today with the Australian dollar dropping close to
1% on the back of last night's softer than expected consumer price
report. The Canadian dollar also extended its losses after their
retail sales report showed consumer spending growing at a slower pace in
the month of February. Despite a rebound in job growth, Canadians have been
cautious about spending, reinforcing the Bank of Canada's belief that the
recovery will be gradual and in reaction, USD/CAD rose to its strongest
level in 3 weeks.
Dollar: New Home
Sales drops to 8 Month Lows
There was very little
consistency in the U.S. dollar's performance today. The greenback
traded lower against the euro, Japanese Yen and Swiss Franc but
strengthened against the British pound, Australian, New Zealand and
Canadian dollars. Just as stronger U.S. data failed to lift the dollar,
today's disappointing economic reports did not put much pressure on the
greenback. According to a report by Markit Economics, manufacturing
activity slowed in the month of April. New home sales also dropped
14.5%, which was significantly weaker than expectated. Economists had
been looking for a 2.3% rebound in March after the decline in February but
unfortunately affordability is becoming a bigger concern and as such, sales
reached its weakest level in 8 months. Durable goods orders and weekly
jobless claims are scheduled for release on Thursday. While we are eager to
se if claims continue to improve and drop below 300k, neither one of these
reports are expected to have a significant impact on the greenback.
Euro: Supported by
Stronger PMIs
Stronger than expected
Eurozone PMI numbers helped the euro avoid losses against the U.S.
dollar. Unfortunately the rally fizzled during the North American
session with the euro only managing to hold onto a small part of today's
gains. Risk aversion played a role in the intraday reversal but the
improvement was relatively modest. Tomorrow's German IFO report is
typically less market moving than PMIs but a good number would be enough to
keep the EUR/USD afloat. In some ways, ECB President Draghi's speech
could cause a bigger reaction as investors look to see whether his outlook
has improved given the uptick in PMIs.Our colleague Boris Schlossberg
provided a detailed analysis today's data. He said the better than
expected flash PMI numbers allayed "fears that ECB would have to
resort to a more accommodative policy in order to stimulate growth in the
region. EZ PMIs came in at 53.3 versus 53.0 eyed for manufacturing and 53.1
versus 52.7 for services. The gains were led by German readings which were
considerably better than forecast. In Germany the Services PMI rose to 55
from 53.5 expected and the manufacturing PMI rose to 54.2 versus 53.9
projected. The results were markedly better than consensus view and were
especially good given the geo-political tensions in the region. The one
dark spot was the data from France, which saw the PMI readings decrease to
50.9 and 50.3 respectively, but even in France the PMI remained above the
50 boom/bust line indicating that the EZ economy continues to expand. With
overall PMI readings better than forecast, the ECB has little reason to act
now and the central bank is likely to remain stationary for the time being
despite the deflationary pressures that persist. EZ monetary officials are
becoming increasingly concerned with the strength of the euro, which they
feel contributes to the downward pressure on prices and could hamper
exports going forward. So far however, the EZ economy is seeing little
negative impact from the strong currency and all of policymakers jawboning
is falling on deaf ears as the markets continue to bid euro higher."
Sterling Bulls
Disappointed by BoE Minutes
The 1.6850-level is proving
to be an extremely significant area of resistance for GBP/USD. The
currency pair has come close to breaking this level on a number of
occasions but its failure to do so indicates that there must be a ton
offers at or near that level. Based on the recent rise in sterling,
we know that investors are positioning for an earlier rate hike from the
Bank of England and today they were disappointed by the lack of surprises
in the BoE minutes. The central bank acknowledged the improvements in the
economy and the momentum in the housing market but wage growth and
inflation remain subdued. Although the BoE raised their first quarter
GDP forecast from 0.9% to 1.0%, sterling traders were unimpressed.
With near term inflationary pressures easing further in the past month
according to BoE Governor Mark Carney, there's no major urgency to tighten
monetary policy. While no one expected the central bank to raise
rates next month, sterling bulls were certainly hoping for more
hawkishness. We continue to believe that there could be a deeper
correction in GBP this week especially with the strong possibility of
retail sales falling short of expectations on Friday.
Yen Crosses Sink
Despite BoJ Optimism
After holding steady or
edging higher for the past 8 trading days, the dollar finally backed off
against the Japanese Yen. There was no specific catalyst for the
sell-off in USD/JPY outside of increased uncertainty in Ukraine but the
larger than expected decline in U.S. new home sales and drop in Treasury yields
certainly didn't help. The fact that the sell-off in USD/JPY began in
the early European trading session confirms that a wave of risk aversion in
the foreign exchange market was triggered by Russia's warning of a
potential military response to events in Eastern Ukraine. Japanese Yen
pairs generally suffer during times of political uncertainty and on a day
with very little market moving U.S. or Japanese data, the uncertainties in
Eastern Europe are weighing on those currencies. The Nikkei performed
well overnight thanks in part to the Bank of Japan's optimism. BoJ
Governor Kuroda expects inflation to exceed their projections in the
previous fiscal year and to stay on track to achieving their 2% price
target. Deputy Governor Nakaso said he believes the economy is
resilient enough to absorb the effect of the sales tax increase, a line
that Kuroda uses often. Nonetheless both gentlemen did not hesitate
to say the BoJ couldk adjust monetary policy if the outlook for the economy
or inflation changes.
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