- FX: Why Policymakers did a 180 on Currencies USD: Stocks Soar, Currencies Do Not Follow
- GBP: Comeback Week for the GBP
- CAD: Hit By Weaker Employment
- AUD: RBA Cuts GDP and Inflation Forecasts
- NZD: Saved by Stronger Chinese Trade Numbers
- JPY: Rally Sparked by Finance Minister Comments
FX: Why Policymakers did a 180 on Currencies
Policymakers who were once comfortable with the movement in their currencies did a 180 this week and their shift in stance caused the euro to fall and the Yen to rise. The turns in the EUR/USD and USD/JPY have traders wondering whether there will be a broader sell-off in currencies in the coming week. We have been talking about how the only comments that matter with regards to the euro are the ones from ECB President Draghi and on Thursday, Draghi said they are watching the currency carefully, which is a shift from his nonchalant attitude last month. So why did Draghi do a 180 on the euro? When the ECB met in January, the EUR/USD was trading around 1.3080. Since then, the currency appreciated over 5% against the U.S. dollar before settling up 3% ahead of this week's meeting. So from a valuation perspective, the value of the EUR/USD has changed and if the EUR/USD was at 1.37 before this week's meeting, Draghi would have probably been even more critical of the move in the currency. Also, Draghi knew that if he didn't create some uncertainty for the EUR/USD, it would soar and hit their pain threshold quickly because their nonchalant attitude in January drove the EUR/USD up over 2 full cents on the day of the ECB meeting. Even if the Eurozone can handle a stronger currency, endorsing the move could cause the EUR/USD to overshoot levels that the central bank would be comfortable with. Having this in mind, the fundamentals for the Eurozone haven't changed. The tail risks have receded and capital should return to the region. Anywhere between 1.3250 and 1.3350 would be a good value for the euro.
As for the Japanese Yen, Finance Minister Aso's comment last night sent the JPY soaring. He said, "the yen's sudden move from 78 or 79 to 90 was not something we anticipated." So why did Aso do a 180 on the Yen? The Japanese want a weaker Yen but we believe his comments represent political posturing ahead of next week's G20 meeting. This is a clearly calculated move to avoid criticism about excessive Yen weakness in Moscow, a strategy employed often by the Chinese who almost always allow the Yuan to appreciate ahead of G20 meetings. The sell-off in the Yen may be happening faster than the Japanese have wanted but it is consistent with their monetary policy goals. Therefore, we still believe that USD/JPY will test 95 and anywhere between 90 and 92.50 represents value points for the currency.
USD: Stocks Soar, Currencies Do Not Follow
The biggest story out of the U.S. today was the persistent rise in equities. For the first time in 5 years, the S&P 500 broke above 1515. Unfortunately the optimism in the stock market failed to carry over to currencies. While the GBP, AUD and NZD rebounded against the U.S. dollar, the greenback strengthened against the euro and the strength of the Yen vs. the dollar reflects pessimism and not optimism. There has been a complete breakdown in the correlation between currencies and equities and while this shows that country specific factors are driving currency flows, it also suggests that the rally in stocks lack conviction. Few will argue that the 5-year high in U.S. equities does not properly reflect the outlook for the U.S. economy or the level of confidence in the nation. Nonetheless, stocks continue to soar, currencies are being held back but eventually the correlation will resume and that will involve either a rally in risk currencies or a pullback in stocks. Meanwhile this week's U.S. economic calendar was extremely light in terms of data. The U.S. trade deficit beat expectations, providing mild support for USD/JPY. In the month of December, the U.S. trade deficit narrowed to -$38.5B from -$48.6. This was third biggest month on month swing in history and the best reading since January 2010. Exports increased 2.1% thanks to a sharp improvement in petroleum while imports dropped 2.7%. Retail sales are due for release next week and that could shift the focus back to the U.S. economy.
GBP: Comeback Week for the GBP
It was comeback week for the British pound, which rose 2.75% against the euro and nearly 1% against the U.S. dollar. There are 3 primary factors behind the recovery in sterling. The much anticipated testimony by incoming Bank of England Governor Carney was complete bore. He did not propose any radical new measures for U.K. monetary policy. Foreign demand for U.K. bonds also remains strong and the sell-off in the pound did not properly reflect capital flows. There were improvements in economic data with service sector activity expanding, industrial production rising and the trade balance narrowing. At the same time, fresh political troubles in Spain and upcoming elections in Italy pose a threat to stability in the Eurozone and led to profit taking on long EUR/GBP positions. However the factors that have driven the pound lower in the beginning of the year have not changed. Overall, the economic outlook for the U.K. is weak, the country is still at risk of losing its AAA rating and there is still potential for more easing by the BoE. Next week, U.K. inflation and retail sales numbers are due for release along with the Bank of England's Quarterly Inflation Report. The central bank will oftentimes use the inflation report to signal their plans for monetary policy. While we are not sure if the central bank will be ready to ease in March, there's a very good chance the report will contain a dovish tone which could renew the sell-off in sterling.
CAD: Hit By Weaker Employment
The Canadian dollar fell sharply against the greenback on the heels of surprisingly weak labor market numbers. Last month, 21.9K jobs were lost in Canada, the largest decline in 6 months. Nearly all of those jobs were full time but part time work also fell by 1.4K. To some, labor market conditions may not appear to have deteriorated significantly because the unemployment rate dropped to a 4 year low of 7%. However don't be misled by the improvement in the jobless rate because the only reason why it declined is because the participation rate also dropped to 66.6% from 66.8%. What is interesting is that more people are clocking out of the workforce in Canada, Australia and New Zealand, which plays into our belief that investors got ahead of themselves in terms of hoping for a stronger global recovery in the start of the year. The global economy will continue to recovery but the bumps in the road are happening early. The Canadian dollar weakened despite a narrower trade deficit because the deterioration in the labor market explains why the Bank of Canada became less hawkish at their last monetary policy meeting. Employment is a leading indicator for economic activity because jobs affect spending. The trade deficit on the other hand was for the month of December and is one of the biggest lagging indicators. The deficit narrowed to -$0.901B from -$1.665 billion as exports declined 0.9% and imports fell 2.8%. Meanwhile thanks to stronger Chinese data, the Australian and New Zealand dollars rebounded against the greenback despite the RBA's lower GDP and Inflation forecasts. The central bank now expects the economy to expand by 2.5% vs. 2.75% and inflation to rise by 3% vs. a prior estimate of 3.25%. China' trade surplus declined less than expected in the month of January as exports and imports soared. While experts say that the data is distorted by the upcoming Chinese New Year holiday, we can't help but point out that Chinese data continues to beat expectations.
JPY: Rally Sparked by Finance Minister Comments
The Japanese Yen traded higher against all of the major currencies. According to our colleague Boris Schlossberg, "Comments by Japanese Finance Minister Taro Aso sparked a fast and furious sell off in USD/JPY and yen crosses as traders booked their profits and dumped the pair ahead of the long Tokyo weekend. Speaking in Japanese Parliament Mr. Aso said, "The yen's sudden move from 78 or 79 to 90 was not something we anticipated." That one sentence was enough to trigger a massive selloff in USD/JPY, which quickly tumbled more than 150 points off the session highs to hit a low of 92.16. Mr. Aso's comments seem disingenuous at best since Prime Minister Abe specifically campaigned on raising the USD/JPY rate to 90.00. However, now that the pair has exceeded that target and has weakened further to hit 94.00 this week, Japanese fiscal authorities are clearly concerned with the pace of depreciation. While Japanese officials definitely want to see further yen depreciation, the runaway rally that we've seen over the past few weeks may be causing both political and economic risks as the country now comes under strong criticism from its Asian neighbors while the market volatility creates hedging problems for its export driven corporate sector. Therefore today's statement by Mr. Aso was a clear calculated move to temper some of the investor flows into USD/JPY and allow the pair to consolidate around the 90.00-94.00 region while the Abe administration looks for a BOJ nominee and continues to assert it power over the monetary policy making apparatus."