- FX: US Data a Welcomed Break from Currency War Talk
- EUR: Draghi Criticizes Talk of Currency War
- GBP: Potential Surprise in BoE Inflation Report
- USD/JPY Not Out of the Woods
- CAD: Lifted by Carney's Comments
- AUD: Business Confidence Stabilizes
- NZD: Continues to Recover Despite Weaker Data
FX: US Data a Welcomed Break from Currency War Talk
All this talk of currency wars and competitive devaluation has caused a tremendous amount of intraday volatility in currencies. With the Eurozone and EU Finance Ministers meetings behind us and the G20 meeting not beginning until Thursday, tomorrow should provide a welcomed respite from the official rhetoric that has done nothing but confuse FX traders. While the Japanese could still jump in with some unscheduled comments on the Yen, we expect far fewer comments tomorrow, allowing investors to focus on Wednesday's U.S. retail sales report. Based on the non-farm payrolls report, we know that job growth has been steady but the real question for the Federal Reserve is whether more jobs have translated into more spending. Economists expect retail sales to rise a mere 0.1% in the month of January which at first glance looks like a sharp deterioration from December but excluding autos and gas purchases, retail sales are expected to rise 0.4%, compared to 0.6% growth the previous month. Handicapping this month's retail sales report is tough because the International Council of Shopping Centers said sales were up 4.5%, the strongest increase since September 2011 but Johnson Redbook reported a 0.6% decline in sales. Retail sales is one of the most potentially market moving economic releases for the U.S. dollar but in recent months, it along with other U.S. economic reports have had less impact on the greenback because of the Fed's unwavering commitment to ultra-easy monetary policy.
Along these lines, the most hawkish member of the FOMC and Kansas City Fed President George is not convinced that the Fed is ready to sell its assets. In a speech on the economy, she said asset sales are an untested tool for normalizing monetary policy and may disrupt market functioning and push up mortgage rates. She also believes that inflation for the time being appears manageable which suggests that she does not favor winding down the central bank's asset purchase program this year. If the most hawkish member of the central bank has reservations about phasing out asset purchases, we believe many other policymakers do as well which is important to remember because investors got extremely excited when the Fed first talked about this possibility and it will undoubtedly be a topic of discussion when the FOMC minutes are released next week.
EUR: Draghi Criticizes Talk of Currency War
The euro traded higher against the U.S. dollar today after ECB President Draghi criticized people whose mandate "is not immediately related to monetary policy (think E.U. politicians) for engaging in "inappropriate or fruitless" comments on the currency. He went on to say that, "they are inappropriate if they are meant to instruct the ECB." Draghi believes that "the term currency war is way way overdone," as there has been "no declaration of currency wars from G7." The ECB is one of the few central banks that understand the amount of damage confusion about currency policies can create. On the euro, Draghi reiterated that the exchange rate is near its long-term average and monetary policy remains accommodative. It is clear that the ECB has no interest in participating in the currency war and will keep their euro comments to a minimum. This morning ECB member Constancio suggested that the central bank's staff forecasts will not be changed significantly, lowering the risk of any significant downgrades. Eurozone industrial production is due for release tomorrow - hotter German manufacturing activity should offset weaker activity in France.
GBP: Potential Surprise in BoE Inflation Report
While the British pound continued to weaken against the euro, it experienced a sharp intraday reversal against the U.S. dollar. Having originally fallen to a yearly low on the back of softer consumer price pressures, sterling recovered all of its losses to end the day unchanged against the greenback. Consumer prices dropped 0.5% in the month of January, but the annualized pace of CPI growth, which is what the Bank of England watches most carefully held steady at 2.7%. Unfortunately the pound sold off after the report as core CPI growth eased slightly from 2.4% to 2.3%. Despite this decline however, there is potential for an upside surprise in tomorrow's BoE Quarterly Inflation Report. For the central bank, inflationary pressures are still a big problem. Producer prices increased significantly in the month of January and eventually this 1.3% increase in input prices and 0.2% increase in output prices could eventually filter down to CPI. A weaker currency and higher commodity prices also puts upside pressure on inflation and for this reason, the BoE could actually revise up its inflation forecast which would be extremely bullish for the British pound because it would reduce the chance of additional easing this year. Of course their views may change once Carney takes office on July 1st but between now and then, the recent deterioration in data may not be enough to encourage the Bank of England to grow more dovish.
USD/JPY Not Out of the Woods
It has been a long time since a G7 statement received this much interest by foreign exchange traders. During the European trading session, a brief statement released by the G7 that contained no major changes to the exchange rate language provided support for USD/JPY and led many investors to believe that G20 would do the same. Unfortunately, USD/JPY came crashing down at the start of the NY session when a G7 official said their statement was misinterpreted because they are concerned about excessive moves in the Japanese Yen. The official also indicated that Japan will be in focus at the G20 meeting in Moscow. For the G7 to come out and release an official statement in Washington aimed directly at resetting market expectations is a strong sign that they do not endorse a one way move in the Yen. Considering that the statement on currencies is still relatively boilerplate, the clarification means that the G7 clearly does not want to step on the G20's toes and draw away from the main meeting. There is still a risk that Japan will be criticized on Thursday and also the risk that Japanese officials will try to talk up the Yen prior to the meeting.
CAD: Lifted by Carney's Comments
All 3 of the commodity currencies strengthened against the U.S. dollar today. The Canadian dollar benefitted from Bank of Canada Governor Carney's comments this morning. Carney said that while "higher rates in Canada are less imminent, they are still likely to be needed over time because inflation risks are roughly balanced, Europe is in a better place than in October, the quality of U.S. growth improved and there is still a positive outlook for the labor market." He also said that the discount in the price of Western Canada Select oil and Crude has less to do with weak U.S. demand and more to do with the lack of pipelines and refining in Canada. Overall his relatively optimistic comments on the outlook for the domestic and global economy reminds investors that the Bank of Canada still leans more towards tighter and not looser monetary policy. Improvements in business confidence and business conditions helped the the Australian dollar. According to NAB, a brighter outlook for China and the prospect of further interest rate cuts helped to keep sentiment steady amidst weaker domestic conditions. Consumer confidence numbers are due for release this evening and it will be interesting to see if these same factors helped boost consumer sentiment. The New Zealand dollar appreciated the most despite steady credit card spending and a larger decline in house prices. Perhaps the double-digit increase in annualized house sales made up for the difference.