Big Night for AUD and NZD

• Big Night for AUD and NZD
• AUD: All Eyes on RBA and Chinese PMIs
• CAD: GDP Growth Accelerates in January
• Dollar Gives Up Gains after Chicago PMI
• EUR: Bounces on Surprisingly Strong German Retail Sales
• GBP: Holding Onto Optimism Ahead Of PMIs
• How the Sales Tax Hike Could be Positive for USD/JPY

Big Night for AUD and NZD

Tonight is a big night for the Australian and New Zealand dollars. Both currency pairs are trading near their recent highs with further gains contingent on positive surprises from many if not all of tonight's economic reports. The evening kicks off with Australia's manufacturing PMI index, which is probably the least interesting and market moving event risk of the night for AUD and NZD.  Instead, forex traders are keenly waiting for China's official manufacturing report and the Reserve Bank of Australia's monetary policy announcement.  Manufacturing activity in the world's second largest economy is widely expected to slow further in March. However with the index hovering just a whisker above the 50 boom/bust mark, the danger is that the index could drop into contractionary territory. If China's PMI index falls below 50, AUD and NZD could give up its gains quickly.  However weaker data would also trigger additional speculation for accelerated stimulus from China, which could limit the downside in commodity currencies.  If the PMI report surprises to the upside and improves or holds steady, AUD and NZD could climb to new highs.  As for the RBA, no changes in monetary policy are expected.  Central Bank Governor Stevens feels that economists are too pessimistic about the outlook for Australia, which can explain why he is not concerned about the current level of the Australian dollar.  However since his speech last week, AUD hit a 4 month high so there is still scope for Stevens to express a modicum of discomfort if only to introduce some two action into the currency. If he does, it would sap the gains in AUD but if he continues to avoid talking down the currency, traders could interpret this as a green light for further gains. Meanwhile the Canadian dollar ended the day unchanged despite stronger GDP numbers.  In the month of January, GDP rose by 0.5%, which was slightly stronger than the 0.4% forecast. On an annualized basis, this bumped year over year GDP growth up to 2.5% from 2.4%. The improvements in the mining, oil and gas, construction and manufacturing sectors tell us that the first quarter is off to a strong start.  The Canadian dollar actually fell to session lows on the back of the GDP report but as the North American trading session progressed, the loonie gave up most of its gains as USD/CAD rubber banded off the 1.10 level.

Dollar Gives Up Gains after Chicago PMI

The U.S. dollar traded lower against all of the major currencies today with the exception of the Japanese Yen.  Before the Chicago PMI report, the greenback had been trading well but the drop in manufacturing activity erased not only the dollar's gains but also the rise in Treasury yields.  Yet the pullback is still considered modest because the improvement in manufacturing activity in the NY and Philadelphia regions still leads us to believe that the manufacturing sector is growing.  We'll get a better sense of whether this is true with tomorrow's ISM manufacturing report.  Stocks on the other hand traded sharply higher today on the back of Janet Yellen's comment that the economy will need the Fed's support for some time.  However we believe that the impact of her comments are limited because even though she believes that the central bank is short of reaching its employment and inflation goals, as long as non-farm payrolls continue to rise and there is no surprise contraction in ISMs, the Fed will continue to taper asset purchases at every successive meeting.   As a result, we still feel that U.S. rates are higher and once we start seeing upside surprises in U.S. data, USD/JPY will extend its gains. 

EUR: Bounces on Surprisingly Strong German Retail Sales

The euro rebounded against the U.S. dollar today thanks to an unexpected increase in retail sales.  After the recent softness in German data, economists had been looking for retail sales to contract by 0.5% in the month of February.  However instead of falling, retail sales grew 1.3%.  Between the February increase and the 1.7% rise in January, we are now looking at the potential for a strong first quarter.  If the economy recovers from its recent disappointments, the combination of stronger confidence and higher wage growth from negotiations could boost consumption but it will be some time before we see positive results.  When the European Central Bank meets on Thursday, they will certainly take the increase in German consumption into consideration along with the continued decline in consumer prices.  While we do not expect the central bank to change interest rates based on stubbornly low inflation, we do expect the ECB to remain dovish.  Germany's labor market report is scheduled for release on Tuesday. Based on the PMIs, job growth improved in March, which would help to offset some of the weakness in last month's German economic reports.  According to a quick and dirty analysis we did on Friday, the euro appreciated on the day of the European Central Bank's rate decision 4 out of the last 5 months because Mario Draghi was less pessimistic than investors anticipated and after the recent increase in German spending, this pattern could repeat on Thursday.

GBP: Holding Onto Optimism Ahead Of PMIs

The British pound held onto its gains against the euro and U.S. dollar ahead of this week's PMI reports.  The latest manufacturing activity report is scheduled for release tomorrow and while economists are looking for a slight pullback, the improvement in the Confederation of British Industry's industrial trends survey signals a potential acceleration in activity.  A positive release would reinforce the notion that the Bank of England could be the next central bank to raise interest rates.  With today's gains, sterling has now appreciated against the U.S. dollar for the sixth consecutive trading session. As the currency pair shrugged off slightly weaker housing data, this week's PMI reports need to be very strong to sustain the rally in the currency.  Mortgage approvals dropped to 70.3k from 76.8k while net consumer credit held steady at 0.6B after a downward revision to the January report.  Just as the massive current account surplus is supporting the euro, last week's surprisingly large current account deficit for the U.K. should have driven sterling lower. If this week's PMI numbers surprise to the downside, traders could look back to the CA deficit as a reason to unwind their long GBP positions. 

How the Sales Tax Hike Could be Positive for USD/JPY

All of the Japanese Yen pairs traded higher on the eve of Japan's first sales tax hike in 17 years.  On April 1st, the consumption tax will rise from 5% to 8% and while this still leaves Japan with one of the lowest rates in the world, higher taxes are rarely received well by consumers or businesses.  There are plenty of reasons to be worried about how consumers will react to the increase but the sales tax hike may not be immediately negative for the Nikkei and USD/JPY.  In fact in 1997, when taxes were last increased, both the Nikkei and USD/JPY ended the month of April higher.  The follow chart shows how USD/JPY rallied more than 4% the month that taxes were increased in 1997 because economic data did not take a turn for the worse until the following month.  While this does not preclude a near term drop, there's a good chance the currency pair will behave in a similar way this time around. However the following months were tough with USD/JPY falling as much as 13% and the Nikkei losing 28% in the 6 month period after peaking in June.  Aside from the historically significant increase in taxes, the Quarterly Tankan survey is also scheduled for release and while businesses are expected to report an improvement in activity during the first quarter, the upcoming consumption tax is expected to cause their outlook to deteriorate.