G10 FX At the Mercy of Chinese Data

• G10 FX At the Mercy of Chinese Data
• Euro: Unfazed by Decline in Investor Confidence
• AUD Hit Hard by 1.9% Drop in Gold
• CAD: Bank of Canada Rate Decision on Tap
• NZD: Uptick in CPI Expected
• GBP: No Surprise in CPI Means No Pressure to Tighten
• JPY: Risk of Further Nikkei Weakness

G10 FX At the Mercy of Chinese Data

There are a lot of U.S. economic reports on the calendar this week but there has been very little in movement in the U.S dollar.  While the dollar traded slightly higher against most of the major currencies today, its value versus the euro, British pound and Japanese Yen has not changed significantly over the past 48 hours.  Investors shrugged off every piece of positive U.S. data from retail sales to consumer prices and last week's jobless claims and consumer confidence survey.   Although manufacturing activity in the NY region slowed in April, any initial losses were erased by the end of the North American trading session thanks to the recovery in U.S. equities.  Janet Yellen did not touch on monetary policy or the economy in her speech today but she could still comment on these topics tomorrow.  Part of the reason why the market completely disregarded U.S. data is because none of the surprises in recent reports change the Fed's plans for monetary policy.  Even tomorrow's housing starts, building permits, industrial production and Beige Book reports won't cause the Fed to bat an eye or drift away from their plans to taper asset purchases by another $10 billion this month. 

So instead, G10 FX will be at the mercy of Chinese data, particularly over the next 24 hours.  The pace of Chinese growth will not only affect commodity currencies but could also have a significant impact on overall risk appetite and in turn other major currencies such as the dollar, euro and British pound. The most important report on China's calendar this evening will be Q1 GDP. The first 3 months of the year were particularly tough in China and the first quarter GDP report is expected to show growth slowing from 7.7% to 7.3%, the slowest pace in 5 years.  Any small deviation from the forecast will affect how G10 FX trades. If Chinese growth slows to only 7.4% for example, high beta currencies will rally but if it slows to 7.2%, they will weaken.  Retail sales and industrial production provide a more up to date read on the economy.  Q1 GDP is for the first 3 months of the year but retail sales and IP are for March.  The second quarter seems to be shaping up better for China and firmer reports would either exacerbate the recovery in G10 FX or ease the losses depending on the direction of the surprise. 

Euro: Unfazed by Decline in Investor Confidence

The tug of war between lower U.S. yields and weaker conditions in the Eurozone kept EUR/USD confined within a narrow 45 pip trading range.  On an intraday basis, euro kept a close eye on U.S. equities, falling when stocks trended lower and rising when they rebounded.  Traders were unfazed by the ZEW survey, which dropped from 61.5 to 61.2 because the decline was modest and driven entirely by the expectations component of the report.  Current economic activity was better than expected but investors are worried about future economic activity. This is the third consecutive month that the expectations component of the report, which is more important than current conditions, missed forecasts.  While the ECB does not care as much about the ZEW survey compared to the PMIs or IFO, the concern that the drop in confidence could spread to economic activity reinforces their dovish bias.  At the same time the weaker ZEW was offset by an increase in the Eurozone trade balance.  The central bank's number one focus right now is inflation, which makes tomorrow's CPI report particularly important. CPI is expected to rise 1% in March, up from 0.3% and if prices grow as much as economists anticipate, concern about low inflation will ease, providing support to euro.

AUD Hit Hard by 1.9% Drop in Gold

Today's sharp decline in gold prices hit the Australian dollar hard.  Not only was AUD the day's worst performer but it also traded lower against all of the major currencies.  Last night's RBA minutes did not provide any support to the currency.  The central bank kept rates on hold and while the minutes did not contain anything new, investors latched on the comments that the "exchange rate remained high by historical standards" and "Despite commodity prices falling further over the past month, the exchange had appreciated a little further."  There was no fundamental driver for the slide in gold outside of a bearish report from Goldman Sachs that triggered stops below $1,300 an ounce.  With a number of important Chinese economic reports scheduled for release tonight, the Australian dollar is vulnerable to further volatility over the next 24 hours.  NZD was also affected by the sell-off in AUD and the decline in commodity prices but first quarter CPI numbers are scheduled for release this evening and if CPI growth accelerates, it could boost expectations for tightening, which would support NZD/USD.  The most resilient commodity currency was the Canadian dollar. While the loonie still ended the day lower against the greenback, the larger than expected increase in existing home and manufacturing sales eased the selling in the currency.  The Bank of Canada meets tomorrow and given the unevenness in recent data, we don't expect any changes in the central bank's outlook. When we last heard from the BoC in March, the central bank acknowledged that growth towards the end of last year was slightly stronger than anticipated but warned that Q1 growth is likely to soften.  Despite some signs of improvement, the Canadian central bank was worried about the underperformance of exports and business investment and they felt that the downside risks to inflation remain important.

GBP: No Surprise in CPI Means No Pressure to Tighten

The British pound erased all of its earlier losses to end the day unchanged against the U.S. dollar and euro.  U.K. consumer prices rose 0.2% in the month of March compared to 0.5% the previous month.  This slowdown drove year over year CPI growth down to 1.6%, which is comfortably below the central bank's 2% inflation target. The lack of inflationary pressures leaves the central bank thoroughly comfortable with the current level of monetary policy.  Yet there are initial signs of a potential increase in prices - although input prices declined more than expected, producers are beginning to charge more, which is a reflection of increased confidence and the first step to higher consumer prices.  Tomorrow's employment report should have a bigger impact on sterling because aside from inflation, how quickly the central bank tightens also depends on average weekly earnings.  We are looking for stronger numbers all around but earnings are expected to rise by its strongest pace since October 2012.  If wage growth meets expectations, we could see a jump in sterling especially if the claimant count declines and the number of people filing for unemployment benefits drops by more than 35k. 

JPY: Will Japan Downgrade its Economic Assessment?

With U.S. yields continuing to fall and U.S. stocks moving in and out of negative territory, it is no surprise to see all of the Japanese Yen crosses trade lower. Risk aversion and disappointing U.S. data made investors even more reluctant to buy dollars and at the same time, put pressure on high beta currencies.  Japanese yen pairs are vulnerable to further losses if the Nikkei responds negatively to reports that the government could downgrade its economic assessment in April.  If they do so, it would be a sign that the Japanese government is finally recognizing the negative impact of the consumption tax.  The next natural question to ask is if this is a precursor to easing and while it is a step in that direction, the Bank of Japan will want to see a more significant slowdown in the economy before increasing stimulus.  Also, the government has been quicker to acknowledge any slowdown in the economy than the BoJ.  Tonight investors will be watching the newswires carefully for comments from BoJ Governor Kuroda. If he is pessimistic, stocks will sell-off and if he remains optimistic, the prospect of no stimulus in the near term could also weigh on equities.  Either way, the risk for USD/JPY remains to the downside.  Revisions to February's industrial production report is also scheduled for release and although no changes are expected, there is a revision, it could impact the yen.