Daily Trade Recommendation

Our general trade call for the week is to sell Cable and Kiwi on pullbacks (Kiwi may rally on oil gains however). The USD rallied during Friday’s NY session as Preliminary GDP and Personal Consumption Expenditures both smashed expectations. The headline for GDP beat estimates at 1.0% versus an expected 0.4% and an Advance reading of 0.7%. Familiarize with the latest changes in the market by reading my currency update bellow. 

USD: Core PCE for January ticked up to 1.7% y/ywhich is reassuring for the Fed’s tightening policy. We may see some hawkishcomments from Fed members in relation to the recent move higher in underlyinginflation. The second reading of Q4 GDP beat estimates at 1.0% above 0.4%expected. The USD remains the strongest currency fundamentally. CPI forJanuary beat estimates with Core CPI y/y ticking up to 2.2% and rising 0.3% forthe month. Headline CPI was at 1.4% y/y. Minutes from the January meetingstruck a cautious tone, noting increased uncertainty regarding inflation andpotential financial risks. NFP for Jan saw 151,000 jobs added, versusexpectations for 190,000. The unemployment rate fell to 4.9%. Average hourlyearnings jumped 0.5% for the month, however the y/y figure held steady at2.5%. 

EUR: Eurozone final CPI for January missedestimates for the y/y at 0.3% vs expected 0.4%, however the m/m and corereading were both inline with expectations at -1.4% and 1% respectively. At theJanuary 21 ECB meeting, Draghi made dovish comments, saying that monetarypolicy will be reviewed at the March meeting due to further deterioration ininflation expectations and other financial uncertainty. 

GBP: UKGDP second estimate for Q4 2015, came inline with expectations for both the q/qat 0.5% and the y/y at 1.9%. London Mayor Boris Johnson’s announcement tocampaign for leaving the EU has put extra bearish sentiment on sterling. RetailSales beat estimates across the board with the m/m figure printing its highestvalue since December 2013. Average Earnings were at 1.9% for December, whilethe jobless rate moved up to 5.1%. Core CPI for January missed estimates anddipped back to 1.2%. The Bank of England vote split changed back to 9-0 with McCaffertyno longer voting for a hike. Growth forecasts for 2016 and 2017 were downgradedwhile inflation is expected to remain below 1% til the end of the year. Thereferendum regarding Britain’s exit from the EU contributes to bearishsentiment on the currency due to political uncertainty.

AUD: Q4 Private Capex beat estimates howeverforward-looking estimates for 2016/17 dramatically missed prior estimates,which caused weakness in the Aussie. 7,900 jobs were lost in January while theUnemployment Rate ticked up to 6%. On February 2, the RBA left its cash rateunchanged as was expected. The accompanying rate statement was fairly upbeatand signaled growing confidence in a domestic recovery, while low inflationstill remains a concern and could provide scope for further easing movingforward if warranted. CPI for the fourth quarter beat expectations overall withTrimmed Mean y/y remaining at 2.1%, which is within the Banks’s target of 2-3%.The Australian dollar remains a neutral currency which will be guided bydirection in key commodity assets.

NZD: RBNZ Inflation Expectations for Q4 2015came in at a 22-year low at 1.6%which puts pressure on the Bank to easefurther. The RBNZ kept rates on hold in January but struck a dovish tone sayingthat the NZD needs to move lower and further easing is a possibility. Westpacforecast a cut to 2.25% at the March meeting. CPI for Q4 was poor showingdeflation of -0.5% for the 3-month period and a rise of only 0.1% throughoutall of 2015. This increases chances of further RBNZ cuts. On February 3, theQuarterly Employment Change printed at 0.9% versus the 0.8% consensus, whilethe Unemployment Rate tumbled to 5.3% smashing expectations of a 0.1% rise to6.1%, and the lowest since the first quarter of 2009.

CAD: January employment declined 5,700 – itssecond decrease in the last three months, and missing consensus of a 6,000gain. The jobless rate ticked up to 7.2%, on par with its highest mark sinceMarch 2013. The BOC kept rates on hold at the January 20 meeting, which surprisedsome analysts. The tone of the statement and Poloz’s press conference was lessdovish than anticipated, which is in line with Poloz and the BOC’s generallyoptimistic stance. The severe depreciation of the CAD due to falls in oil meansthere is less urgency to cut rates, as the lower CAD will boost inflation bymaking CAD-denominated goods more attractive to overseas buyers. Further, itappears that the Canadian government may introduce fiscal stimulus measures inthe next budget which allows the BOC to refrain from action for now. CAD willcontinue to be directed by the price of WTI.

JPY: BOJ core CPI dropped to 1.1% y/y forJanuary. GDP for Q4 2015 missed estimates at -0.4%. The Bank of Japan announcednegative interest rates of -0.10% on January 29 but left the QQE programunchanged. The inflation target was pushed back to end 2017 and the Bankremains prepared to ease further if necessary. The BOJ are watching CPIexcluding food & energy to gauge underlying inflation trend. 

CHF: The franc is fundamentally a weak currencygiven the SNB’s negative interest rates, however it can suddenly rally onsafe-haven flows. The SNB regularly recite that the franc is overvalued andthey are prepared to intervene to weaken the currency. The franc’s direction isdifficult to predict due to regular intervention by the SNB.