Based upon the price action in the foreign exchange market, very few investors, if any want to own dollars. The greenback has performed terribly since the beginning of the year and over the past 24 hours it has fallen to fresh lows against many of major currencies. More specifically, the dollar is currently at its weakest level against the euro and British pound in more than a year and its weakest level against the Canadian dollar in more than 3 years. The Australian dollar on the other hand continues to be pushed to fresh record highs as a result of the dollar’s weakness. Aside from driving up the value of other currencies, the recent sell-off in the greenback has also pushed commodity prices higher across the globe. This poses problems for many countries around world who may soon point fingers at the U.S. for artificially driving down the value of the dollar by keeping monetary policy easy. The U.S. government’s fiscal and monetary policy has come under criticism by other countries in the past but few have directly complained about the dollar’s weakness. One country that has is China and next week’s economic reports which include the trade balance, retail sales and industrial production numbers could give the Chinese government a good excuse to point fingers at the U.S. At the time of publication, the U.S. government is still at risk of being shutdown Friday evening.
The historically low level of U.S. interest rates and extremely accommodative monetary policy combined with growing deficits has made the dollar one of the most unattractive currencies to invest in while at the same time making it one of the most attractive funding currencies. As long as the U.S. government continues down its current course and makes no changes to U.S. fiscal or monetary policy, investors have very little reason to buy back dollars. However it will not take much to turn the dollar to turn around. All the Federal Reserve has to do is join the ECB in tightening monetary policy. Unfortunately for the dollar, raising interest rates is not in the game plan right now for the Federal Reserve. According to the latest comments from Fed officials, there is still healthy disagreement about what the next step should be other than not raising interest rates. Fed President Lockhart who is not a voting member of the FOMC is cautiously optimistic about the outlook for the U.S. economy. He believes that current monetary policy is appropriate and that excessive talk about an exit strategy could send the wrong signal to the market. Fisher who is a voting member of the FOMC and one of its most hawkish members continued to call on the central bank to curtail Quantitative Easing. Although we are fairly certain that the central bank will complete its QE program, Fisher’s comments show increasing concerns about inflationary pressures within the central bank.
There are a lot of important U.S. economic data on the calendar next week that could build the case for tighter monetary policy but until the Fed acknowledges this need, the impact on the dollar could be limited. This includes inflation, consumer spending and trade numbers along with the Empire State, industrial production and University of Michigan Consumer Confidence reports. Investors should also keep an eye out for the reports from China because stronger inflation will increase the need for additional tightening by the PBoC.
** PERCENTAGES MAY NOT ADD UP TO 100% BECAUSE OF THE PROBABILITY OF LARGER OR SMALLER MOVES BEYOND THOSE SHOWN ON THIS TABLE
The recent interest rate hike by the European Central Bank has proven to be extremely positive for the euro. Of all the fundamental factors that matter to the currency market, nothing is more important than interest rate differentials. The 25bp rate hike by the ECB yesterday widened the distance between U.S. and European yields and based upon Euribor futures, the market is looking for at least another 50 to 75bp of tightening from the European Central Bank this year. The higher oil prices rise, the greater the need for additional rate hikes from the ECB. Price stability is the central bank’s top priority which means that the euro could have a particularly strong correlation with the euro in the coming days. Sovereign debt troubles remain in the background but for the time being it matters little to the euro. Investors view the problems in the peripheral as isolated and unlikely to spillover to Spain abd other countries. Portugal has officially requested aid from the IMF who responded by pledging to move quickly on holding discussions with the Portuguese government. According to the EU the bailout program for Portugal should be approximately EUR 80 billion which is the same amount provided to Ireland. Trouble in the peripheral countries will remain a risk for the Eurozone until the stress test results are released and investors have an opportunity to react to them. However whether it becomes a problem again for the euro remains to be seen because foreign exchange traders can be particularly short-sighted, choosing only to focus on the most recent issues. One of the few things that could trigger a top in the euro is critical comments about the currency. Unfortunately ECB President Trichet stopped short of that this morning when he said a strong dollar is important. In the meantime, we have a number of economic reports from the Eurozone next week that could affect how the euro trades. This includes the ZEW survey of economic sentiment, Eurozone industrial production, consumer prices and the trade balance. It is also worth mentioning that the Swiss Franc has performed very well thanks in large part to the overall strength of the Swiss economy. Over the past two weeks, we have seen evidence of stronger consumer spending, hotter inflationary pressures and a healthier labor market. The SNB is not currently looking to raise interest rates, but if the economy continues to improve, a rate hike may be unavoidable.
The British pound ended the day higher against the greenback but not before quite a bit of intraday volatility. The problem for the U.K. is that unlike the Eurozone, there is not enough fundamental strength to support the rally in the currency. Service sector activity has improved, but this is one of the few pieces of stronger data reported by the U.K. in recent weeks, giving investors cause for skepticism. At the same time, the bailout of Portugal could cost Britain as much as GBP4.4 billion, a sum that they can hardly afford to part with. This does not include any pain that U.K. banks may have incurred from losses on loans made to Portugal. Although growth is important to the Bank of England, at some point, they will have to stop ignoring the rise inflationary pressures. This morning, the U.K. government reported stronger than expected producer price growth. Input prices rose 3.7 percent versus 2.2 percent expected while output prices increased 0.9 percent versus a forecast of 0.7 percent. According to our colleague Boris Schlossberg “Prices rose at their fastest pace in nearly 2 ½ years driven primarily by soaring energy costs. With output PPI now running at 5.4% annual rate the pressure on the BoE to tighten monetary policy is rising by the moment. The UK central bank is danger of losing its credibility if it doesn’t act soon as persistently high wholesale prices will no doubt seep into the CPI figures over next several months.” Next week’s economic reports will provide clues on the degree of flexibility that the U.K. government has to tighten monetary policy. If trade, consumer price and the employment numbers surprise to the upside, showing further strength in the U.K. recovery, the Bank of England could cave and raise interest rates next month. If the data disappoints the GBP/USD could give up its gains quickly.
For the third to fourth consecutive trading day, the Canadian, Australian and New Zealand dollars climbed to fresh highs against the greenback. Higher commodity prices, a weak dollar and healthy economic data helped to stoke further gains in the commodity currencies. This morning, the Canadian dollar rose to a fresh 3 year high against the greenback after Statistics Canada released its latest labor market numbers. The report showed a loss of 1,500 jobs last month and at first glance the labor market report was very disappointing but the details were not nearly as grim as the headline number. The reason is because all of the jobs lost in March was part time which declined by 92.1k while full time work increased by 90.6k. Any country prefers to see a more significant increase in full time than part time jobs as it means greater income security which could translate into more consumer spending. Accommodations, food services and the construction sector hired aggressively, helping to bring the unemployment rate down to 7.7 percent. Looking at full time jobs alone, this is the strongest month of job growth that we have seen in a very long time. Unlike its U.S. neighbor, Canada's recovery is progressing very quickly and the latest jobs report adds pressure on the Bank of Canada to raise interest rates. With higher crude prices providing a boost to the oil and gas industry, the outlook for a key industry in Canada has also brightened. The U.S. economy may be struggling to gain momentum but domestic demand in Canada and demand from other pars of the world has kept the Canadian economy going. If not for the strength of the loonie, the BoC would have probably raised interest rates already and even with the strength of the loonie, manufacturing activity continues to increase. This is a tough position for the central bank to be in. The CAD is trading at a 3 year high but not far from its record high. If the BoC were to raise interest rates, they risk triggering further gains in the currency which combined with higher oil prices could deal a serious blow to U.S. demand. Canada cannot ignore how its policies could affect the import and export activities of its largest trading partner and as a result, they have to weigh their decision carefully. We expect the Bank of Canada to sound mildly hawkish next week which could promote more gains in the currency. Meanwhile it is important to mention that the drop in the unemployment rate was partially caused by a lower participation rate which means that fewer Canadians looked for work last month. Nonetheless CAD traders have interpreted the labor market report to be positive for the currency and for the time being, USD/CAD appears poised for a test of 0.95.
The Japanese yen traded lower against practically all of the major currencies. Yesterday, the Bank of Japan released its monthly economic report where it discussed the supply-chain effects of the March 11 disaster and its own positive outlook going forward. The report outlines that “financial markets have been stable as a whole, as the Bank of Japan has continued to provide ample funds.” However, there is no mention the BoJ of taking additional measures to boost the economy. Despite the seemingly light report and an optimistic tone from the BoJ, Japan’s Economy Watchers Sentiment and Current Account releases paint a much more realistic image. The Eco Watchers report showed the largest one-period drop in sentiment over the history of the 11-year old survey, falling to 27.7 to hit a 2-year low. As the costs of the earthquake estimates into the hundreds of billions of dollars, surveyors responded pessimistically about the current economic conditions facing Japan. The survey was taken 2 weeks after the earthquake and provides the first indication of how the disaster has shocked the Japanese economy. Last night’s Current Account release also fell short of the 1.33T yen forecast and printed 1.21T yen. Looking ahead to next week, Core Machinery Orders for the month of February are due for release though it’s backward looking information is likely to be a non-event. Minutes from the last MPC meeting is due Monday while Preliminary Machine Tool Orders for March will be out Tuesday. After a two-week rally in dollar-yen, we’re starting to see a slight retrace in the pair. If the trend turns more significantly the BoJ could come in and announce an additional round of monetary stimulus to prop up the depressed Japanese economy. Though the aftershock of the most recent earthquake continues, the markets have been less reactive than before, as the Japanese domestic market sentiment shows resilience in the face of turmoil.
EUR/USD will be our currency pair in play on Monday. There is no U.S. economic data scheduled for release but French Industrial Production numbers are due at 2:45 AM NY Time / 6:45 GMT.
The EUR/USD has performed extremely well, rising to its highest level in more than a year. There is no question that the trend in the EUR/USD is strong. The closest level of resistance is 1.45 which is a psychological point of contention. The more technically significant level is 1.4580, the Jan 2010 high. Should the EUR/USD trickle lower, it could find some support at 1.4200. A break of 1.40 would be needed to negate the downtrend.
The historically low level of U.S. interest rates and extremely accommodative monetary policy combined with growing deficits has made the dollar one of the most unattractive currencies to invest in while at the same time making it one of the most attractive funding currencies. As long as the U.S. government continues down its current course and makes no changes to U.S. fiscal or monetary policy, investors have very little reason to buy back dollars. However it will not take much to turn the dollar to turn around. All the Federal Reserve has to do is join the ECB in tightening monetary policy. Unfortunately for the dollar, raising interest rates is not in the game plan right now for the Federal Reserve. According to the latest comments from Fed officials, there is still healthy disagreement about what the next step should be other than not raising interest rates. Fed President Lockhart who is not a voting member of the FOMC is cautiously optimistic about the outlook for the U.S. economy. He believes that current monetary policy is appropriate and that excessive talk about an exit strategy could send the wrong signal to the market. Fisher who is a voting member of the FOMC and one of its most hawkish members continued to call on the central bank to curtail Quantitative Easing. Although we are fairly certain that the central bank will complete its QE program, Fisher’s comments show increasing concerns about inflationary pressures within the central bank.
There are a lot of important U.S. economic data on the calendar next week that could build the case for tighter monetary policy but until the Fed acknowledges this need, the impact on the dollar could be limited. This includes inflation, consumer spending and trade numbers along with the Empire State, industrial production and University of Michigan Consumer Confidence reports. Investors should also keep an eye out for the reports from China because stronger inflation will increase the need for additional tightening by the PBoC.
Expectations for upcoming Fed meetings
** PERCENTAGES MAY NOT ADD UP TO 100% BECAUSE OF THE PROBABILITY OF LARGER OR SMALLER MOVES BEYOND THOSE SHOWN ON THIS TABLE
EUR EXTENDS GAINS AFTER RATE HIKE
The recent interest rate hike by the European Central Bank has proven to be extremely positive for the euro. Of all the fundamental factors that matter to the currency market, nothing is more important than interest rate differentials. The 25bp rate hike by the ECB yesterday widened the distance between U.S. and European yields and based upon Euribor futures, the market is looking for at least another 50 to 75bp of tightening from the European Central Bank this year. The higher oil prices rise, the greater the need for additional rate hikes from the ECB. Price stability is the central bank’s top priority which means that the euro could have a particularly strong correlation with the euro in the coming days. Sovereign debt troubles remain in the background but for the time being it matters little to the euro. Investors view the problems in the peripheral as isolated and unlikely to spillover to Spain abd other countries. Portugal has officially requested aid from the IMF who responded by pledging to move quickly on holding discussions with the Portuguese government. According to the EU the bailout program for Portugal should be approximately EUR 80 billion which is the same amount provided to Ireland. Trouble in the peripheral countries will remain a risk for the Eurozone until the stress test results are released and investors have an opportunity to react to them. However whether it becomes a problem again for the euro remains to be seen because foreign exchange traders can be particularly short-sighted, choosing only to focus on the most recent issues. One of the few things that could trigger a top in the euro is critical comments about the currency. Unfortunately ECB President Trichet stopped short of that this morning when he said a strong dollar is important. In the meantime, we have a number of economic reports from the Eurozone next week that could affect how the euro trades. This includes the ZEW survey of economic sentiment, Eurozone industrial production, consumer prices and the trade balance. It is also worth mentioning that the Swiss Franc has performed very well thanks in large part to the overall strength of the Swiss economy. Over the past two weeks, we have seen evidence of stronger consumer spending, hotter inflationary pressures and a healthier labor market. The SNB is not currently looking to raise interest rates, but if the economy continues to improve, a rate hike may be unavoidable.
GBP: INFLATION PRESSURES REMAIN A PROBLEM FOR BOE
The British pound ended the day higher against the greenback but not before quite a bit of intraday volatility. The problem for the U.K. is that unlike the Eurozone, there is not enough fundamental strength to support the rally in the currency. Service sector activity has improved, but this is one of the few pieces of stronger data reported by the U.K. in recent weeks, giving investors cause for skepticism. At the same time, the bailout of Portugal could cost Britain as much as GBP4.4 billion, a sum that they can hardly afford to part with. This does not include any pain that U.K. banks may have incurred from losses on loans made to Portugal. Although growth is important to the Bank of England, at some point, they will have to stop ignoring the rise inflationary pressures. This morning, the U.K. government reported stronger than expected producer price growth. Input prices rose 3.7 percent versus 2.2 percent expected while output prices increased 0.9 percent versus a forecast of 0.7 percent. According to our colleague Boris Schlossberg “Prices rose at their fastest pace in nearly 2 ½ years driven primarily by soaring energy costs. With output PPI now running at 5.4% annual rate the pressure on the BoE to tighten monetary policy is rising by the moment. The UK central bank is danger of losing its credibility if it doesn’t act soon as persistently high wholesale prices will no doubt seep into the CPI figures over next several months.” Next week’s economic reports will provide clues on the degree of flexibility that the U.K. government has to tighten monetary policy. If trade, consumer price and the employment numbers surprise to the upside, showing further strength in the U.K. recovery, the Bank of England could cave and raise interest rates next month. If the data disappoints the GBP/USD could give up its gains quickly.
CAD: WHAT TO EXPECT FROM BOC
For the third to fourth consecutive trading day, the Canadian, Australian and New Zealand dollars climbed to fresh highs against the greenback. Higher commodity prices, a weak dollar and healthy economic data helped to stoke further gains in the commodity currencies. This morning, the Canadian dollar rose to a fresh 3 year high against the greenback after Statistics Canada released its latest labor market numbers. The report showed a loss of 1,500 jobs last month and at first glance the labor market report was very disappointing but the details were not nearly as grim as the headline number. The reason is because all of the jobs lost in March was part time which declined by 92.1k while full time work increased by 90.6k. Any country prefers to see a more significant increase in full time than part time jobs as it means greater income security which could translate into more consumer spending. Accommodations, food services and the construction sector hired aggressively, helping to bring the unemployment rate down to 7.7 percent. Looking at full time jobs alone, this is the strongest month of job growth that we have seen in a very long time. Unlike its U.S. neighbor, Canada's recovery is progressing very quickly and the latest jobs report adds pressure on the Bank of Canada to raise interest rates. With higher crude prices providing a boost to the oil and gas industry, the outlook for a key industry in Canada has also brightened. The U.S. economy may be struggling to gain momentum but domestic demand in Canada and demand from other pars of the world has kept the Canadian economy going. If not for the strength of the loonie, the BoC would have probably raised interest rates already and even with the strength of the loonie, manufacturing activity continues to increase. This is a tough position for the central bank to be in. The CAD is trading at a 3 year high but not far from its record high. If the BoC were to raise interest rates, they risk triggering further gains in the currency which combined with higher oil prices could deal a serious blow to U.S. demand. Canada cannot ignore how its policies could affect the import and export activities of its largest trading partner and as a result, they have to weigh their decision carefully. We expect the Bank of Canada to sound mildly hawkish next week which could promote more gains in the currency. Meanwhile it is important to mention that the drop in the unemployment rate was partially caused by a lower participation rate which means that fewer Canadians looked for work last month. Nonetheless CAD traders have interpreted the labor market report to be positive for the currency and for the time being, USD/CAD appears poised for a test of 0.95.
JPY: SIGNS OF WEAKNESS
The Japanese yen traded lower against practically all of the major currencies. Yesterday, the Bank of Japan released its monthly economic report where it discussed the supply-chain effects of the March 11 disaster and its own positive outlook going forward. The report outlines that “financial markets have been stable as a whole, as the Bank of Japan has continued to provide ample funds.” However, there is no mention the BoJ of taking additional measures to boost the economy. Despite the seemingly light report and an optimistic tone from the BoJ, Japan’s Economy Watchers Sentiment and Current Account releases paint a much more realistic image. The Eco Watchers report showed the largest one-period drop in sentiment over the history of the 11-year old survey, falling to 27.7 to hit a 2-year low. As the costs of the earthquake estimates into the hundreds of billions of dollars, surveyors responded pessimistically about the current economic conditions facing Japan. The survey was taken 2 weeks after the earthquake and provides the first indication of how the disaster has shocked the Japanese economy. Last night’s Current Account release also fell short of the 1.33T yen forecast and printed 1.21T yen. Looking ahead to next week, Core Machinery Orders for the month of February are due for release though it’s backward looking information is likely to be a non-event. Minutes from the last MPC meeting is due Monday while Preliminary Machine Tool Orders for March will be out Tuesday. After a two-week rally in dollar-yen, we’re starting to see a slight retrace in the pair. If the trend turns more significantly the BoJ could come in and announce an additional round of monetary stimulus to prop up the depressed Japanese economy. Though the aftershock of the most recent earthquake continues, the markets have been less reactive than before, as the Japanese domestic market sentiment shows resilience in the face of turmoil.
EUR/USD: Currency in Play for Next 24 Hours
EUR/USD will be our currency pair in play on Monday. There is no U.S. economic data scheduled for release but French Industrial Production numbers are due at 2:45 AM NY Time / 6:45 GMT.
The EUR/USD has performed extremely well, rising to its highest level in more than a year. There is no question that the trend in the EUR/USD is strong. The closest level of resistance is 1.45 which is a psychological point of contention. The more technically significant level is 1.4580, the Jan 2010 high. Should the EUR/USD trickle lower, it could find some support at 1.4200. A break of 1.40 would be needed to negate the downtrend.
