The Twists and Turns in the Dollar Post NFPs

We saw an unusual amount of volatility in USD/JPY over the last 24 hours as the greenback ended Friday higher against the Japanese Yen. The twists and turns in the dollar were directly caused by the struggle between economics and politics.  This morning, a weaker than expected labor market report sent the dollar tumbling against all of the major currencies but rebounded off its lows after President Trump signed executive actions that set the framework for scaling back Dodd-Frank financial regulations. Democrats described this as a gift to Wall Street and in line with that view, stocks traded higher.  The improvement in risk appetite triggered a reversal in USD/JPY but the greenback still ended the day unchanged to lower against all of the major currencies with the exception of sterling.  This was a tough week for the greenback as President Trump called on other countries to stop weakening their currencies.  He threatened to include currency intervention clauses in bilateral trade deals and his staff criticized Germany for the weak euro. While non-farm payrolls rose by its strongest amount in 4 months, wage growth slowed and the unemployment rate increased to 4.8%.  Economic data in general has been mixed with consumer confidence falling, personal income growth rising less than anticipated but personal spending accelerated along with manufacturing and service sector activity.  Unfortunately weaker wage growth takes a March rate hike off the table for the time being especially in light of the Fed's less hawkish views. The mixed jobs report and lack of unambiguous optimism hurt the dollar and could keep it under pressure in the new trading week. The most important reports are secondary releases such as the trade balance and the University of Michigan Consumer Sentiment Index.  As a result, the dollar is likely to take its cue from Trump's policies, comments and the views of Fed Presidents Harker, Bullard and Evans.

The Bank of Japan's actions are worth mentioning. They left monetary policy unchanged at the beginning of the week but on Friday, they took the yen on a rollercoaster ride when they bought fewer bonds than expected which shot the yen higher but then they sent the yen tumbling by announcing plans to buy an unlimited amount of 5-10 year of JGBs to "hit CPI target as soon as possible" according to BoJ Governor Kuroda. The central bank's actions are negative for JGBs and negative for the yen and will be a factor that helps keep USD/JPY supported.

Sterling was the only currency that performed worse than the U.S. dollar this past week. While its losses against the greenback were limited it experienced steep losses versus the Japanese Yen, Australian and Canadian dollars. Nearly all of the latest economic reports were disappointing with manufacturing, service and construction activity slowing and consumer credit dropping.  These are the early affects of Britain's decision to leave the European Union with more weakness likely to follow.  However the main driver of sterling's weakness this past week had less to do with data and more to do with the Bank of England's cautious outlook.  Back in December, their optimism sparked talk of a rate hike in 2017 but they seemed in no rush to tighten this past week.  Although the BoE raised its forecasts for GDP significantly, they kept their inflation forecast unchanged.  The central bank now expects the U.K. economy to grow by 2% this year, up from its previous forecast of 1.4% in November. They also upgraded their 2018 and 2019 forecast by 0.1% each year and said they now believe the unemployment rate could fall to 4.5%, down from a previous estimate of 5% before it starts to push inflation higher.  The upgraded forecasts were attributed to a weaker currency and an adjustment of their dire views of the economic damage that Brexit would have on the economy.  Even with these upgraded forecasts, the BoE seemed in no rush to raise interest rates as they now expect inflation in 2 year's time (a key measure) to be slightly lower than previously estimated.  The problem for the BoE is the lack of clarity on how Brexit and Trump will impact the local and global economy.  More specifically, Carney said "the Brexit journey is really just beginning. While the direction of travel is clear, there will be twists and turns along the way."  Investors were disappointed by his cautious tone and sent sterling tumbling as a result. The U.K. trade balance report is the only piece of market moving data on the U.K. calendar this coming week.  Although the weak GBP should support demand, we expect further underperformance in sterling. 

Euro traded higher against the U.S. dollar this past week but struggled to break above 1.08, which has become an extremely important resistance level for the currency pair.  Data from the Eurozone has been mixed which suggests that the stimulative effect of a weaker euro is fading.  Consumer prices dropped more than expected in the month of January, retail sales tumbled -0.9%, which was a big miss considering that the market anticipated a 0.6%. The only good news reported by Germany was in the labor market where unemployment rolls fell more than anticipated.  Interestingly enough the Eurozone as a whole is performing better with inflation rising in the aggregate to a whopping 1.8% in January. GDP growth also accelerated in the fourth quarter and consumer confidence is on the rise. There is no ECB meeting next week and with only German trade and industrial production numbers on the calendar, the euro is likely to take its cue from the U.S. dollar. If 1.08 resistance holds then its back to 1.06 for the pair but if 1.0850 breaks we could see a stronger run to 1.10.

All three of the commodity currencies traded higher against the greenback this past week. The Australian dollar was the best performer followed by the Canadian and New Zealand dollars.  A large part of the gains were driven by the surprisingly strong trade balance as manufacturing and service sector activity slowed. The Australian dollar will be in play this coming week with retail sales and a Reserve Bank of Australia monetary policy announcement on the calendar.  The RBA is widely expected to leave interest rates unchanged and maintain a neutral monetary policy stance as there has been both improvements and deterioration in Australia's economy since their December meeting.  Consumer spending for example has been soft, labor activity lacking and inflation slightly weaker.  However business activity and confidence is on the rise as the Chinese economy continues to recover.  Disappointing labor market data along with a surprisingly hefty drop in wages caused NZD to underperform. The Reserve Bank of New Zealand also has a monetary policy meeting next week and like Australia, the performance of New Zealand's economy has been uneven. On the consumer level, employment, spending, confidence has been soft but inflation, GDP and trade is on the rise.  We still think that the RBNZ has more reason to be dovish than hawkish and in turn expect NZD to underperform AUD. There is no monetary policy meeting in Canada next week but that does not mean that the Canadian dollar won't be on the move.  Canada's calendar is packed with market moving data such as trade, the IVEY PMI and employment reports.  USD/CAD spent most of last week above 1.30 with stronger GDP growth and oil prices keeping the Canadian dollar supported.  However we expect USD/CAD to trade higher next week as the Bank of Canada's concerns about exports and slack bear fruit.  That means 1.30 could be a near term bottom for USD/CAD.