Dollar - Feeling the Pain of Rising Rates and Trade Tensions

For the first time since the U.S. government shutdown the S&P 500 closed in negative territory. This decline coincided with weakness in most of the major currencies. Although it would be easy to attribute the deterioration in sentiment and decline in stocks to the larger than expected drop in existing home sales, equity futures were negative well before the data was released. With the U.S. government shutdown going on for 32 days, the cost to the economy could exceed $5 billion and the economic impact will be more significant than past years as furloughed employees with no paychecks struggle to make ends meet. With that in mind though, so far the shutdown has been great for the U.S. dollar and stocks because no news is good news. The delay of data releases that would have otherwise confirmed that the economy is losing momentum helped U.S. assets stabilize at the start of year. But reports like the one we've seen today remind us of how the combination of rising interest rates and trade tensions weight the economy. According to the Financial Times, the Trump administration rejected China's offer for preparatory trade talks ahead of Vice Premier Liu He's visit at the end of the month. This suggests that not enough progress has been made and the U.S.' request for extradition of Huawei CFO does not help thaw relations. The Australian dollar has been hit the hardest by these developments as AUD/USD drops to a 2 week low.

The New Zealand dollar reversed earlier losses to end the day in positive territory after a stronger inflation report. Consumer prices rose 0.1% in the fourth quarter and while this increase was significantly smaller than Q3, where CPI rose 0.9%, it was better than the market's 0% forecast. The uptick also helped year over year CPI growth hold steady at 1.9% instead of falling further to 1.8%. The Canadian dollar on the other hand experienced its steepest one day slide this year as USD/CAD trades well above 1.33. Retail sales are scheduled for release tomorrow and despite a healthy labor market, the sharp decline in wholesale sales points to a weaker consumer spending report. Aside from the wholesale sales report, USD/CAD was also pushed higher by a big decline in manufacturing sales and lower oil prices.

Despite all of the U.K.'s Brexit troubles, sterling traded higher today on the back of stronger labor market data. Not only did jobless claims rise less than the previous month, but average weekly earnings grew 3.4% vs. 3.3% forecast and the unemployment rate dropped to 4% from 4.1%. Its hard to understand why currency traders are not disappointed by Theresa May's Plan B which looks very much like Plan A and does not include the much needed request to extend Article 50. As reported by our colleague Boris Schlossberg, the focus with cable remains squarely on the Brexit negotiations which appear to have been so badly botched by PM May that a new consensus is starting to form around the idea of a 2nd referendum. The market is now completely discounting the prospect of a hard Brexit, though the political risk still remains in play and volatility is sure to ratchet higher if no clear path is visible to the market. Last but not least, a mixed ZEW survey prevented euro from rallying today. Although the expectations component of the German ZEW survey improved, the current situation index dropped steeply.