USD/JPY dips but dollar bulls remain in control

Investors continued to buy U.S. dollars on Thursday despite weaker than expected Philadelphia Fed manufacturing index and jobless claims. Market participants are convinced that these disappointments will fade as the economy improves because the Federal Reserve’s upgraded economic projections gave everyone the confidence that the recovery will gain traction.  With that said, USD/JPY fell from its highs after U.S. data. Other major currencies quietly trickled lower versus the greenback. The dollar maintained its bid because the Federal Reserve gave bulls everything they hoped for on Wednesday. They admitted that it may be time to talk taper, pulled forward their rate hike forecasts and upgraded nearly all of their economic projections. Chairman Powell admitted that inflation could be higher and more persistent than they anticipated.
 
Thanks to the Federal Reserve’s hawkish economic forecasts, the U.S. dollar’s outlook is strong. Investors will continue to look past data weakness and focus entirely on central bank comments in the U.S. and abroad. The quiet period for U.S. policymakers is over and it will be interesting to see if their language changes as well. Given the moderate sell-off in stocks and decline in Treasury yields on Thursday, U.S. policymakers should feel comfortable confirming that discussions about reducing asset purchases should begin which would be positive for the dollar.
 
Traders should keep an eye on stocks. Reducing asset purchases and advancing the time line for raising interest rates is bearish for equities. The losses in the S&P 500 have been limited but the Dow Jones Industrial Average closed lower for the 9th straight trading day, its longest stretch of weakness since March 2017. Further losses in equities will drive Yen crosses lower and compound the dollar’s gains.
 
Demand for the greenback completely overshadowed better than expected economic reports from Australia and New Zealand. Australia reported the strongest one month increase in jobs since October. At 115K, it was three times greater than anticipated with solid full and part time job increases. The unemployment rate which was expected to hold steady at 5.5% fell to a pre-pandemic low of 5.1%. Both Australia and New Zealand’s labor markets have now returned to pre-pandemic levels.  The New Zealand economy grew 1.6% in the first quarter, three times faster than anticipated. Year over year, GDP growth accelerated from -0.8% from 2.4%. These reports should have been wildly positive for AUD and NZD but they were two of the day’s worst performing currencies.
 
The weakest currency was the Swiss Franc which dropped nearly a percent against the dollar. Central bank monetary policy divergence is becoming increasingly important and in the case of the Swiss National Bank who met this morning, their decision to affirm their -0.75% interest rate highlighted the widening gap between U.S. and Swiss policies. The Bank of Japan meets tonight and they are widely expected to keep monetary policy and their forward guidance unchanged.
 
The most resilient currency was sterling. Retail sales numbers are due for release tomorrow. Like inflation and employment, the risk is to the upside. Economists are looking for spending growth to slow after last month’s strong rise but ongoing reopenings and the sharp rise in average hourly earnings suggests healthy retail demand.