Dollar Tips Lower, What To Make Of BoE
By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
The last 24 hours have been extremely busy in terms of economic data and central-bank rate decisions from G10 countries but interestingly enough, none of these event risks had much impact on the major currencies. The biggest movers were USD/CAD and AUD/USD, which at a daily change of around 0.5%, were virtually unchanged. Investors are clearly biding time waiting for the big events on next week’s calendar. That includes monetary policy announcements from the Federal Reserve, Bank of Japan, Reserve Bank of New Zealand and the minutes from the last Reserve Bank of Australia meeting. Thursday’s U.S. economic reports harden the case for steady rates. Retail sales dropped 0.3% in August, the first decline in 5 months. Excluding autos and gas, spending also fell -0.1%, which was significantly worse than the market’s 0.3% forecast. Producer price growth also stagnated and industrial production declined. Although manufacturing activity in the NY and Philadelphia regions improved, these reports make it very difficult for the Fed to justify raising interest rates next week. Between weak job growth, consumption and spending, the U.S. economy needs rates to stay low. These disappointing reports should have driven the U.S dollar sharply lower but instead the greenback ended the day higher versus the British pound and unchanged against the euro and Japanese yen. USD/JPY fell initially after the retail sales report, but recovered quickly and then drifted lower to end the day near where it was trading pre-data. While this suggests that the majority of forex traders never expected a September hike and so their views were unchanged after the data, the rise in U.S. stocks shows that equity traders are relieved by the implications of Thursday’s data. Treasury yields were unchanged. Looking ahead, we expect the U.S. dollar to remain heavy, especially into the consumer price and University of Michigan Consumer Sentiment reports. The decline in producer prices points to weaker CPI while the drop in spending and slowdown in job growth provides consumers with plenty to worry about. We would not be surprised if USD/JPY drifted back to 101 and expect EUR/USD to hit 1.13. The euro was actually the least interesting currency on Thursday. It was encouraging to see Eurozone consumer prices tick up in August but the data had very little impact on the currency. As expected, the Swiss National Bank left interest rates unchanged. While the SNB upgraded its GDP forecast slightly, saying the recovery will continue, they expressed continued concerns about the significant overvaluation of the franc and indicated that second-half growth is more modest. The Swiss franc sold off following the rate decision but bottomed against the dollar 15 minutes after. The Bank of England’s monetary policy announcement also failed to spark any fireworks for the British pound. U.K. policymakers voted 9-0 to keep interest rates unchanged, which was not a surprise considering that they just unleashed an aggressive stimulus package last month. The central bank recognized that recent data has been better than expected and the first impact of stimulus is encouraging. Sterling traded higher initially then gave up all of its gains and only recovered after U.S. economic reports. At the end of the day, the Bank of England is still in wait-and-see mode. Until Article 50 is invoked and the world learns the terms of Brexit, investors will sit at the edge of their seats and policymakers will keep their finger on the stimulus button. For this reason, we still believe sterling is a sell on rallies. There was a late-day headline that said some EU sources see the U.K. giving up on Brexit if the negotiations are too tough — don’t expect any official sources to confirm this possibility as the road toward that decision would be long and rocky. Thanks to the rebound in U.S. equities and disappointing U.S. data, oil prices may have finally found a bottom. For the first time in 7 trading days we have finally seen a correction in USD/CAD and typically when that happens, it becomes a multi-day move for the currency. We believe the latest sell-off in USD/CAD will take the currency pair down to 1.3050 and possibly even 1.30. There are no major Canadian economic reports scheduled for release this week but next week we have retail sales and consumer prices. Meanwhile, the Australian dollar shrugged off mixed labor-market numbers to end the day sharply higher. Australia reported a disappointing 3.9k loss in jobs when an increase of 15k jobs was expected. The change was mainly driven by a loss of 15.4k part-time jobs, which was clearly a retracement of last month’s sharp increase. Full-time job change was more optimistic as the country added 11.5k jobs, a rebound from the previous month. While this uptick in jobs helped to take the unemployment rate down to 5.6%, the participation rate declined. Meanwhile, the New Zealand dollar benefitted from stronger GDP growth. The 0.9% pace of growth was less than anticipated but still an uptick from the previous quarter. The PMI manufacturing report was disappointing with the index falling to 55.1, a slight drop when compared to the prior month’s 55.5 figure. Looking ahead, the sharp rise in U.S. stocks and decline in the U.S. dollar should pave the way for further gains in AUD/USD and NZD/USD.