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Boris and Kathy Forex Weekly 10/4/2017

Posted on: 10 April 2017 , by: Boris & Kathy , category: Market Review

The U.S. dollar traded higher against most of the major currencies this past week. Unfortunately the strength was driven by risk aversion and not healthier data.

This can be confirmed by the fact that the Australian dollar was the worst performer and the Japanese yen the best performer. High beta currencies tend to perform poorly when investors are nervous whereas the yen is generally bid up under these same conditions.

Spot Returns Month to Date 10/4/17

US DOLLAR

Data Review

  • ISM Manufacturing 57.2 vs. 57.2 Expected
  • Construction Spending 0.8% vs. 1.0% Expected
  • Trade Balance -$43.6b vs. -$44.6b Expected
  • Factory Orders 1.05 vs. 1.0% Expected
  • Durable Goods Orders 1.8% vs. 1.7% Expected
  • ADP Employment Change 263k vs. 185k Expected
  • Services PMI 52.8 vs. 53.1 Expected
  • ISM Services/Non-Manufacturing Composite 55.2 vs. 57.0 Expected
  • FOMC Minutes Show Possible Tightening of Balance Sheet
  • Non-Farm Payroll Change 98k vs. 180k Expected
  • Unemployment Rate 4.5% vs. 4.7% Expected
  • Avg. Hourly Earnings 0.2% vs. 0.2% Expected

Data Preview

  • PPI- Will update after import prices
  • University of Michigan Consumer Sentiment- Potential for downside surprise given drop in IBD/TIPP Sentiment index
  • CPI and Retail Sales- Spending could be stronger – While there was no major changes in gas prices, Redbook reports 1.1% yoy rise in retail sales in March

Key Levels - USD/JPY

  • Support 110.00
  • Resistance 112.50

Geopolitical risks are front and center for forex traders this month with terrorist attacks in Russia and Sweden and the U.S.’ airstrikes in Syria putting investors on edge.  U.S. data took a backseat to these developments, resulting in a messy to end to a busy trading week. The Chinese – U.S. Summit ended the best way possible – with no shots fired from either side. Instead, President Trump said “tremendous progress” was been made and declaredthe U.S.’ relationship with China as “outstanding.” Without going into details he also said “I believe lots of very potentially bad problems will be going away.”  In a statement released by China, President Xi told Trump, "We have a thousand reasons to get China-US relations right, and not one reason to spoil the China-US relationship."  While Chinese President Xi won’t be happy with the U.S.’ attacks on Syria (as their views are more closely aligned with Russia), this was the best ending that the markets could have hoped for from one of this week’s most dangerous event risks. Meanwhile we believe that the weakness in March non-farm payrolls will come back to haunt the dollar as the market looks forward to the latest U.S. consumer spending and inflation reports.  Geopolitical risks and softer U.S. data could keep investors risk averse, leading to weakness in USD/JPY and other high beta currencies like the euro. The U.S.’ decision to take direct military action in Syria is shifting U.S.-Russian relations and that could be bad news for the markets. Fox News reported that a Russian warship has entered the eastern Mediterranean heading toward 2 US Navy destroyers that launched airstrikes last night. Yet many investors may be confused by the quick recovery in the U.S. dollar post payrolls but the move was driven by a combination of short covering, positive outcome to the U.S. / Chinese Summit and a flight to safety into U.S. dollars. 


BRITISH POUND

Data Review

  • PMI Manufacturing 54.2 vs. 55 Expected
  • Construction PMI 52.2 vs. 52.5 Expected
  • BRC Shop Prices -0.8% vs. -0.8% Expected
  • Services PMI 55.0 vs. 53.5 Expected
  • Composite PMI 54.9 vs. 53.8 Expected
  • Industrial Production -0.7% vs. 0.2% Expected
  • Manufacturing Production -0.1% vs. 0.3% Expected
  • Visible Trade Balance -£12.46b vs. --£10.9b Expected
  • Trade Balance Non EU -£3.7b vs. -£2.5b Expected
  • Total Trade Balance -£3.66b vs. -£2.2b Expected
  • NESIR GDP Estimate 0.5% vs. 0.6% Expected

Data Preview

  • CPI, RPI and PPI- Potential for upside surprise given PMIs show stronger manufacturing and services price growth. Shop prices fall but at a better pace
  • Employment Report- Stronger manufacturing job growth but weaker job growth in services

Key Levels - GBP/USD

  • Support 1.2250
  • Resistance 1.2550

Finally sterling ended the week lower against most of the major currencies. Data has been mostly weaker and likely to worsen as the U.K. moves towards leaving the European Union. Although service sector activity accelerated, manufacturing and construction activity slowed in the month of March.  Friday’s Halifax house price report, industrial production and the trade balance also missed expectations. Next week, we’ll get more insight into whether the hawkish dissent from BoE member Forbes at the last monetary policy meeting is justified. This past week’s data and the cautious comments from BoE member Vlieghe certainly puts her views into question. Vlieghe believes the BoE should be cautious as the U.K. consumer slowdown could intensify. The U.K.’s inflation and employment reports are scheduled for release next week. Inflation is an exceptionally important input into the central bank’s policy. 


EURO

Data Review

  • GE Manufacturing PMI 58.3 vs. 58.3 Expected
  • EZ Manufacturing PMI 56.2 vs. 56.2 Expected
  • EZ PPI 0.0% vs. 0.1% Expected
  • Unemployment Rate 9.5% vs. 9.5% Expected
  • EZ Retail Sales 0.7% vs. 0.5% Expected
  • GE Services PMI 55.6 vs. 55.6 Expected
  • GE Composite PMI 57.1 vs. 57.0 Expected
  • EZ Services PMI 56.0 vs. 56.5 Expected
  • EZ Composite PMI 56.4 vs. 56.7 Expected
  • GE Factory Orders 3.4% vs. 4.0% Expected
  • Draghi Says Negative Rates will Be Maintained and that it is too Early to Reduce Stimulus
  • GE Construction PMI 56.4 vs. 54.1 Prior
  • GE Retail PMI 52.5 vs. 51.2 Prior
  • EZ Retail PMI 49.5 vs. 49.9 Prior
  • ECB Minutes show Concerns over Sustainable Inflation and Keeps Forward Guidance Consistent
  • GE Industrial Production 2.2% vs. -0.2% Expected
  • GE Trade Balance 19.9b vs. 17.7b Expected
  • GE Current Account Balance 20.4b vs. 19.1b Expected

Data Preview

  • EZ Industrial Production and GE ZEW Survey- Investor confidence is difficult to predict but the ZEW survey can be very market moving
  • GE CPI Revisions- Revisions are hard to predict but can be market moving

Key Levels - EUR/USD

  • Support 1.0550
  • Resistance 1.0700

After trading in an exceptionally tight range for most of the week, the euro finally broke down on Friday, falling to its lowest level versus the U.S. dollar in 3 weeks. The move had nothing to do with data as German industrial production and trade activity improved in the month of February. Instead, ongoing terrorist attacks in Europe are making investors nervous about Marine Le Pen’s chances of becoming the next President of France. She is running on a campaign of anti-immigration, anti-terrorism and the latest polls show her virtually neck to neck with Emmanuel Macron going into the first round of voting on April 23rd. The latest terror attacks probably won’t make it into this week’s ZEW survey but we continue to expect the euro to trade with a heavy bias despite improving domestic conditions. At the same time, ECB officials are still worried about inflation – central bank President Draghi said this past week that it is clearly too soon to declare success on inflation and they need more inflation confidence to change their stance. As such, he sees no need to deviate from the wording of forward guidance even as the balance of growth risks seem to be shifting upwards. ECB member Constancio agrees that it is too soon to declare success on inflation and Praet believes rates should stay at present or lower level well past QE.


AUD, NZD, CAD

Data Review

Australia

  • PMI Manufacturing 57.5 vs. 59.3 Prior
  • Retail Sales -0.1% vs. 0.3% Expected
  • Building Approvals 8.3% vs. -1.0% Expected
  • Trade Balance $3574m vs. $1900m Expected
  • RBA Holds Rates Steady at 1.50%, Neutral Statement
  • Caixin PMI Composite 52.1 vs. 52.6 Prior
  • Caixin Services PMI 52.2 vs. 52.6 Prior
  • Construction PMI 51.2 vs. 53.1 Prior

New Zealand

  • Dairy Prices Rise 1.6%

Canada

  • Building Permits -2.5% vs. 1.3% Expected
  • Unemployment Rate 4.5% vs. 4.7% Expected
  • Full Time Employment Change 19.4k vs. 105.1k Prior
  • Part Time Employment Change 1k vs. -89.8k Prior
  • Net Change in Employment 19.4k vs. 5.7k Expected
  • IVEY PMI 61.1 vs. 56.0 Expected

Data Preview

Australia

  • AU Employment Report- Stronger employment in services but weaker in manufacturing
  • CH Trade Balance- Chinese data can be very market moving but hard to predict

New Zealand

  • No Data

Canada

  • BoC Rate Decision- Data has been mixed. Labor and spending up but trade and inflation lower

Key Levels

  • Support AUD .7500 NZD .6900 CAD 1.3300
  • Resistance AUD .7700 NZD .7100 CAD 1.3500

Stronger than expected Canadian data and a rise in oil prices helped the Canadian dollar stave off further losses.  Syria is not a major oil producer but their geographic location and alliances with major Middle East oil producers raises fear for additional uncertainty in the region. The latest Canadian economic reports were strong with Canada adding another 19.4K jobs in the month of March. Full time and part time jobs increased, indicating that there was no let up after the strong rise in February.  The IVEY PMI index also jumped to 61.1, to its highest level in more than a year.

All of these developments are important going into Wednesday’s Bank of Canada monetary policy announcement.  This month’s meeting will be more market moving than last month’s because it will be followed by a press conference from Bank of Canada Governor Poloz. The last time the central bank met, they expressed concerns about low wage growth, slack and the competitive challenges that the export sector faces. In the past month, economic activity has been uneven.  The pressure on exports intensified with the trade balance returning to a deficit in the month of February.  Inflation is also low with CPI growth slowing to 2%.  Yet job growth, manufacturing activity and consumer spending has been strong.  So we may not see any major changes to the central bank’s outlook. With that in mind, if the BoC hardens their dovish bias by reiterating their concerns, the Canadian dollar will sell off. However, if they emphasize the improvement in spending and labor activity USD/CAD will fall hard from its elevated levels. 

Canada Economy - Central Bank Meeting

The Australian and New Zealand dollars traded lower this past week with AUD/USD reaching 75 cents on the back of risk aversion. The latest Australian economic reports were mixed with retail sales and manufacturing activity slowing but service sector and trade activity growing. These contradictory reports created more confusion than clarity and gave investors very little reason to buy AUD. In the coming week, Australian labor data and China’s trade balance will be the numbers to watch. The RBA has recently expressed concerns about the labor market, which makes this month’s report particularly important. China’s trade balance will most likely rebound after the unexpected deterioration last month. There’s quite support for AUD/USD at 75 cents but it is looking risky.  As there are no major New Zealand economic reports scheduled for release in the new trading week, NZD will most likely take its cue from AUD, regional data and the market’s appetite for U.S. dollars.


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