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Boris and Kathy Forex Weekly 6/3/2017

Posted on: 06 March 2017 , by: Boris & Kathy , category: Market Review

What a great week it has been for the U.S. dollar! The greenback took in gains against all of the major currencies, rising more than 2% versus sterling, the New Zealand and Canadian dollars.

Key levels were broken all around with EUR/USD testing 1.05, USD/JPY hitting 114.50, GBP/USD cracking 1.2300 and AUD/USD breaking below 76 cents. These big moves give traders a taste of the volatility that they can expect this month as there are a number of high profile events in March that could shake the financial markets. This coming week for example we have the European Central Bank’s monetary policy announcement and the U.S. non-farm payrolls report. The following week is the FOMC meeting, press conference from Janet Yellen, the Dutch elections and the G20 Finance Ministers / Central Bankers meeting. Of course we can’t forget that U.K. Prime Minister May plans to trigger Article 50 by the end of the month. Each of these events could trigger big moves in currencies but with so much happening over the next 20 trading days, March will certainly be an exciting month.

Spot Returns Month to Date 6/3/17

US DOLLAR

Data Review

  • Durable Goods Orders 1.8% vs. 1.6% Expected
  • Durables Ex Transportation -0.2% vs. 0.5% Expected
  • Pending Home Sales -2.8% vs. 0.6% Expected
  • Annualized GDP 1.9% vs. 2.1% Expected
  • Personal Consumption 3.0% vs. 2.5% Expected
  • GDP Price index 2.0% vs. 2.1% Expected
  • Core PCE 1.2% vs. 1.3% Expected
  • Advanced Goods Trade Balance $-69.2b vs. $-66.0b Expected
  • Wholesale inventories -0.1% vs. 0.4% Expected
  • Chicago PMI 57.4 vs. 53 Expected
  • Consumer Confidence 114.8 vs. 111.0 Expected
  • Fed Officials Hint at Strong Possibility for Hike Soon
  • Trump Suggest $1 Trillion US Infrastructure Investment
  • Personal Income 0.4% vs. 0.3% Expected
  • Personal Spending 0.2% vs. 0.3% Expected
  • Real Personal Spending -0.3% vs. -0.1% Expected
  • PCE Deflator 1.9% vs. 2.0% Expected
  • PCE Core 0.3% vs. 0.3% Expected
  • Manufacturing PMI 54.2 vs. 54.4 Expected
  • ISM Manufacturing 57.7 vs. 56.2 Expected
  • Construction Spending -1.0% vs. 0.6% Expected
  • FOMC Sees Possibility for Hike Fairly Soon

Data Preview

  • Factory and Durable Goods Orders- Factory orders and durable goods is difficult to predict
  • Trade Balance- Potential for upside surprise given stronger ISM Manufacturing index
  • JN GDP- Revisions are difficult to forecast but growth is expected to be steady
  • ADP Employment Change- Needs to be strong to help dollar
  • Non-Farm Payrolls - Non-farm payrolls is notoriously volatile and best traded reactively but likely to be stronger

Key Levels - USD/JPY

  • Support 111.50
  • Resistance 115.00

The question that we are being asked the most right now is what could derail the dollar’s rally. We have seen how sentiment can change dramatically in just 5 days with the market going from doubting a U.S. rate hike in March to pricing one in almost completely. According to Fed fund futures, the odds of a rate hike this month sits at 90%, up significantly from 40% the week prior. Sentiment could also swing the other way if this week’s non-farm payrolls report is abysmal or between now and March 15th, stocks crash. Of course both of these scenarios are unlikely because while market expectations have changed recently, underlying fundamentals have not.

The U.S. economy is improving, the labour market is strong and Federal Reserve officials have taken every opportunity to say that rate hikes are coming soon. This was the backdrop 2 weeks ago and remains the backdrop today. The difference is that the bulls are finally listening to the cohesiveness of Fed officials who have been saying all along (doves and hawks) that conditions are prime for tightening. The manufacturing and service sectors are humming along and if this week’s U.S. labour market report is satisfactory, a quarter point hike this month is almost certain. Fed Chair Janet Yellen said on Friday that a March hike is appropriate if the economy evolves as expected. Vice Chair Fischer said almost no indicator has come in badly and if there’s a conscious effort on rate expectations, he said he will join it – which basically means if everyone is in favour of a March hike, he’ll vote for it as well.


BRITISH POUND

Data Review

  • GfK Consumer Confidence Survey -6 vs. -6 Expected
  • Nationwide House Prices 0.6% vs. 0.2% Expected
  • PMI Manufacturing 54.6 vs. 55.8 Expected
  • PMI Services 53.3 vs. 54.1 Expected
  • PMI Composite 53.8 vs. 55.6 Expected
  • Net Consumer Credit 1.4b vs. 1.4b Expected
  • Net Lending Sec. on Dwellings 3.4b vs. 3.6b Expected
  • Mortgage Approvals 69.9k vs. 68.5k Expected
  • Construction PMI 52.5 vs. 52.0 Expected

Data Preview

  • Industrial and Manufacturing Production and Trade Balance- Potential for downside surprise given drop in manufacturing PMI index

Key Levels - GBP/USD

  • Support 1.2200
  • Resistance 1.2400

Sterling fell hard this past as data took a turn for the worse. After a month of very narrow trading ranges, sterling finally broke down on the heels of softer data. Aside from slower service sector activity, manufacturing activity also eased in the month of Feb and between the stronger U.S. dollar, Scotland pushing for another referendum vote and Article 50 for Brexit expected to be triggered later this month, it was only a matter of time before the bottom underneath sterling fell out. Now that support has been broken, we anticipate further losses in GBP.


EURO

Data Review

  • EZ Economic Confidence 108.0 vs. 108.1 Expected
  • EZ Business Climate Indicator 0.82 vs. 0.79 Expected
  • EZ Industrial Confidence 1.3 vs. 1 Expected
  • EZ Services Confidence 13.8 vs. 13.3 Expected
  • EZ Consumer Confidence -6.2 vs. -6.2 Expected
  • GE Manufacturing PMI 56.8 vs. 57.0 Expected
  • GE Unemployment Change -14k vs. -10k Expected
  • GE Unemployment Rate 5.9% vs. 5.9% Expected
  • EZ Manufacturing PMI 55.4 vs. 55.5 Expected
  • GE CPI 0.6% vs. 0.6% Expected
  • EZ PPI 0.7% vs. 0.7% Expected
  • EZ Unemployment Rate 9.6% vs. 9.6% Expected
  • EZ CPI Estimate 2.0% vs. 2.0% Expected
  • EZ CPI-Core 0.9% vs. 0.9% Expected

Data Preview

  • EZ GDP Revisions- Revisions to GDP is difficult to predict
  • GE Industrial Production- Likely to be stronger given weaker EURO
  • ECB Rate Decision- ECB could upgrade inflation forecasts
  • GE Trade Balance- Will update after factory orders and industrial production but strong manufacturing PMI

Key Levels - EUR/USD

  • Support 1.0500
  • Resistance 1.0700

The European Central Bank also has a monetary policy announcement on the docket and while no changes are expected, the central bank will share their latest economic outlook and Mario Draghi will hold a press conference. There have been widespread improvements in the Eurozone economy since their last meeting in January. Inflation is up significantly, the unemployment rate is down, and manufacturing and services activity is up. German business and investor confidence is down but that is related to political uncertainty rather than economic performance. French politics have dominated the headlines and with more candidates dropping out of the race. The market is relieved that Independent Centrist Macron is gaining traction over Far Right leader Le Pen and if this continues to be the case we could see relative strength in the euro. While the ECB’s monetary policy announcement is the most important event risk on this week’s Eurozone calendar, revisions to Q4 GDP, German industrial production, factory orders, trade and current account balance are also scheduled for release.


AUD, NZD, CAD

Data Review

Australia

  • HIA New Home Sales -2.2% vs. 0.2% Prior
  • Current Account Balance $-3.9b vs. $-4.0b Expected
  • Manufacturing PMI 59.3 vs. 51.2 Prior
  • GDP 1.1% vs. 0.8% Expected
  • CNY Non-Manufacturing PMI 54.2 vs. 54.6 Prior
  • Manufacturing PMI 51.6 vs. 51.2 Expected
  • Caixin PMI Manufacturing 51.7 vs. 50.8 Expected
  • Trade Balance $1302m vs. $3800m Expected
  • Building Approvals 1.8% -0.5% Expected
  • Services PMI 49.0 vs. 54.5 Prior
  • Caixin China PMI Composite 52.6 vs. 52.2 Prior
  • Caixin China PMI Services 52.6 vs. 53.1 Prior

New Zealand

  • Trade Balance -285m vs. -25m Expected
  • NBNZ Business Confidence 16.6 vs. 21.7 Prior

Canada

  • Industrial Product Price 0.4% vs. 0.5% Expected
  • Current Account Balance -$10.73b vs. -$9.75b Expected
  • Manufacturing PMI 54.7 vs. 53.5 Prior
  • BoC Keeps Rates Steady at 0.50%
  • GDP 0.3% vs. 0.3% Expected
  • Quarterly GDP Annualized 2.6% vs. 2.0% Expected

Data Preview

Australia

  • Retail Sales – Potential for downside surprise given sharp drop in sales component of PSI
  • RBA Cash Rate Target- RBA could express some concern
  • CH Trade Balance- Chinese data is very market moving but hard to predict

New Zealand

  • Trade Balance – Potential for downside surprise given big drop in manufacturing PMI and lower dairy prices
  • Terms of Trade Index- Potential for downside surprise given strong NZD, weaker dairy hurts trade

Canada

  • International Merchandise Trade and IVEY PMI- IVEY PMI and trade released at same time
  • Employment Statistics- Will update after IVEY PMI

Key Levels

  • Support AUD 7500 NZD 7000 CAD 1.3200
  • Resistance AUD 7700 NZD 7200 CAD 1.3500

As a basket, the commodity currencies were hit the hardest by U.S. dollar strength. After consolidating throughout the month of February, the Australian dollar could no longer hold onto its gains. The currency fell sharply against the greenback following disappointing trade numbers and extended its losses on the back of a weaker PMI services report. Service sector activity contracted for the first time in 5 months, offsetting the strength seen in the manufacturing sector. The latest trade balance report was a sharp reminder of the damage that a strong currency can do to an export dependent economy.

The trade surplus shrank to 1.3B, less than a third of forecasted levels as exports fell 3%. These misses are important going into this week’s Reserve Bank of Australia monetary policy announcement. The RBA is widely expected to leave interest rates unchanged but they may start to sound less optimistic. The last time they met, they maintained an upbeat tone that included a positive outlook on consumption, non-mining business investment and growth. Since then, we’ve seen business confidence and manufacturing activity improve with Q4 GDP growth surprising to the upside but labour market activity and consumer inflation expectations weakened significantly. In other words, there are new factors for the RBA to be concerned about and their bias will determine whether 75 cents breaks or holds.

AU Economy - Change Since Last RBA Meeting

Meanwhile the New Zealand dollar was the week’s worst performing currency. Softer trade numbers contributed to the move but NZD was also hit hard by U.S. dollar strength. When 71 cents broke the currency pair fell quickly and aggressively down to 70 cents. What was interesting about the move and NZD’s underperformance was the fact that Reserve Bank of New Zealand Governor Wheeler was slightly less dovish when he spoke this past week. Rather than express his usual caution Wheeler said he sees risks around future rate moves as equally balanced. He is still worried about the strong currency and the global economy but the housing market is strong and it’s too early to say whether the moderation in prices will continue. There are no major New Zealand economic reports scheduled for release this week which means NZD should take its cue from the market’s appetite for U.S. and Australian dollars.

The Canadian dollar was also hit hard and was the second worst performer for the week versus the greenback. There was not even one day of retracement in USD/CAD which raced form a low of 1.31 to a high of 1.3437. As expected the Bank of Canada left interest rates unchanged and their cautious views kept the loonie under pressure throughout the NY trading session. The central bank felt that there was persistent slack and subdued wage growth with exports facing ongoing competitive challenges. Although inflation is on the rise, the BoC said they would look through the temporary effect of higher oil prices. This implies that they will maintain a dovish bias that leaves the door open to additional easing. These cautionary comments overshadowed the stronger GDP report. This week will be a busy one for Canada with the country’s trade balance, manufacturing PMI and employment reports scheduled for release.


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