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Is the US dollar prime for a reversal?

Posted on: 18 February 2019 , by: Boris & Kathy , category: Market Review

FX Weekly with Boris and Kathy

The US dollar enjoyed strong gains in the first week of February, but even a budget deal in Washington failed to drive it higher. With retail sales falling by the biggest amount in nearly a decade, many forex traders are wondering if the US dollar is past its prime.

Last week all of the major currencies held steady or traded higher against the greenback. The New Zealand dollar rose the most on the back of the Reserve Bank’s monetary policy announcement. The Australian dollar was not far behind in gains, but the Japanese yen, Swiss franc and euro lagged behind. A large part of these moves were driven by progression in US-China trade talks and its positive impact on risk appetite. The dow jones Industrial Average ended the week at year to date highs, and further gains are likely if the US officially extends the 1st of March trade deal deadline. With no monetary policy announcements or major US economic reports on this week’s calendar, softer consumer spending will linger on everyone’s minds, but the big movers will come from updates on trade, Brexit and the newest battle in Washington.

5 day return vs. USD Feb 11-15, 2019

 

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US DOLLAR

Data Review

  • US CPI MoM 0% vs. 0.1% Expected
  • US CPI YoY 1.6% vs. 1.5% Expected
  • PPI MoM -0.1% vs. 0.1% Expected
  • PPI Ex Food and Energy 0.3% vs. 0.2% Expected
  • Jobless Claims 239K vs. 225k Expected
  • Retail Sales -1.2% vs. 0.1% Expected
  • Retail Sales ex Food & Energy -1.8% vs. 0% Expected
  • Empire Manufacturing 8.8 vs. 7 Expected
  • Industrial Production -0.6% vs. 0.1% Expected
  • University of Michigan Consumer Sentiment Index 95.5 vs. 93.7 Expected

Data Preview

  • FOMC Minutes – Likely to be dovish, echoing Fed’s cautious tone
  • Philadelphia Fed Index – Potential for upside surprise given recovery in Empire State manufacturing index
  • Durable Goods – Potential for recovery given subdued release last month
  • Existing Home Sales – Potential for recovery as Fed plans for slower interest rate hikes

Key Levels

  • Support 109.00
  • Resistance 111.00

Dollar – real or false promises

We’ve been down this road before. President Trump says US-China trade talks are going well, and the market believes him and rallies in the hopes that tariffs will be delayed, reduced or eliminated. Days or weeks later, he back peddles, and the White House says there’s too much division to reach an agreement at this time. The US, Australian and New Zealand dollars rose this past week sharply on the hope that with the 1st of March deadline, Trump’s comment that trade talks are ‘going well’ is a sign of real progress and not false promises. Trump said he’s open to extending the deadline and could even remove the tariffs if a deal is done but until an agreement is signed, sealed and delivered attitudes could change quickly. What is certain is that another government shutdown is no longer a concern. Even though Trump’s decision to declare a state of emergency to get wall funding opens up new legal and legislative problems, for now, hundreds of thousands of federal workers won’t have to worry about missing paychecks again. And by returning to work, they provide much needed underlying support for the economy because if retail sales dropped by its largest amount in nearly a decade before the shutdown, the January numbers could be much worse.

The problem for the dollar is that the economy is slowing, and we are finally beginning to see the evidence. Not every one of this past week’s economic reports surprised to the downside, but the two most important measures for the Fed – inflation and spending missed expectations. So fundamentally, the dollar shouldn’t be that strong especially since rate hike expectations have pared significantly since the last meeting. However, if a trade deal is reached between the US and China, or China gets an extension, the market’s appetite for risk will return taking the dollar higher against the Japanese yen. There is a very good chance that the 1st of March deadline will be pushed out so the slide in USDJPY will be limited, but there’s still significant upside for the Australian and New Zealand dollars. Until that happens though, the softer retail sales report will continue to haunt the greenback especially as this week’s FOMC minutes remind investors that the central bank has no plans to raise interest rates soon.


EURO

Data Review

  • Q4 German GDP 0% vs. 0.1% Expected
  • EZ Industrial Production -0.9% vs. -0.4% Expected
  • EZ Employment Q3 0.3% vs. 0.2% Previous
  • Q4 EZ GDP 0.2% vs. 0.2% Previous
  • EZ Trade Balance 15.6 vs. 15.7 Expected

Data Preview

  • German ZEW Survey – Potential for downside surprise given general weakness of EZ data
  • German PPI – Potential downside surprise given drop in wholesale prices
  • EZ and German PMIs - Potential for downside surprise given general weakness of EZ data
  • German IFO - Potential for downside surprise given general weakness of EZ data
  • EZ CPI - Potential for downside surprise given general softness of GE CPI

Key Levels

  • Support 1.1250
  • Resistance 1.1450

Euro bounces off 3-month lows

The range for EURUSD was also tight but unlike USDCAD it hit a 3-month low. There are no shortages of reasons to keep investors away from euros including:

  1. Softness in EZ data
  2. US Budget deal, trade talk optimism
  3. Lower German yields
  4. Snap Elections in Spain
  5. Prospect of weaker ZEW, IFOs and PMIs this week

Nearly every single piece of EZ data released over the past week was softer including German GDP, EZ industrial production and trade balance. The same weakness is expected in the upcoming ZEW, IFO and PMI reports. Just as the central bank has warned, the Eurozone economy is slowing, and it could worsen before it improves. 10-year German bund yields also dropped to 0.1%, which is minuscule return compared to the Treasury yield of 2.66%. The yield spread is moving further against the euro, and that pressure is keeping a lid on the currency. Spanish Prime Minister Sanchez was backed into a corner this month with Parliament rejecting the government’s 2019 budget bill, a first in more than two decades. He was forced to call early elections next month, and if his government falls, a right-wing coalition government could take over which would be very bad for the euro. The only saving grace is risk appetite and a sliding US dollar. EURUSD ended the week near 1.13 and could rise from there on trade optimism, but the rally should still be limited to 1.14. The US Commerce Department is also set to publish a report on the car industry by February 17th that will include a recommendation on European car tariffs. If they feel that tariffs could be necessary, the euro could fall sharply.


BRITISH POUND

    Data Review

    • UK Q4 GDP 0.2% vs. 0.3% Expected
    • Trade Balance –GBP$12.1B vs. –GBP11.89B Expected
    • Industrial Production -0.5% vs. 0.1% Expected
    • December GDP -0.4% vs. 0% Expected
    • CPI MoM -0.8% vs. -0.7% Expected
    • CPI YoY 1.8% vs. 1.9% Expected
    • PPI Input -0.1% vs. 0.2% Expected
    • PPI Output 0% vs. 0% Expected
    • Retail Sales 1% vs. 0.2% Expected
    • Retail Sales Ex Auto 1.2% vs. 0.2% Expected

    Data Preview

    • Claimant Count & Jobless Rate – Potential for downside surprise as PMIs show weaker labor market conditions in manufacturing and service sectors

    Key Levels

    • Support 1.2800
    • Resistance 1.3000

    PM May getting no where on Brexit

    Another week has passed, and Prime Minister May is no closer to cobbling together a Brexit deal that will satisfy the EU and Parliament. Over the past week, she asked Parliament for more time, reaffirmed her commitment to leaving the EU on the 29th of March and said no deal is still on the table. She also suffered another defeat with the House of Commons objecting to the amendments made in the original Brexit deal because it seemed to take no deal off the table. Although this was not a binding vote, it shows a sign of continued division in the UK that discourages the EU from providing concessions. Based on the modest decline in sterling, investors are still hopeful that Article 50 will be extended, but some action needs to be taken to prevent May from running down the clock. The Labour party is pushing for a hard stop of the 26th of February–May will have to present her new deal for vote or allow Parliament to take control. Given the resistance of the EU, Tory Brexiters and other parties, May is setting up for defeat. Economic data has been mostly weaker, but a sharp jump in retail sales helped fuel an end of week rally in sterling. Labour market numbers are scheduled for release this week and based on the PMIs, which reported a decline in employment in the manufacturing and service sectors, the risk is to the downside.


    AUD, NZD, CAD

    Data Review

    Australia

    • Home loans -6.1% vs. -2% Expected
    • NAB Business Conditions 7 vs. 2 Previous
    • NAB Business Confidence 4 vs. 3 Previous
    • Westpac Consumer Confidence 103.8 vs. 99.6 Previous
    • Consumer Inflation Expectations 3.7% vs. 3.5% Previous

    New Zealand

    • RBNZ leaves rates unchanged, says next move in rates will be 2021
    • Card Spending Retail 1.8% vs. 1.4% Expected
    • QV House Prices 2.9% vs. 3.2% Previous
    • REINZ House Sales -2.5% vs. -12.9% Previous
    • Food Prices 1% vs. -0.2% Previous
    • Business Manufacturing PMI 53.1 vs. 55.1 Previous

    Canada

    • Manufacturing Sales -1.3% vs. 0.4% Expected
    • Existing Home Sales 3.6% vs. -0.6% Expected

    Data Preview

    Australia

    • RBA minutes – Minutes are likely to echo the central bank’s cautious tone
    • Employment Change – Potential for upside surprise as the PMIs show improvements in manufacturing and services

    New Zealand

    • NZ PMI Services – Potential downside surprise given weaker manufacturing activity
    • PPI – Potential downside surprise given drop in CPI

    Canada

    • Retail Sales – Potential for upside surprise given overall strength of labor market

    Key Levels

    • Support AUD .7100 CAD 1.3200 NZD .6800
    • Resistance AUD .7250 CAD 1.3350 NZD .6950

    AUD and NZD rip higher on trade talk optimism

    The mere possibility of a delay or reduction in Chinese trade tariffs has been wildly positive for the Australian and New Zealand dollars. NZD outperformed all the major currencies by almost a per cent because the Reserve Bank of New Zealand was dovish but not dovish enough. We are surprised by the robust demand for the currency because the central bank pushed back their forecast for a rate increase to early 2021. They made it clear that interest rates will remain at its current level for the next two years, which should have driven NZD lower. However, some investors were hoping for some stronger language about rate cuts, but when RBNZ Governor Orr said the chance of easing has not increased and noted that growth should pick up, it was all that bulls needed to hear to drive the currency higher. The economy is still on shaky footing, and we have seen more evidence of that in the pullback in manufacturing activity. This week’s PMI services and PPI reports should also be softer, but none of that will matter if negotiations between the US and China progress positively.

    The Australian dollar is only starting to recover after falling sharply at the start of the month. There’s significant resistance around .7150-.7160, and if AUDUSD breaks above this zone, the next stop could be 73 cents. Unlike New Zealand, the latest economic reports show improvements in Australia’s economy. Consumer and business confidence is up while inflation expectations ticked higher. This week’s employment report should also help the currency as employment conditions in manufacturing and services activity improve. The RBA minutes are also due for release, and the central bank’s neutral outlook will be made abundantly clear.

    USDCAD, on the other hand, traded in a tight 1.32 to 1.3340 range. Despite a firm employment report and oil prices rebounding to three-month highs, the loonie refused to rise. We think it should be only a matter of time before USDCAD breaks the lower bound of its recent range. It could happen on this week’s retail sales report which should benefit from a strong labour market.


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