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US Stocks Recover, When Will Dollar Follow?

Posted on: 19 February 2018 , by: Boris & Kathy , category: Market Review

FX Weekly with Boris and Kathy

After selling off relentlessly in early February, U.S. equities stabilised over the past week. 

Unfortunately, the recovery in stocks provided zero relief to the U.S. dollar, which extended its losses against all of the major currencies. The Japanese yen was the best performer, but EUR/USD hit the biggest milestone rising to its strongest level since December 2014. With the panic selling over, high beta currencies like the euro and the Australian dollar rebounded as volatility retreated. The VIX, which measures the volatility of U.S. equities and reflects the market’s level of risk aversion, dropped more than 50% from its peak on February 5th. If stocks continue to recover, currency pairs like EUR/USD and AUD/USD will extend their gains but if the sell-off resumes, the attempted reversals towards the end of the week could become deeper corrections. 

5 Day Return vs. USD 12 February - 16 February 2018

 

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US DOLLAR

Data Review

  • CPI 0.5% vs. 0.3% Expected
  • CPI Ex. Food and Energy 0.3% vs. 0.2% Expected
  • Retail Sales Advance -0.3% vs. 0.2% Expected
  • Retail Sales Ex Auto 0.0% vs. 0.5% Expected
  • Retail Sales Ex Auto and Gas -0.2% vs. 0.3% Expected
  • Real Avg. Weekly Earnings 0.4% vs. 0.9% Prior
  • Business Inventories 0.4% vs. 0.3% Expected
  • Empire Manufacturing 13.1 vs. 18 Expected
  • PPI Final Demand 0.4% vs. 0.4% Expected
  • PPI Ex Food and Energy 0.4% vs. 0.2% Expected
  • PPI Ex Food Energy and Trade 0.4% vs. 0.2% Expected
  • Philadelphia Fed Business Outlook 25.8 vs. 21.8 Expected
  • Industrial Production -0.1% vs. 0.2% Expected
  • Manufacturing Production 0.0% vs. 0.3% Expected
  • NAHB Housing Market 72 vs. 72 Expected
  • Import Price Index 1.0% vs. 0.6% Expected
  • Housing Starts 9.7% vs. 3.5% Expected
  • Building Permits 7.4% vs. 0.0% Expected
  • U. of Mich. Sentiment 99.9 vs. 95.5 Expected
  • U. of Mich. Current Conditions 115.1 vs. 111.7 Expected
  • U. of Mich. Expectations 90.2 vs. 87.2 Expected

Data Preview

  • Existing Home Sales- Likely to recover after drop end of year
  • FOMC Meeting Minutes- Should reinforce the positive tone of Jan FOMC statement

Key Levels

  • Support 105.00
  • Resistance 107.00

It was no surprise to see the U.S. dollar fall as equities recovered because investors are dipping their toes back into riskier trades but the big story this past week was the Japanese Yen. Like the greenback, the rebound in stocks should have driven the yen lower across the board but instead it rose to its strongest level versus the dollar since November 2016. There was no relief rally as USD/JPY tumbled from 109 to 105.54 over the course of 5 trading days. The sell-off was triggered by Prime Minister Abe, who sparked a crisis of confidence when he said he wasn’t sure if he’d reappoint BoJ Governor Kuroda. This took USD/JPY below 108 and as the selling gained momentum, the Ministry of Finance added fuel to the fire by downplaying the need for FX intervention. However as the yen continued to rise, sending the Nikkei tumbling lower, Abe suddenly reappointed Kuroda in an expedited move on Friday to calm the market and arrest the rapid decline in USD/JPY. Although Friday’s price action suggests that investors are not entirely convinced that USD/JPY deserves to rise, between the move in U.S. equities and Treasuries and the presence of the 200-month simple moving average at 105.60, USD/JPY should recover in the coming week. 

Next week’s U.S. economic reports could help. Although the latest U.S. report show American pocketbooks being pinched by rising prices - inflation increased 0.5% in January while retail sales fell -0.3%, this will not stop the Federal Reserve from raising interest rates next month. Despite this week’s softer spending report, Fed fund futures are pricing in 100% chance of tightening in March. Next week’s FOMC minutes will reinforce those expectations as the central bank upgraded their inflation outlook and touted the improvements in the economy at their last meeting. Existing home sales should also recover after falling at the end of last year but before getting too excited about a full-fledged dollar recovery, investors should watch U.S. yields carefully because they continue to pose a serious danger to the markets and the economy. If they peak at 2.91%, we should see a stronger recovery in USD/JPY, risk appetite and stocks but if 10 year rates head towards 3%, sellers will return.   


BRITISH POUND

Data Review

  • CPI -0.5% vs. -0.6% Expected
  • RPI -0.8% vs. -0.7% Expected
  • PPI Input 0.7% vs. 0.6% Expected
  • PPI Output 0.1% vs. 0.2% Expected
  • PPI Output Core 0.3% vs. 0.2% Expected
  • Retail Sales Ex Auto Fuel 0.1% vs. 0.6% Expected
  • Retail Sales Inc. Auto Fuel 0.1% vs. 0.5% Expected

Data Preview

  • UK Employment Report- Potential for upside surprise given services and manufacturing reported very strong job growth
  • GDP Revision- Revisions to GDP are hard to predict but changes can be market moving

Key Levels

  • Support 1.3800
  • Resistance 1.4100

Meanwhile a series of softer economic reports did not stop the British pound from participating in the risk recovery rally. Inflation is lower, retail sales growth slowed and there’s been zero progress on Brexit negotiations. Sterling should be trading much lower given these latest developments but investors are still hopeful that the central bank will raise interest rates later this year. Despite the European Union’s resistance, we continue to believe that a Brexit deal will be done but if Wednesday’s labor market report shows a significant slowdown in wage growth, we could see a sharp pullback in the British pound. According to the PMIs, the labor market continued to improve at the start of the year but wage growth has also been very firm and a pullback would overshadow the claimant count. 


EURO

Data Review

  • GE GDP (QoQ) 0.6% vs. 0.6% Expected
  • GE CPI -0.7% vs. -0.7% Expected
  • EZ Industrial Production 0.4% vs. 0.1% Expected
  • EZ GDP 0.6% vs. 0.6% Expected
  • EZ Trade Balance 23.8b vs. 22.3b Expected
  • GE Wholesale Price Index 0.9% -0.3% Prior

Data Preview

  • ECB Current Account- Potential for upside surprise given German and French current account balance improved
  • GE PPI- Potential for upside surprise given rise in Wholesale Price Index
  • GE ZEW Survey- Potential for downside surprise as investor confidence is likely to be sapped by market volatility
  • GE and EZ PMI’s- Will have to see ZEW but industrial production drop offset by factory orders strength
  • GE IFO Business Report- Will have to see how ZE and PMIs fare
  • GE GDP and EZ CPI Revisions - Revisions to GDP are hard to predict but changes can be market moving

Key Levels

  • Support 1.2300
  • Resistance 1.2600

EUR/USD had a great run this past week but the sell-off on Friday screams of a deeper reversal. Technically, the rally stopped just short of the 100 and 200-month simple moving averages near 1.2550. These are significant resistance levels that would be the perfect points for reversal. Technically, we see reasons for a near-term recovery in the U.S. dollar but fundamentally there are plenty of reasons supporting the euro’s rise. The latest Eurozone economic reports show ongoing strength in the Eurozone economy. The European Central Bank is optimistic with members like Benoit Coeure saying the central bank will discuss changes to the policy language in early 2018. There’s no doubt that the positive momentum in the economy has ECB officials thinking about normalizing monetary policy and they could make the move as early as next month. This would be irrespective of how next week’s economic reports fare. EUR/USD will be in focus with a number of market-moving data scheduled for release including the ZEW survey, February PMIs and the German IFO report. So even if EUR/USD dips, we expect buyers between 1.2250 and 1.2375. 


AUD, NZD, CAD

Data Review

Australia

  • AUD Consumer Inflation Expectations 3.6% vs. 3.7% Prior
  • Employment Change 16.0k vs. 15.0k Expected
  • Unemployment Rate 5.5% vs. 5.5% Expected
  • Full Time Employment Change -49.8k vs. 12.7k Prior
  • Part Time Employment Change 65.9k vs. 20.7k Prior

New Zealand

  • PMI Manufacturing 55.6 vs. 51.1 Prior

Canada

  • Existing Home Sales -14.5% vs. 4.5% Prior
  • Manufacturing Sales -0.3% vs. 0.3% Expected

Data Preview

Australia

  • RBA February Meeting Minutes- No major insight expected on guidance. RBA comfortable with neutral policy 

New Zealand

  • NZ PPI Output- Potential for downside surprise given weaker CPI in Q4
  • Retail Sales Ex Inflation- Potential for upside surprise given stronger credit card sales

Canada

  • Retail Sales- Will have to see how wholesale sales fare but labor market activity has been decent
  • CPI- Potential for upside surprise given rebound in price component of IVEY PMI report

Key Levels

  • Support NZD .7450 AUD .8000 CAD 1.2600
  • Resistance NZD .7300 AUD .7800 CAD 1.2450

All three commodity currencies traded higher against the greenback with the New Zealand dollar leading the gains. NZD was the best performing currency behind the Japanese yen and is trading at a 6 month high versus the U.S. dollar. While better than expected economic data played a big role in this week’s outperformance, the New Zealand dollar was also one of the most resilient currencies when stocks tumbled. According to the latest reports, manufacturing activity accelerated in January, house sales increased along with inflation expectations and food prices. Producer prices and retail sales are due for release next week, which leaves the New Zealand dollar in play. The Australian dollar also had a nice run despite slightly weaker labour data. Although the increase in job growth was in line with expectations, full-time jobs declined for the first time in 6 months. It was bound to happen but if it continues it could be a big problem because consumer confidence is already falling. The minutes from the last RBA meeting will be the main focus. Having heard from RBA Governor Lowe, we know that they are not extremely concerned about the level of the currency. Although consumer spending remains uncertain and they believe the next move in rates will be higher, they don’t see a compelling reason to change policy in the near term. Last but certainly not least, the Canadian dollar benefitted the least from the risk rally. Although oil prices rebounded, existing home sales and manufacturing sales were weaker than expected. However, these reports are not significant enough to explain the currency’s underperformance. Instead, investors are still hopeful that Canada’s economy is going strong and we’re set to learn if that’s true with retail sales and consumer prices scheduled for release.