The U.S. dollar traded lower against most of the major currencies today on the back of weaker economic data. For our readers, this sell-off should be no surprise because in yesterday’s note we said that lower gas prices and softer spending reported by Johnson Redbook raised the risk of a disappointment for retail sales. As we anticipated, consumer spending dropped -0.8% in the month of January, two times more than expected. This would not have had such a dramatic impact on the dollar had spending excluding gas and auto purchases been stronger but consumption rose by only 0.2%, versus a 0.4% forecast. Jobless claims also increased more than expected from 279k to 304k and this one two punch gave investors the perfect excuse to take profits on their long dollar positions. Investors sold dollars across the board with the greatest losses seen in USD/JPY which took out the 120 and 119 handle to trade down as much as 1.3% intraday. We are not worried about the pullback in the dollar or about the weak retail sales report and as indicated in our recent notes, we view the decline as an opportunity to buy the currency pair again at a lower level. On a historical basis, jobless claims remain low and more importantly we are encouraged by the fact that retail sales ex autos and gas increased last month. Core spending in the month of December was also revised up to 0% from -0.3% so if you extrapolated that upward revision to the January report, the overall reading was not as bad. With wage growth recovering and the Fed optimistic that household spending is rising modestly, the decline in retail sales should be short-lived. Gas prices have stabilized and moved higher in February according to gasbuddy.com and we should soon see the positive impact of lower gas prices and higher wages on discretionary incomes and spending. Based on the rally in U.S. equities and the modest decline in Treasury yields, investors outside of FX are also not particularly distressed about today’s reports. The University of Michigan consumer sentiment index is scheduled for release tomorrow and between the strong labor market report and lower gas prices, we expect sentiment to hold near its 11-year highs.
EUR Rallies on Ukraine and Greek News
While no deal was reached between the European Union and Greece at this week’s talks, euro traders were encouraged by the European Central Bank’s decision to extend an emergency 5 billion euro loan to Greece to avoid any funding problems. This extension takes the total amount provided to Greece under the ECB’s Emergency Liquidity Assistance program to EUR65 billion. The ECB will meet again next week to talk about the ELA program and Eurogroup Finance Ministers will hold another meeting on Monday. Clearly the issue is important and their commitment to reaching a deal is significant enough for European Union officials to hold back to back meetings. While contingencies are certainly being made for a Grexit, Europe isn’t giving up easily because there are huge consequences for everyone. We continue to remain optimistic that a deal will be reached and see today’s ELA extension as small progress. The ceasefire deal between Russia and Ukraine also helped to drive the euro higher. The ongoing uncertainty was paralyzing the region and in the words of French President Hollande, the “truce is a huge relief for Europe.” Eurozone GDP numbers are scheduled for release tomorrow and stronger growth could extend the euro’s recovery. Of course, softer numbers would drive it right back into its 1.1360 to 1.1270 range.
GBP Soars on Hawkish BoE Quarterly Report
The British pound traded sharply higher against the U.S. dollar today following a hawkish Bank of England Quarterly Inflation Report. U.S. dollar weakness also contributed to the move but the main catalyst was the Quarterly Report. The BoE lowered its 2015 inflation forecast to 0.5% from 1.4%, far short of negative levels. Going into today’s release, investors feared that the central bank would issue its first ever deflation forecast but not only did they stop short of that but they also see inflation rising to 1.8% in 2016 and then to 2.1% in 2017. The BoE also raised its growth forecast for next year to 2.9% from 2.6%. These changes tell us that policymakers are committed to raising interest rates in 2015. In fact, in the press conference that followed, BoE Governor Mark Carney said that while inflation will be close to zero for much of 2015, wage growth and unit labor costs are growing. The conversation centered on tightening with Carney saying point blank that the next move by the BoE will be a rate hike but any tightening will be gradual. Sterling soared as a result with GBP/USD rising to its strongest level in 1 month. We now expect further strength in the pound particularly against currencies of countries easing monetary policy. GBP/USD itself should make a run for 1.55.
AUD Shrugs Off Weak Employment But Rate Cut Bets Soar
The Australian dollar traded lower against all of the major currencies today with the exception of the U.S. dollar. AUD/USD’s lack of participation indicates that the currency pair is driven by the market’s appetite for the greenback. Fundamentally, we believe that AUD/USD should be trading much lower but on this day of significant profit taking on long dollar positions, the currency pair recovered all of its post employment losses to trade higher for the day. Last night’s employment report was unambiguously negative for the Australian dollar. Over 12k jobs were lost in the month of January with full time jobs falling -28.1k and part time jobs rising by 15.9k. The decrease in full time work helped to push the unemployment rate up to 6.4% from 6.1%, the highest level since June 2002. This deterioration explains why the Reserve Bank felt pressured to cut interest rates this month and raises the odds of further easing in March. Considering that the market is now pricing in a 68% chance of a reduction in March, up from 43% before the jobs report, we believe that the gains in AUD/USD will be short-lived. The New Zealand and Canadian dollars also performed well today with both currencies rising more than 1.25% as the weaker dollar drove commodity prices. However we are a bit worried about last night’s NZ business PMI report which dropped from 57.1 to a 2 year low of 50.9.
EUR Rallies on Ukraine and Greek News
While no deal was reached between the European Union and Greece at this week’s talks, euro traders were encouraged by the European Central Bank’s decision to extend an emergency 5 billion euro loan to Greece to avoid any funding problems. This extension takes the total amount provided to Greece under the ECB’s Emergency Liquidity Assistance program to EUR65 billion. The ECB will meet again next week to talk about the ELA program and Eurogroup Finance Ministers will hold another meeting on Monday. Clearly the issue is important and their commitment to reaching a deal is significant enough for European Union officials to hold back to back meetings. While contingencies are certainly being made for a Grexit, Europe isn’t giving up easily because there are huge consequences for everyone. We continue to remain optimistic that a deal will be reached and see today’s ELA extension as small progress. The ceasefire deal between Russia and Ukraine also helped to drive the euro higher. The ongoing uncertainty was paralyzing the region and in the words of French President Hollande, the “truce is a huge relief for Europe.” Eurozone GDP numbers are scheduled for release tomorrow and stronger growth could extend the euro’s recovery. Of course, softer numbers would drive it right back into its 1.1360 to 1.1270 range.
GBP Soars on Hawkish BoE Quarterly Report
The British pound traded sharply higher against the U.S. dollar today following a hawkish Bank of England Quarterly Inflation Report. U.S. dollar weakness also contributed to the move but the main catalyst was the Quarterly Report. The BoE lowered its 2015 inflation forecast to 0.5% from 1.4%, far short of negative levels. Going into today’s release, investors feared that the central bank would issue its first ever deflation forecast but not only did they stop short of that but they also see inflation rising to 1.8% in 2016 and then to 2.1% in 2017. The BoE also raised its growth forecast for next year to 2.9% from 2.6%. These changes tell us that policymakers are committed to raising interest rates in 2015. In fact, in the press conference that followed, BoE Governor Mark Carney said that while inflation will be close to zero for much of 2015, wage growth and unit labor costs are growing. The conversation centered on tightening with Carney saying point blank that the next move by the BoE will be a rate hike but any tightening will be gradual. Sterling soared as a result with GBP/USD rising to its strongest level in 1 month. We now expect further strength in the pound particularly against currencies of countries easing monetary policy. GBP/USD itself should make a run for 1.55.
AUD Shrugs Off Weak Employment But Rate Cut Bets Soar
The Australian dollar traded lower against all of the major currencies today with the exception of the U.S. dollar. AUD/USD’s lack of participation indicates that the currency pair is driven by the market’s appetite for the greenback. Fundamentally, we believe that AUD/USD should be trading much lower but on this day of significant profit taking on long dollar positions, the currency pair recovered all of its post employment losses to trade higher for the day. Last night’s employment report was unambiguously negative for the Australian dollar. Over 12k jobs were lost in the month of January with full time jobs falling -28.1k and part time jobs rising by 15.9k. The decrease in full time work helped to push the unemployment rate up to 6.4% from 6.1%, the highest level since June 2002. This deterioration explains why the Reserve Bank felt pressured to cut interest rates this month and raises the odds of further easing in March. Considering that the market is now pricing in a 68% chance of a reduction in March, up from 43% before the jobs report, we believe that the gains in AUD/USD will be short-lived. The New Zealand and Canadian dollars also performed well today with both currencies rising more than 1.25% as the weaker dollar drove commodity prices. However we are a bit worried about last night’s NZ business PMI report which dropped from 57.1 to a 2 year low of 50.9.
Read more about Dollar Outlook: Don’t Fear Retail Sales
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