The economic calendar at the onset of last week showed that only three currencies could move on new fundamental information – the AUD, GBP, and the CAD. As you can see from the relative performance chart above, the released info was enough to move the needle, as those three currencies were the outliers for the week.
The Australian economy seems to be quite the jobs making machine – employment in December rose by 34.7K, of which 15.1K were full time jobs. The unemployment rate ticked up to 5.5% from 5.4%, while the participation rate rose to 65.7% from 65.5%. The three-month rolling average for job creation is now 35.5K per month. To put this into perspective, it is as twice as much as the country's rate of population growth. If this keeps up, pressure will build for higher wages, which puts pressure on inflation and bring forward a rate hike by the central bank. Also, China can never be far from any assessment of Australia's performance, with that said - China's economy expanded by 6.9% in 2017, retail sales slowed into the year end, but industrial production growth accelerated. All in all, this caused the AUD to pop its head above the 0.80 level for the first time in four months on its way as the top performing currency on the week.
Not to be outdone, the GBP matched the Aussie’s weekly performance of 0.89%. Sterling was up for seven straight days until Friday’s disappointing retail sales report sent it lower. December retail sales fell by 1.5%, which was more than the forecast of a 1.0% decline, and the latest drop since mid-2016. Keep in mind that this drop comes after two strong consecutive monthly gains of 1.1% and 1.2%. Momentum earlier in the week was sustained by news that the Spanish and Dutch had thrown their support behind a soft Brexit, which UK officials will be striving for.
Believe it or not, the CAD turned in the worst performance for the week even though the Bank of Canada became the first major central bank to alter monetary policy in 2018. The BOC raised interest rates by 25 bps to 1.25% but the CAD fell as traders took profits after a three week run up and on the expectation the central bank will hold rates steady at the next policy meeting. The BOC expressed concerns about wages, the risk of stalling the expansion by raising rates too quickly, and the risks surrounding NAFTA negotiations. This is what Mr. Market would call a “dovish hike”.
Now, back to the USD’s plight - the US dollar index is down for the 6th consecutive week and is down 9 of the last 11 weeks. What’s wrong with the USD? This is the question we have been asked the most since mid-December. Clients always say “I don’t get it”, the Fed is on record, by way of the Fed’s dot plots, saying that they will probably raise rates at least 3 times in 2018. However, Mr. Market remains fundamentally anti-USD and favors other currencies and commodities instead. Here lies the crux of the problem – Mr. Market has already discounted the 3 rate hikes for this year. Thus, the upside in the USD is limited:
- Trump's tax cuts may add to the federal deficit;
- A shift in the way China sets the reference rate casuing the Yuan's sharp appreciation;
- The subtle hint that China may not be keen on expanting its US Treasury holdings;
- The Bank of Japan's shift from yield curve targeting from an aggressive quantitive easing is currently being interpreted as the start of a shift in monetary policy;
- The minutes from the ECB last meeting are being interpreted as a hawkish shift followed by this week's comments from Estonian ECB member Hansson about shifting to more-hawkish ECB language and ending bond purcahses in September;
- the revelation from Andreas Dombert, a member of executive bard of Budesbank, that Germany's central bank will begin adding China's Yuan to its official currency reserves;
- The threat of US protectionism by the way of negative comments about abandoning NAFTA and speculation that Trump was considering a big fine as part of a probe into China's alleged theft of intellectual property;
- Trump has on many occasions commented on the fact that the USD was too high and that he preferred a lower dollar – thus, a bearish bet on the USD is a bet for the President;
- And finally, but not least, the shutdown of the US government is just the latest fodder for the USD’s sell-off.
The next level of support for the US dollar index is around the 88.40 level followed by 84.75. The momentum indicators are still moving lower on both the daily and weekly charts. It is difficult to call the bottom of the USD’s decline and if we start the week with a US government shutdown then the USD may have enough oomph to fall to the first support area. On the other hand, monetary policy meetings for both the Bank of Japan and the ECB this week may help push back on the early policy normalization meme. This would help to encourage some two way trade and perhaps inspire a correction in the already stretched downtrend in the US dollar index.
Key Data Releases This Week
|MONDAY, JANUARY 22|
|Tentative||JPY||Monetary Policy Statement|
|Tentative||JPY||BOJ Outlook Report|
|TUESDAY, JANUARY 23|
|01:30||JPY||BOJ Press Conference|
|WEDNESDAY, JANUARY 24|
|04:30||GBP||Average Earnings Index 3m/y||2.5%||2.5%|
|10:30||USD||Crude Oil Inventories||-6.9M|
|THURSDAY, JANUARY 25|
|07:45||EUR||Minimum Bid Rate||0.00%||0.00%|
|08:30||CAD||Core Retail Sales m/m||0.9%||0.8%|
|08:30||EUR||ECB Press Conference|
|FRIDAY, JANUARY 26|
|04:30||GBP||Prelim GDP q/q||0.4%||0.4%|
|08:30||USD||Advance GDP q/q||3.0%||3.2%|
|08:30||USD||Core Durable Goods Orders m/m||0.6%||-0.1%|
|09:00||GBP||BOE Gov Carney Speaks|
|09:00||JPY||BOJ Gov Kuroda Speaks||189K||288K|
Senior FX Dealer,
Global Treasury Solutions