- US personal spending for the month of January was revised substantially lower, suggesting that a US domestic driven recovery will take some time. We expect the market to price this info back in as traders return from the Easter break
- EUR/USD: The bias remains on the downside with the 1.1144 level as the closest support
- USD/JPY continues to gain ground, as economic data keeps disappointing
- We expect the Japanese yen to remain under pressure as the BoJ will likely step in to prevent a potential JPY appreciation
- NZD/USD: Should commodity prices remain under pressure, we expect the NZD to reverse earlier gains and to return to the 0.66 level
- In the event of a rate hike, Mexico’s economy will be at stake as the country continues to pay the price for its lack of investments in its industry sector, in particular its oil industry
- We believe however that the health of the US domestic economy is overstated and believe that no further rate hike should happen this year
- USDMXN should unfortunately further weaken which is not good news for Mexico
Yesterday, the US dollar got slammed in the early US session, after sluggish economic data. The greenback dropped 0.50% against the euro on Monday in thin liquidity trading conditions as most markets remained closed for the Easter holiday; EUR/USD hit 1.1220, while the dollar index fell to 95.84 as inflation data came in on the soft side. The Fed’s preferred gauge of inflation, the personal consumption expenditure core price index, rose 0.1%m/m in February from 0.3% in the previous month, missing consensus of 0.2%. On a year-over-year basis the gauge remained stable at 1.7% versus 1.8% in January. Separately, data showed that American consumers remain cautious, preferring to increase their savings, despite income continuing to increase at a steady pace. However, personal spending for the month of January was revised substantially lower, suggesting that a US domestic driven recovery will take some time. Overall, the US dollar lost ground against most currencies on Monday. However, we expect the market to price this info back in as traders return from the Easter break. EUR/USD moved back below the 1.12 threshold; from a technical standpoint, the bias remains on the downside with the 1.1144 level as the closest support (Fibo 38.2% on March rally).
Peter Rosenstreich, head of market strategy: "With traders returning after the Easter break, global markets will be focused on Fed Chair Yellen’s speech at the Economic Club of New York (@17:20 GMT). Last week markets got another dose of conflicting statements made by senior Fed officials over how the monetary policy path is likely to unfold this year. The Fed “dots” suggest that most Fed member anticipate only two 25bp hikes this year. This is a view that was reinforced by Yellen’s comments at the FOMC press conference and a reiteration of the statement that rate hikes are likely to be gradual. Yet, judging from known hawk Fed Bullard’s definite comments, a rate hike should be on the table for the next meeting in April. The disharmony and lack of clarity has become alarming. For USD traders the conflicting view makes forecasting challenging, as EURUSD range consolidation indicates. We suspect that a majority of Fed members would like to keep rates lower for longer yet the healthy US data supports a divergent path. During Yellen’s speech today it is unlikely that she will dramatically shift market expectations, even though it will clearly generate short-term volatility, rather she will continue to highlight that the timing of the next rate hike will be determined by incoming data. Markets are pricing in 50/50 probability of a June rate hike which we feel to be slightly over optimistic considering the softer economic data. Given our outlook we suspect that USD has further to decline as weak external data further weakens US domestic outlook. With regards to the potential for the USD to find buyers on the back of safe haven trades, we suspect that risk aversion will be temporarily sidelined (further recovery in EM and commodities) as global central bank policy remains supportive.”--
USD/JPY continued to gain ground, up 2.75% from its low from mid-March as Japanese economic data keeps disappointing. The jobless rate rose to 3.3% in January from 3.2% in the previous month. Separately, retail trades printed at +0.5%y/y, missing estimates of 1.6% and a downwardly revised figure of -0.2% in January. Finally, retail sales contracted 2.3%m/m, well below median forecast of -0.9%. However, January’s reading was revised higher to -0.4% from 1.1%. Overall, we expect the Japanese yen to remain under pressure as the BoJ will likely step in to prevent a potential JPY appreciation.
The New Zealand dollar was the biggest winner in overnight trading as NZD/USD tested the 0.6761 before easing slightly to 0.6745 as traders failed to find a meaningful reason to push the Kiwi higher against the backdrop of looming rate cuts by the RBNZ and the Fed’s rate tightening cycle. The Kiwi stumbled over the 0.6750-75 resistance area (top of February’s range). Should commodity prices remain under pressure, we expect the New Zealand dollar to reverse earlier gains and to return to the 0.66 level.
In the equity market, European equity futures are pointing to a higher open in spite of Asia’s negative lead. In Japan, the Nikkei and Topix fell 0.18% and 0.31% respectively. Mainland Chinese shares were also trading in negative territory with the CSI 300 down 1.22%. Finally, in Hong Kong the Hang Seng was down 0.31%, while in Australia the S&P/ASX slid 1.57% as iron ore prices continue to fall, with the September contract on the Dalian commodity exchange down 4.30% to 375 yuan/metric ton.
Yann Quelenn, market analyst: “Mexico: Expected lower economic activity. Today January economic activity will be released and is expected to print lower than December at 2.50% vs 2.56%. The Mexican economy is highly dependent on the United States and its oil revenues. Mexico’s curse is that its central bank needs to carefully follow the Fed’s monetary policy in order to avoid any capital outflow that would result from a narrowing rate differential. In 2015, the Mexican central bank changed the dates of its interest-rate decision based on the FOMC's meeting dates in order to be more reactive to any change in US monetary policy. In other words, it wants to ensure it can respond to an increase in US borrowing costs.
It is clear that in the event of a rate hike, Mexico’s economy will be at stake as the country continues to pay the price for its lack of investments in its industry sector, in particular its oil industry. With an out of date infrastructure the country simply does not have a fighting chance to compete in the oil market. Nevertheless, we believe that the health of the US domestic economy is overstated and believe that no further rate hike will happen this year. The dovish stance is clearly retreating and unfortunately for Mexico, we should therefore see further weakening in the USDMXN.”--
Today traders will be watching retail sales from Sweden; business & consumer confidence from Italy; Fed’s Williams and Kaplan (both non-voters) speeches, Yellen will also speak in NY later today and consumer confidence index from the US; the BoE will release a statement from its March 23 meeting.