By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
At the start of the week, we said the Canadian and Australian dollars could hit new multi-month highs and now that these milestones have been reached, we are weary of a correction in both currencies. For the Canadian dollar, it's all about the Doha oil summit this weekend. And while there’s talk that key producers could officially freeze production, there’s still significant doubt that an agreement will be reached. After such a strong recovery in oil prices and corresponding rally in the Canadian dollar, profit taking ahead of such an important decision is not unusual and is in fact expected.
For the Australian dollar on the other hand, there was little fundamental support for the push to 8-month highs. Job growth in Australia was stronger than anticipated and the unemployment rate declined, that was primarily due to a steady participation rate and increases in part-time work. More full-time jobs were lost than gained in March, which is a reflection of weakness and not strength in the labor market. Gold prices also turned lower and the U.S. dollar is trading higher against most of the major currencies. So why is AUD the day’s best-performing currency? The answer is easy. Just look at the AUD/NZD cross. AUD/NZD experienced its strongest one-day rise in more than a month as the Australian and New Zealand dollars moved in completely opposite directions. This could be driven by a major M&A flow or hedge transaction or it could be a reaction to changes in monetary-policy expectations by local banks. The research team at Macquarie, the 5th largest bank in Australia, pushed back its rate-cut expectations to August while Bank of New Zealand, one of the largest in the country, expects the central bank to reduce rates in April and June and warned that the market is underpricing the chance of April easing. Investors could also be punishing the New Zealand dollar for the leaked March rate-cut decision. Last night, the RBNZ admitted that its surprise rate cut in March was leaked by a journalist ahead of the official announcement and in response, the central bank will now be making its monetary-policy decisions available to the public and the media at the same time. So as you can see, the strength of the Australian dollar Thursday had more to do with exogenous factors than a rosier outlook for the country.
China was due to release its first-quarter GDP Thursday evening along with retail sales and industrial production. These numbers will have a significant impact on the Australian dollar and will draw fundamentals back to the forefront. If Chinese GDP numbers beat expectations, AUD/USD will hit fresh multi-month highs. But if growth slows more than anticipated, 0.77 cents will mark the top for the pair.
There were no surprises in Thursday’s Bank of England monetary-policy announcement as U.K. policymakers voted 9-0 to leave interest rates unchanged. However the minutes show that central-bank officials are growing more concerned about Brexit. Members felt that with the referendum looming it is difficult to forecast the direction of the economy. They also believe uncertainty may increase post-Brexit and in fact they expect GDP growth to slow in the first half of the year due to Brexit uncertainty. Furthermore, while our data table showed significantly more improvement than deterioration in the economy since March, they shrugged off the reports saying there are already signs of the EU referendum weighing on activity and that financial conditions were broadly similar to or a little looser than 6 months ago. In other words, the tone of the BoE monetary-policy announcement was less hawkish, keeping pressure on sterling, which seems to be happy to trade within a broad 1.40 to 1.45 range ahead of the referendum.
Meanwhile even after a smaller increase in consumer prices, the U.S. dollar ended the day higher against most of the major currencies. The Japanese yen and Swiss franc were unchanged leaving the New Zealand dollar as the only currency to underperform the greenback. The yen jumped after a powerful earthquake hit in southern Japan. Thankfully it was far away from densely populated Tokyo and no tsunami warning was issued. With U.S. consumer prices rising a mere 0.1% and retail sales falling -0.3% in March, even if April is a live Fed meeting, there’s zero chance of a rate hike this month. Tightening in June looks extremely unlikely as well unless retail sales grows by 0.5% or more in each of the next 3 months and consumer prices rise at a faster pace. But the trend is moving in the opposite direction with year-over-year CPI growth slowing to 0.9% from 1%. Jobless claims fell to its lowest level since 1973 but investors have grown immune to this report as fewer job losses fail to coincide with stronger job growth. Also, there’s been a lot of layoff announcements in the financial sector this past week that has yet to filter down to the jobless claims report. FOMC voter Powell spoke Thursday but he did not touch on the economy or monetary policy. The Empire State, industrial production and University of Michigan Consumer Sentiment reports are scheduled for release on Friday. Though interesting, none of these reports is expected to be game changers for the greenback.
Finally, after Wednesday’s sharp decline, the euro extended its losses to 1.1234 and then recovered to end the day unchanged versus the greenback. Eurozone consumer prices grew 1.2% in March, which was right in line with expectations but significantly stronger than the 0.2% rise reported in February. The region’s trade balance report is scheduled for release Friday and improvement in German trade activity is expected to lift the regional balance. However the impact on the currency should be limited.