By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
The confidence of everyone from equity market investors to dollar bulls have been shaken by the latest White House exits. On Tuesday, President Trump fired Secretary of State Rex Tillerson and his long-time personal aide John McEntee. In the past 2 weeks, there have been 5 high-profile departures (Gary Cohn, Hope Hicks, Josh Raffel). Like Cohn, Tillerson was pushed out because he clashed with Trump on recent decisions. For Cohn, it was the tariffs and for Tillerson, it was the president’s approach to North Korea and the Iranian nuclear deal. CIA Director Mike Pompeo who shares Trump’s reluctance to certify Iran’s compliance next month, paving the way for a possible accord withdrawal, will be Tillerson’s replacement. Unlike Pompeo, Tillerson encouraged a more measured approach that would keep the U.S. in the nuclear agreement.
For better or worse, we’ll let you decide but what’s undeniable is that the turnover is hurting the confidence of foreign leaders and investors. We expect the dollar to fall further against all of the major currencies, particularly after the latest inflation report that showed consumer prices easing in February. Between weaker CPI and wage growth, expectations are tipping lower for Wednesday’s retail sales number. If consumer spending falls short of expectations, USD/JPY could break 106.
Meanwhile, EUR/USD traded above 1.2400 on the back of broad-based U.S. dollar weakness. In the early NY session, the single currency received some support from ECB member Lane’s comment that there’s no concern about the euro’s current level. Although this view is not new, it is important as the currency pair eyes 1.25. Based on price action alone, investors don’t seem worried that European Central Bank President Draghi’s comments will drive down the currency. However, based on the recent press conference, he shouldn’t have anything supportive to say either. So the question is what matters more, anti-dollar flows or ECB caution. While we expect EUR/USD to take hit from Draghi’s comments, bargain hunters could swoop in ahead of the retail sales report. The only risk is that Trump announces Larry Kudlow as Cohn’s replacement, which could provide some relief to the market and the U.S. dollar. Eurozone industrial production numbers are scheduled for release but this report will take a back seat to U.S. data.
Sterling also powered higher as there was nothing particularly damaging in the government’s Spring Statement. According to Chancellor Hammond, the U.K. will grow faster this year and slow in the years to follow. Public sector borrowing should be less but overall, they felt that there’s “little reason to change our view of medium-term growth potential." Some analysts were hoping for a boost in tax revenues that would improve public finances but the OBR felt that they were cyclical and not permanent. Regardless, sterling shot higher after Tillerson’s departure hit the wires and the move took GBP/USD out of its 6-day-long range. The pair is now trading at its highest level in March and primed for a move to 1.40.
Meanwhile, unlike euro and sterling, the Canadian dollar fell sharply on Tuesday, making the loonie the day’s worst-performing currency. Its weakness took USD/CAD back above 1.2900 and within striking distance of 1.30 as Bank of Canada Governor Poloz’s comments propelled the currency higher. Although he expressed confidence in the economy, saying there’s untapped potential with room to expand, the possibility of this expansion happening without driving inflation means they are in no rush to raise interest rates. Poloz “doesn’t know when they will be raising interest rates again,” and that was clearly enough to drive USD/CAD sharply higher. Oil prices fell 1% Tuesday on higher shale oil output. The Australian dollar also turned lower on risk aversion flows. Business conditions improved in February according to NAB but business confidence declined. Australian consumer confidence, Chinese retail sales and industrial production numbers were due for release Tuesday evening. Softer numbers are expected all around. The New Zealand dollar on the other hand continued to power higher ahead of Tuesday’s current account report and Wednesday’s Q4 GDP report.