By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
U.S. and U.K. politics dominated currency flows on the first day of trading in the last week of February. One of the biggest event risks this week was supposed to be U.S. President Trump’s speech before the joint session of Congress Tuesday evening but he preempted the main event by pre-announcing part of his plans. Investors hoped for details on the president’s “phenomenal tax plan,” but Trump said no announcements on taxes will be made until after a proposal is developed to replace Obamacare. Instead, he will be focusing his speech on infrastructure and security spending. The president increased defense spending by $54 billion and plans to make “a big statement on infrastructure on Tuesday.” Investors were initially disappointed by the delay of the tax plan but looked past that by the end of the day. USD/JPY held 112, 10-year Treasury yields ticked up as much as 5bp near the close and stocks hit new record highs. The U.S. dollar continues to struggle as the greenback either traded lower or held steady against most of the major currencies. U.S. data was mixed -- durable goods orders rose strongly in January but the increase was due entirely to transportation orders. Pending home sales fell sharply on the back of higher mortgage rates but the manufacturing sector continues to chug along as evidenced by the increase in the Dallas Fed manufacturing index. Fed President and 2017 FOMC voter Kaplan spoke on Monday and he repeated his recent comment that rates should be increased sooner rather than later. He added that “even raising rates a few times this year would leave monetary policy stance accommodative.” Unfortunately these words fell on deaf ears as USD/JPY refused to rise. With such a clear and consistent message from the Fed, the dollar should stabilize soon. Tuesday is another busy one for U.S. data with revisions to fourth-quarter GDP, the trade balance, Chicago PMI and the Conference Board’s consumer sentiment index scheduled for release. We anticipate healthy data, which should reinforce the central bank’s view of an improving economy. Taking a look at the charts, support in USD/JPY is at the 2017 low of 111.60 with resistance at 113.
Sterling's underperformance was also caused by politics. Talk of a Scottish referendum gained traction on Monday with investors recognizing that a vote could be held in the coming weeks. According to our colleague Boris Schlossberg, “The Times reported that Scottish FM Nicola Sturgeon may call for a vote in response to UK triggering Article 50 as early as next month, thus officially commencing the Brexit process. Scotland voted to remain in the EU, but also narrowly voted to remain in the UK during the first referendum on 2014.” While the threat of a referendum could hang over sterling throughout the week, the market should be quickly shifting its focus to U.K. fundamentals. Manufacturing, service and construction sector PMIs are due for release later this week and after a series of misses, investors are hoping for a rebound in February. GBP/USD traders should keep an eye on 1.2380. If this key support level breaks, we could see a sharp move lower.
While EUR/USD ended the day higher against the greenback, the fact that it broke but failed to close above 1.06 is a sign of weakness for the currency pair. Nonetheless, the euro traded higher on the back of stronger data. Eurozone economic confidence increased in February although slightly less than anticipated. This improvement was caused by stronger industrial and services confidence. Consumer confidence remained unchanged. Demand for EUR/GBP also helped lift the single currency as the cross rose above 85 cents for the first time in a week. On the political front, most recent poll figures showed Macron extending his lead over Le Pen in the next French Presidential election. Eurozone consumer prices are scheduled for release on Tuesday and lower German and French data points risk a softer report.
The Canadian dollar traded lower versus the greenback today while the Australian and New Zealand dollars ended the day unchanged. There were no major economic reports from the 3 commodity-producing countries. Oil prices ticked slightly higher. We heard from OPEC’s Barkindo who said non-cartel members were lagging with production cuts and were having monitoring issues -- he buffered the statement by saying that commitment to production cuts for non-OPEC countries continued to be strong. Steady gold prices helped support the Australian dollar. Gold has been performing very well recently, having hit a fresh 3-month high on Monday. New Zealand was slated to release its trade balance report. With dairy prices falling and manufacturing activity slowing, the risk was to the downside.