By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
The U.S. dollar continued to fall despite another round of better-than-expected U.S. data. This counterintuitive price action has many investors confused but the greenback is clearly taking its cue from yields, which pulled back Thursday after rising for 5 days in a row. Housing starts turned negative but building permits rose sharply (4.6% vs. 0.2% expected), jobless claims continue to undershoot expectations while the Philadelphia Fed index surged to its highest level in 33 years. Manufacturing activity in the NY and Philadelphia regions saw very strong gains in February on the back of hope that the Trump administration will increase spending and reduce regulation. Given the magnitude of the gains in both reports, it is hard to believe that this strength can be sustained without a pullback in March. With that in mind though, the data was strong and should have supported further gains in the dollar. At the same time, U.S. policymakers like Fed President Lockhart continued to talk about progress being made toward the central bank’s inflation and employment goals. Their commitment to raising interest rates is what makes the price action in the dollar so counterintuitive. With no major U.S. economic reports scheduled for release on Friday, we could see EUR/USD hit 1.07 and USD/JPY pullback to 112.50 before buyers swoop in. At the end of the day, it is important to remember that the Federal Reserve is the only major central bank planning to raise interest rates this year and everything that we’ve heard and all of the data that we’ve seen suggests that rate hikes are coming sooner rather than later.
Meanwhile, Thursday was the best day for the EUR/USD since the beginning of the year. The single currency shot above 1.06 and appears poised for a move to 1.07. There were no Eurozone economic reports released today outside of the ECB minutes, which contained a cautiously optimistic tone. While there has been some talk of possible reduction in asset purchases, the minutes showed otherwise as they reflected wide support for a steady policy stance. With multiple elections happening in the Eurozone and the uncertainty surrounding the current US presidential administration, the central bank felt the need to maintain easy monetary policy. Concerns regarding inflation were also downplayed during the meeting with the recent increase attributed to rising and volatile energy prices. For the time being, the central bank still does not see enough evidence of the prices trickling down to goods and services. The central bank remained cautious overall, mentioning that the economy might hit a speed bump soon and it left the door open for more stimulus if necessary. On Friday, the Eurozone releases current-account figures, which is not a big market-mover for the currency.
Sterling also traded higher against the greenback but failed to enjoy the same magnitude of gains as euro or yen. The currency pair range traded throughout the day between 1.2550 and 1.2450 with little definitive direction. This restrictive price action, however, helped propel EUR/GBP sharply higher. The pause in GBP/USD may be in anticipation of Friday’s retail-sales report, which could be softer given the drop in wages, decline in BRC Shop prices and spending. Sterling has been remarkably resilient in the face of weaker data but if retail sales misses as well, it may have difficulty holding up -- especially as the dollar gets oversold.
Unlike the euro and yen, the commodity currencies ended the day mostly unchanged versus the greenback. The Canadian and New Zealand dollars traded slightly higher while the Australian dollar retreated. The strength of CAD and NZD were due to USD weakness and disappointing data. ANZ’s consumer confidence index declined 1% in February after an increase of 3% the prior month. Thursday's drop in oil prices did little to stem CAD strength. The lone loser of the commodity-currency group was AUD, which was hit by mixed data. While Australia reported an increase of 13.5k jobs vs. 10.0k expected for January and the unemployment rate for the country dropped to 5.7% -- slightly better than the 5.8% expected -- full-time employment actually decreased, showing a loss of 44.8k jobs in January. Therefore, the increase in employment was due entirely to part-time work, which rose by 58.3k in January. To add to the employment worries, Chinese foreign direct investment declined by 9.2%, a great disappointment considering an increase of 1.4% was forecasted. Since China is Australia’s biggest trading partner, this figure paints a worrisome picture for the region. New Zealand’s business PMI index and quarterly retail-sales reports were scheduled for release Thursday evening.