By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
All of the major currencies traded higher Tuesday as U.S. stocks extended their gains. Investors were relieved that Chinese President Xi refrained from escalating trade tensions in his speech Monday night and instead talked about the possibility of lowering trade tariffs on autos and tightening enforcement on intellectual property. They were further encouraged by White House Trade Adviser Peter Navarro’s comment that the doors are open for trade talks with China. The Dow Jones Industrial Average closed up 400 points but a move above 24,750 is needed to break the downtrend.
Although USD/JPY spent most of the day above 107, it struggled to extend its gains as investors opted to buy high-beta currencies like euro, sterling, Canadian, Australian and New Zealand dollars over the greenback. Producer prices also rose more than expected, setting the stage for an uptick in consumer prices on Wednesday. Data continues to take a backseat to political headlines but the FOMC minutes could remind the market that the Fed is optimistic and looking to raise interest rates a few more times this year. With that in mind, the greatest risk is still headline risk and at any moment, President Trump could raise or ease the trade-war stakes. There have been other political developments that are worth watching such as Tom Bossert’s resignation as Homeland Security Adviser and President Trump’s decision to cancel his trip to Latin America to deal with Syria. More could come from that.
Meanwhile, EUR/USD hit a one-week high after ECB member Nowotny said the central bank will end bond buys this year. The single currency pair shot to a high of 1.2379 after taking out stops at 1.2340. However it dropped almost as quickly after the ECB came out to say that his views are his own and not a reflection of the governing council. We find all of this interesting since Monday’s comments from ECB President Draghi were positive and there’s no doubt that European policymakers see growth improving so it won’t be long before they start talking about changing forward guidance again. After the dust settled, the EUR/USD was still hovering above its breakout levels, which suggests that a further move to 1.24 is likely.
Sterling also caught a bid on Tuesday thanks to stronger U.K. data and hawkish comments from the Bank of England. According to monetary policy committee member McCafferty, who voted for a rate hike at last month’s meeting, the central bank should not procrastinate with monetary policy normalization. As indicated by our colleague Boris Schlossberg, “the comment was seen as nod to nudge the BOE to raise rates in May.” Sterling “was also boosted by better than expected BRC like for like numbers, which printed at 1.4% vs. 0.7% showing a pick up in UK retail demand for the first time in months.” The U.K.’s trade and industrial production numbers are due for release Wednesday and marginal improvements are expected after the small uptick in the PMI manufacturing index last month.
The biggest beneficiaries of the improvement in risk were the commodity currencies. The Australian dollar led the gains followed by the New Zealand and Canadian dollars. Although Australia will be hit hard by a U.S.–China trade war the deeply oversold currency also benefitted the most from China’s attempt to ease tensions. Yet if they are serious about devaluing the yuan, their reduced purchasing power won’t be good news for Australia. In light of all this, it's no surprise that Australian business confidence is down. The New Zealand dollar continues to power higher, rising to its strongest level in 6 weeks while USD/CAD broke through 1.26 following stronger Canadian housing starts. The uptick in oil prices and increase in Canadian bond yields also lent support to the pair. USD/CAD is now trading at a 6-week low and the next stop could be 1.25. Investors are still waiting on a NAFTA announcement, which may be needed to drive the pair lower.