The U.S. dollar traded lower against all of the major currencies today
except for the Australian and New Zealand dollars. AUD ended the North
American trading session unchanged versus the greenback while NZD
experienced an unexpected recovery. All of Thursday’s price
action can be explained in 2 words and they are profit taking. After a
slow and steady rally to 104.50, traders cashed in on their profits in
USD/JPY on China’s disappointing trade numbers. Normally, we expect AUD
and NZD to move lower on weaker Chinese data but both currencies held
up well which validates our conclusion that investors cut back on their
positions after the extended dollar rally. The excuse was China’s trade
numbers but U.S. yields also tipped lower after rising strongly for the
past 1.5 weeks. Anyone trading the U.S. dollar right now should be
watching U.S. rates because it has and will continue to be one of the
key drivers of currency flows. USD/JPY broke above 104 when the 2 year
U.S. – Japanese yield spread hit its highest level since June and the
EUR/USD broke 1.10 right after the 2 year spread for German – U.S.
yields hit a decade low.
But even as yields declined on Thursday, the dollar rally isn’t over.
Fed President Harker was the latest U.S. policymaker to throw his
support behind a 2016 rate hike adding that he supported a rate hike in
September. He’s not a voting member of the FOMC this year but
his views are aligned with many of his peers who have a say in policy.
Jobless claims hovered near a 42 year low last week, validating the
central bank’s optimistic views on inflation. Tomorrow is a big day for
the U.S. dollar with retail sales, producer prices and the University
of Michigan consumer sentiment report scheduled for release. These
reports will be accompanied by a speech from Fed Chair Janet Yellen and
President Rosengren. We know that Rosengren voted for a rate hike last
month but Janet Yellen was more apprehensive. Retail sales will
probably rebound because wages are up, gas prices increased and
confidence improved but with slow job growth and Johnson Redbook
reporting a drop in spending, the improvement should be limited. With
that in mind, tomorrow’s economic reports will most likely confirm that
conditions remain in place for a rate hike at the end of the year.
For the second day in a row sterling rebounded against the greenback,
giving investors hope that GBP/USD has bottomed. The recovery has been
fueled by Prime Minister May’s concession to allow Parliament to vote on
Brexit. Hearings before the British High Court began today and
will continue until Monday. May argues that she has the sole right to
determine when Article 50 is invoked but if the court finds that
Parliamentary approval is needed, it would delay the process beyond the
first quarter of 2017. This outcome could be enough to drive GBP/USD to
1.2450. It would also suggest that there would be a softer exit.
However if the high court decides that it does not want to interfere
with the Lisbon Treaty, then GBP/USD will reverse its gains quickly and
aggressively. Either way, the decision will be appealed and sent to the
Supreme Court who should hear the case before year-end. We expect more
profit taking in GBP/USD before the weekend is out.
After briefly dipping below 1.10, the euro ended the day higher versus
the U.S. dollar, confirming the significance of this key level. Germany
reported revised CPI numbers today that were inline with estimates,
printing an increase of 0.1%. Interestingly enough the broad
weakness of the dollar today was able to lift the Euro even as Eurozone
bond yields fell. There were also reports that the ECB is mulling over
tweaks and a possible extension of its QE program to be discussed during
the governing body’s meeting next week. News of such tweaks sent
Eurozone bond yields down 3 basis points today. The Eurozone’s trade
balance is scheduled for release tomorrow and the improvement in German
and French trade activity signals a stronger number.
In contrast the Canadian, New Zealand and Australian Dollars traded higher against the greenback on Thursday. The big story overnight was China and its surprisingly weak trade numbers. China reported a surplus of $41.99b vs. $53b expected. Both imports and exports declined with exports falling a whopping -10%, significantly greater than the forecast of -3.3%. This was also the weakest number since Chinese New Year and indicates that slower global growth particularly in Europe is having a significant impact on Chinese economic activity. USD/JPY was hit the hardest by this report whereas AUD/USD and NZD/USD were surprisingly resilient. Both currencies recovered to end the day in positive territory after a brief decline. There were no economic reports from Australia but business activity accelerated in New Zealand with the BusinessNZ Manufacturing PMI rising to 57.7 for the month of September from 55.2 in August. Higher oil prices lifted the Canadian dollar. Oil prices seesawed today, initially dropping down close to $49, but managed to recapture all the losses to settle over $50. The early decline was triggered by the DoE’s weekly Crude Oil Inventories report, which showed a gain 4850k, when only 2000k gain in inventories was expected but the details were quite mixed as Cushing OK Crude inventories, Gasoline and Distillate Inventories fell. No data is scheduled from the 3 commodity producing countries on Friday.
