Our general trade call for the week is to sell Cable and Kiwi on pullbacks (Kiwi may rally on oil gains however). The USD rallied during Friday’s NY session as Preliminary GDP and Personal Consumption Expenditures both smashed expectations. The headline for GDP beat estimates at 1.0% versus an expected 0.4% and an Advance reading of 0.7%. Familiarize with the latest changes in the market by reading my currency update bellow.
USD: Core PCE for January ticked up to 1.7% y/y which is reassuring for the Fed’s tightening policy. We may see some hawkish comments from Fed members in relation to the recent move higher in underlying inflation. The second reading of Q4 GDP beat estimates at 1.0% above 0.4% expected. The USD remains the strongest currency fundamentally. CPI for January beat estimates with Core CPI y/y ticking up to 2.2% and rising 0.3% for the month. Headline CPI was at 1.4% y/y. Minutes from the January meeting struck a cautious tone, noting increased uncertainty regarding inflation and potential financial risks. NFP for Jan saw 151,000 jobs added, versus expectations for 190,000. The unemployment rate fell to 4.9%. Average hourly earnings jumped 0.5% for the month, however the y/y figure held steady at 2.5%.
EUR: Eurozone final CPI for January missed estimates for the y/y at 0.3% vs expected 0.4%, however the m/m and core reading were both inline with expectations at -1.4% and 1% respectively. At the January 21 ECB meeting, Draghi made dovish comments, saying that monetary policy will be reviewed at the March meeting due to further deterioration in inflation expectations and other financial uncertainty.
GBP: UK GDP second estimate for Q4 2015, came inline with expectations for both the q/q at 0.5% and the y/y at 1.9%. London Mayor Boris Johnson’s announcement to campaign for leaving the EU has put extra bearish sentiment on sterling. Retail Sales beat estimates across the board with the m/m figure printing its highest value since December 2013. Average Earnings were at 1.9% for December, while the jobless rate moved up to 5.1%. Core CPI for January missed estimates and dipped back to 1.2%. The Bank of England vote split changed back to 9-0 with McCafferty no longer voting for a hike. Growth forecasts for 2016 and 2017 were downgraded while inflation is expected to remain below 1% til the end of the year. The referendum regarding Britain’s exit from the EU contributes to bearish sentiment on the currency due to political uncertainty.
AUD: Q4 Private Capex beat estimates however forward-looking estimates for 2016/17 dramatically missed prior estimates, which caused weakness in the Aussie. 7,900 jobs were lost in January while the Unemployment Rate ticked up to 6%. On February 2, the RBA left its cash rate unchanged as was expected. The accompanying rate statement was fairly upbeat and signaled growing confidence in a domestic recovery, while low inflation still remains a concern and could provide scope for further easing moving forward if warranted. CPI for the fourth quarter beat expectations overall with Trimmed Mean y/y remaining at 2.1%, which is within the Banks’s target of 2-3%. The Australian dollar remains a neutral currency which will be guided by direction in key commodity assets.
NZD: RBNZ Inflation Expectations for Q4 2015 came in at a 22-year low at 1.6%which puts pressure on the Bank to ease further. The RBNZ kept rates on hold in January but struck a dovish tone saying that the NZD needs to move lower and further easing is a possibility. Westpac forecast a cut to 2.25% at the March meeting. CPI for Q4 was poor showing deflation of -0.5% for the 3-month period and a rise of only 0.1% throughout all of 2015. This increases chances of further RBNZ cuts. On February 3, the Quarterly Employment Change printed at 0.9% versus the 0.8% consensus, while the Unemployment Rate tumbled to 5.3% smashing expectations of a 0.1% rise to 6.1%, and the lowest since the first quarter of 2009.
CAD: January employment declined 5,700 – its second decrease in the last three months, and missing consensus of a 6,000 gain. The jobless rate ticked up to 7.2%, on par with its highest mark since March 2013. The BOC kept rates on hold at the January 20 meeting, which surprised some analysts. The tone of the statement and Poloz’s press conference was less dovish than anticipated, which is in line with Poloz and the BOC’s generally optimistic stance. The severe depreciation of the CAD due to falls in oil means there is less urgency to cut rates, as the lower CAD will boost inflation by making CAD-denominated goods more attractive to overseas buyers. Further, it appears that the Canadian government may introduce fiscal stimulus measures in the next budget which allows the BOC to refrain from action for now. CAD will continue to be directed by the price of WTI.
JPY: BOJ core CPI dropped to 1.1% y/y for January. GDP for Q4 2015 missed estimates at -0.4%. The Bank of Japan announced negative interest rates of -0.10% on January 29 but left the QQE program unchanged. The inflation target was pushed back to end 2017 and the Bank remains prepared to ease further if necessary. The BOJ are watching CPI excluding food & energy to gauge underlying inflation trend.
CHF: The franc is fundamentally a weak currency given the SNB’s negative interest rates, however it can suddenly rally on safe-haven flows. The SNB regularly recite that the franc is overvalued and they are prepared to intervene to weaken the currency. The franc’s direction is difficult to predict due to regular intervention by the SNB.