The big story in the foreign exchange market today was USD/JPY and its
break above 105. For the past 5 trading days USD/JPY had been quietly
trickling higher and today right around the London close it took out
this key psychological barrier. The dollar had been trading strongly
throughout the European and U.S. session for 3 primary reasons. The
first is U.S. yields, which rose by its strongest amount in days.
With very little market moving U.S. data in the first half of the week,
investors have been watching yields closely especially since they were a
leading driver of the dollar for the better part of this month. Yields
are rising because of U.S. data. Jobless claims fell for the first
time in 3 weeks while pending home sales rose more than expected.
Durable goods orders dropped but the -0.1% decline was modest and
attributed entirely to transportation orders because durables ex
transportation rose 0.2%, up from 0.1% the previous month.
Manufacturing activity also held steady in Kansas city which is good
news considering that economists anticipated a decline. Most importantly
investors bought dollars ahead of Friday’s GDP report. While this
week’s trade data was very strong, raising hope that GDP growth
accelerated, retail sales was weaker in Q3 compared to Q2 and that
raises the serious risk of a downside surprise especially given the
market’s lofty 2.5% forecast. USD/JPY may have found its way above 105
but in order for the currency pair to hold onto its gains Q3 needs to
have been a very strong quarter and it is not clear that this was the
case.
The second big story today was sterling and its sharp aggressive
intraday reversal. GBP/USD raced to high of 1.2272 after the U.K. GDP
report, dropped quickly post data, rebounded to retest those highs into
the NY open and then sold off aggressively throughout the North American
trading session. Investors were clearly not convinced by the
strong GDP numbers, which showed only the initial impact of Brexit. The
decision to leave the European Union did not have a dramatic impact on
the economy but that does not mean that they will avoid a downturn when
Article 50 is invoked. The worst is yet to come for the U.K. and
sterling price action today shows that investors share our view. As
reported by our colleague Boris Schlossberg, “UK GDP printed at 0.5%
versus 0.3% eyed as the preliminary reading suggested that the economy
continued to expand at a healthy pace despite the looming threat of
Brexit. According to the ONS, “In Quarter 3 2016, the services
industries increased by 0.8%. In contrast, output decreased in the other
3 main industrial groups with construction decreasing by 1.4%,
agriculture decreasing by 0.7% and production decreasing by 0.4%, within
which manufacturing decreased by 1.0%”. Tonight’s figure represents
about half the actual data, so the GDP numbers could be subject to
significant revisions later on.”
EUR/USD raced to high of 1.0942 before reversing sharply to end the day
near 1.0900. The reversal was driven entirely by the rising U.S. dollar
although its worth nothing that the 10 year German – U.S. yield spread
increased today, which supports a stronger and not weaker EUR/USD.
Nonetheless the greenback’s vibrant momentum overshadowed the yield
spread. There were also concerns for Deutsche Bank’s earnings after the
bell. A number of ECB officials spoke today including Visco, Nowotny
and Mersch. While Visco expressed concerns about low inflation and
growth, Nowotny and Mersch talked about the limitations of monetary
policy and the side effects of low rates. There was no direct monetary
policy implications from these comments and the question of whether
EUR/USD makes a run for its October 1.0850 low will determined by the
path of U.S. rates and Friday’s U.S. GDP report. Germany’s CPI report
and Eurozone confidence numbers should have only a limited impact on the
euro.
Meanwhile the Australian and New Zealand dollars traded sharply lower while the Canadian dollar ended the day virtually unchanged despite higher oil prices and a very large increase in Canadian yields. Oil prices edged closer to $50 as reports surfaced that Saudi Arabia and other OPEC countries told Russia that it was ready to cut 4% from their peak oil output. In addition to renewed hopes of production cuts, oil got a shot in the arm when data from Wednesday showed that US crude inventories fell more than expected. The New Zealand dollar was hit hard by softer trade numbers. The country’s trade deficit jumped to -1.436B from -1.24B. An improvement was expected. No economic reports were released from Australia but Chinese industrial profit growth slowed materially. Australian producer prices are scheduled for release this evening. No data is expected from Canada or New Zealand.