Both USD and EUR gained as the market was more one of individual currency stories rather than overall USD movement. US rates were largely unchanged as investors awaited today’s testimony by Federal Reserve Chair Jerome Powell. The dollar was not affected much by the new home sales report for January 2018 (-7.8% mom vs expected +3.5% rise). This follows a similar fall in existing home sales.
It was noticeable that despite the renewed “risk on” environment, with stock prices generally higher yesterday and today in Asia, the commodity currencies are not performing well.
NZD was weak after the trade deficit came in much wider than expected (NZD -566mn instead of zero as expected, with both imports higher than expected and exports lower).
CAD was also weak (as was MXN) as the North American Free Trade Agreement (NAFTA) negotiations in Mexico on rules of origin for cars were suspended. The US called back its chief negotiator for auto-related issued to Washington to meet with US industry representatives. However, this is actually a good thing for Canada, as the US manufacturers are arguing in favor of NAFTA, or at least renegotiating it rather than abandoning it. The US auto makers have set up supply chains that reach into Canada; any attempt to require higher US-made content in autos sold in the US could be expensive for them.
CAD may also have been hit by reports that US President Donald Trump is thinking of promoting his trade advisor, Peter Navarro, to more prominent position. Peter Navarro may be promoted to assistant to the president from his current position as deputy assistant. That would give him more access to top-level strategy meetings, meaning he would have more influence on overall policy. This may be a signal of the direction in which US trade policy is moving, which could be negative for CAD.
Furthermore, US President Donald Trump himself commented that “we lose a lot [on trade] with Canada.” For the record, here’s the US merchandise trade balance with Canada. The US deficit with Canada was $17.6bn or a mere 6.2% of US exports to the country and 2.2% of the global US merchandise trade deficit. Furthermore, that’s only merchandise trade; after including trade in services, Canada is one of only two countries in the world that the US actually runs an overall trade surplus with (the other is the UK). On a balance of payments basis, the US ran a $2.6bn surplus in overall trade with Canada last year.
The ascent of Peter Navarro and the worries about NAFTA make today’s US advance trade statistics all the more important for the market (see below).
GBP weakened, possibly due to upcoming Brexit-related news. Tomorrow the ambassadors of the EU member states will submit their draft of the Brexit withdrawal treaty. On Friday March 2nd 2018, UK Prime Minister Theresa May will set out her vision for Brexit in a speech.
The big event today is the semi-annual testimony to Congress by the new Federal Reserve Chair, Jerome Powell. This is always a highlight of the calendar, and never more so than when a new person takes over the Chair.
The Federal Reserve’s report to Congress was already released last week, and Jerome Powell’s opening statement – which is usually just a rehash of the statement following the latest Federal Open Market Committee (FOMC) meeting – will be released before he starts speaking. The Federal Reserve under Janet Yellen has managed the process of normalizing policy quite successfully. It is possibel that no need for any great change in policy or emphasis right now.
The big question facing the market is whether there’s likely to be three or four rate hikes this year. It is unlikely that there will be a clear pronouncement on this subject because the FOMC has consistently said that its moves “will depend on the economic outlook as informed by incoming data.”
Moreover, Jerome Powell is generally considered to be a centrist on the FOMC, and the consensus among the majority of the group hasn’t shifted yet to four rate hikes. They may be thinking that adding fiscal stimulus to an economy that’s already surpassed full employment could mean more inflationary pressure than they expected.
Getting back to the European day, the focus today is going to be the German Consumer Price Index (CPI), a harbinger of tomorrow’s EU-wide CPI. The day starts out with the CPI for the region of Saxony. No forecast is available. By the time the national CPI is released this afternoon, it’s kind of an anti-climax, but still moves the market. It’s expected to show a slow-down in German inflation, which could be negative for EUR.
Next we have a few central bank speakers.
European Central Bank Executive Board member Yves Mersch will give the keynote address at a “Fintech and Digital Innovation” conference. He has recently been talking about the new EU settlement system that will be introduced in November 2018and may just stick to that topic.
Bank of England Monetary Policy Committee (MPC) member Sam Woods will speak at an insurance industry conference. Woods is the Deputy Governor for Prudential Regulation and so he may be talking about regulation and prudential matters, rather than the direction of interest rates.
Bundesbank President Jens Weidmann will present the Bundesbank’s annual report. There is no indication as to what he’ll say, but he’s often news-worthy.
When the US day gets started, we have the trade figures and the durable goods numbers. My research suggests that the trade figures are important to the market – particularly now, when the administration is focused on trade – than the durable goods figures.
The US advanced trade balance is expected to be more or less unchanged from the previous month. Another figure of that nature could be USD-negative, particularly vs the currencies where the administration has been complaining about trade, namely CAD, MXN and EUR.
US durable goods orders are also expected to be bad, at least at the headline level – Boeing reported only 11 airplane orders in January 2018 vs 265 in December 2017. Excluding these volatile transportation orders, the figure is expected to show a modest rise of 0.4% mom, below the six-month average of +0.9% mom. This could be slightly disappointing for the market and therefore modestly USD-negative. But my research suggests that the key point is how the headline figure comes in relative to expectations. Besides, the durable goods figure isn’t as significant for the Forex market as the trade number is. Wholesale inventories are released at the same time.
The Conference Board’s consumer confidence index is expected to rise slightly, just 0.8%. This would compare with the 4.4% jump during the month for the University of Michigan consumer confidence index, although as you can see from the graph the two do not necessarily follow along together exactly on a month-to-month basis. In any case, a further rise from the already high current level could be USD-supportive.
Canada’s federal budget will be announced. It is possible that it will be a modestly stimulatory budget, which could be CAD-positive.
Overnight, Australia releases its private credit figures. The figure is expected to be relatively healthy; the month-on-month figure is forecast to return to October 2017 and November 2017’s level, while the year-on-year rate of change is forecast to accelerate. Growth in housing credit is slowing as the housing sector cools, but business credit is generally expanding, which should leave credit growth fairly steady. This could be AUD-positive.
China’s official manufacturing purchasing managers’ index (PMI) is forecast to be fairly steady, falling only one tic from the previous month to 51.2. The non-manufacturing PMI is forecast to fall a bit more. If the manufacturing PMI does come in as expected, it may be no big deal, but if it comes in weaker, that could be significant. As you can see from the graph, 51.2 is the lowest level it’s been since October 2016. If it falls below that, then people may begin to think that it’s headed back towards the earlier levels. That could be negative for the commodity currencies, particularly AUD.
The Fundamental Analysis are provided by Marshall Gittler, an external service provider of an independent analytical company. Any views and opinions expressed are explicitly those of the writer. Any information contained in the article, is believed to be reliable, and has not been verified by STO and is not guaranteed to be accurate. References to specific products, are for illustrative purposes only and are not a form of solicitation, recommendation or investment advice. Past performance is not a guarantee of future performance.