The key issue facing the foreign exchange market is
whether the modicum of strength the US dollar demonstrated last week is the beginning
of a sustainable move. It is
possible that the market is again at a juncture in which the price action will
drive the narrative rather than the other way around. A move above JPY108 and a decline in the euro
below $1.1350 signal a start to a broader dollar recovery that may have begun
last week with impressive gains against the dollar-bloc.
The RBA’s rate cut
took many by surprise, and the forward guidance, which included a reduction in
the central bank’s inflation forecast, encouraged speculation of another rate
cut in the coming months. The
Australian dollar has given back half of the gains registered since
mid-January. A recognition that the
Canadian economy continues to wrestle with its terms of trade shock and a record trade deficit spurred some profit-taking
in the Canadian dollar. The US dollar
rose through a downtrend line that began in late-January, and short-term Canadian
interest rates, which have risen since
the end of January, have started softening.
The resilience of the
US dollar and the firmness of US yields after the monthly report showed the
weakest job growth in seven months may be significant. Just like strong jobs growth in Q4 15-Q1 16
period (averaged monthly jobs growth 243k) did not translate to strong growth,
the weaker jobs growth may, in fact, coincide
with an acceleration of US GDP.
Of course, the jobs
data was not horrific, and employment growth is expected to slow as full
employment is approached. Nor were the details particularly troubling. Manufacturing added jobs when economists had
been expected it to have shed workers.
The workweek increased 0.1%, which given the number of American
employees, translates into about 450k full-time equivalents (in terms of hours worked). Not only were there more people working a
longer work week, but they were also getting paid slightly better. Average hourly earnings rose 0.3% for a 2.5%
year-over-year pace.
Perhaps the most
troubling part of the report was not the miss on the headline but the decline
in the participation rate. It fell
from 63%, a two-year high, to 62.8%. The
participation rate has been trending higher, and we caution against reading too
much into a single data point.
On balance, one must,
and suspect the Federal Reserve will conclude that the labor market recovery
remain intact, and in any event, it will
get another reading before next month’s meeting. The issue, which the FOMC’s April statement
identified is consumption. We
anticipate better numbers ahead, beginning with this week’s April retail sale
report.
April retail sales
are expected to have been lifted by
stronger auto sales and higher gasoline prices. The 0.7%-1.0% projected increase will be the biggest
in a year. If the GDP component
(excludes, food, building materials, gasoline,
and autos) rises by 0.4%, it would the largest increase since last July.
The wholesale inventory
figures will help economists fine tune expectations for revisions of Q1 GDP. Recent trade and shipment data suggests a
modest upward revision to the first estimate of Q1 GDP toward 0.8%-1.0% (May
27). However, Q2 grow is projected to
move back toward trend of near 2.0%. The
Fed funds futures market continues to price in practically no chance of a June
rate hike.
The eurozone will take another look at Q1 GDP next
week. While more details will be provided, there is some risk of a downward
revision to 0.5% from 0.6%. It makes
March industrial output reports less relevant, though we note that French and
Italian production are expected to bounce back a fall in February. Germany is marching to a different tune. March output likely fell by around 0.2% after
a 0.5% decline in February. Both months
are payback for the outsized 2.3% jump in January. A rise in factory orders may take the sting out
of a small fall in output.
The Eurogroup of
finance minister are to meet Monday to
discuss Greece. The problem is that
the IMF did not participate in the funding of the third aid package last summer. The IMF’s involvement is essential for the Bundestag’s
support. It says it willing to under
certain conditions that the other creditors find unacceptable, including a
write-down of the debt owed to the other official creditors (but not the
IMF). Greece finds some IMF demands
intolerable, like a contingency program of measures that will automatically be triggered
when if Greece misses its fiscal target.
The euro finished last
week a little more than two cents the off its multi-month high set on May 3
near $1.1615. Ironically, the eurozone economy is not its most pressing
issue. Even with a slight downward revision
in Q1 GDP, the eurozone will still have
grown faster than the US, Japan, and
UK. Its
pressing challenges are political in nature, like Brexit, the relationship with
Turkey now Davutoglu is gone and Russian
sanctions are set to expire in July.
The biggest build in
speculative gross long euro position in the futures market in three months leaves late-longs in weak hands. A break of the $1.1200 area is needed to
signal a move into a lower trading range.
Given the size of the ECB latest
initiative, and timing of the launch of the new TLTRO and corporate bond
purchase program, it will be several months before the ECB can fully evaluate
its efforts. This means that it is difficult to
envision fresh ECB initiatives before the end of the year at the
earliest.
The Bank of England
meets. At the same time that price
pressures are beginning to increase, the UK economy is slowing. The April PMIs uniformly warn that the
slowing has bled into the start of Q2.
The last dissent from the BOE was for
an immediate hike.
A dovish dissent now would
surprise and lead to an immediate fall in sterling. The
quarterly inflation report will be presented
at the end of the MPC meeting. The Bank
of England appears to be anticipating a rate hike in the next two years, or inflation may exceed its 2% target.
Norges Bank, Norway’s
central bank meets as well. The risk
of a surprise cut are only marginally higher than for a BOE rate cut. Data before
the meeting will illustrate why Norges Bank is no hurry to move again cutting
the deposit rate by 25 bp to 0.50% in March.
Consumer prices are steady in the low 3% area and Q1 GDP (both overall
and including only the mainland economy) expanded after contracting t the end
of last year. The rise in oil prices may
make officials more tolerant of the 4.7% appreciation of the krone on a
trade-weighted basis and 7.8% against the US dollar this year (second to the
yen’s 12.2% appreciation and edging out
Canada’s 7.2% gain).
Japan’s current account
for March may not help, Finance Minister Aso’s press for a weaker yen at the G7
meeting later this month. The March
current account surplus is often larger than the February surplus, but the
expected increase will lift to it near record highs. It is expected
to rise by JPY530 bln to JPY2.965 trillion.
The trade surplus does not drive the current account surplus; investment
income does. However, the trade surplus
is expected to double (month-over-month) to JPY906 bln.
China reported its
April reserve and trade figures over the
weekend. It will report inflation, lending, industrial output
and investment, and retail sales this week.
China’s reserve rose for the second consecutive month. Currency fluctuations probably played a small part in the increased
valuation, though given current account surplus,
many observers will argue reserves growth should have been greater. In any event, by any metric, Chinese officials have managed to stabilize capital
outflows.
Measured in dollar or yuan, China’s trade surplus
swelled. At $45.56 it was the biggest
surplus in three months. The same is true when measured as CNY298
bln. In dollar terms, exports and imports
are still declining on a year-over-year basis.
In yuan terms, exports rose 4.1%, and imports were off 5.7%.
Lending growth is expected to have moderate while
economic activity should firm. Although many investors and policy makers are
anxious about it, the data in hand, and projected, suggests the soft landing
scenario is holding.
In a strong US dollar environment, the yuan may
closely track its trade-weighted basket. This will discourage criticism that
the PBOC is seeking to devalue the yuan.
In a softer dollar environment, such as over first few months of the
year, the yuan tracks the dollar and under-performs against its basket. Of
course, Chinese officials can change tactics at any time.
Dollar Drivers in the Week Ahead
Reviewed by Marc Chandler
on
May 08, 2016
Rating:
Reviewed by Marc Chandler
on
May 08, 2016
Rating:
