US Dollar: Churn
Another week of slow churn as the dollar managed to squeeze 54 basis points out of the euro, with all of the gains occurring on Friday. The dollar rallied despite a drop of â,“10.2% in the Durable Goods orders against an expectation of only â,“2.0% decline. Granted the headline number was far worse than the underling data (ex-transports the figure actually rose 0.6%). Still a â,“10% month over month fall is an ominous sign. It was the biggest such drop in nearly 6 years and may presage a weakness in overall demand. Nevertheless, FX traders preferred to focus on rates. On Friday night a UK clearer raised their Fed funds forecast to 5.5% and that was reason enough for dollar bulls to push the pair below the 1.1900 figure.
Of course US rates are very likely to depend on US growth â,“ even the Fed stated that they will be more data dependent as the year moves on. To that end next weekâ,"s releases on Housing Sales and Manufacturing activity should provide the market with a clearer view of the whether US economy maintains its pace or is about to stall out.
Finally, last week saw the sudden resignation of Fed Vice Chairman Roger Furgeson to pursue, "other professional opportunities". By itself Mr. Furgesonâ," s departure may not have raised too many eyebrows, but given the fact that Philly Fed President Santomero is also leaving bringing the total turnover to 2 Fed Governors and 6 out of the 12 Fed Presidents in the last 2 years, some may wonder why are so many professionals leaving what are the most powerful monetary policy jobs in the world?
Euro: Not Budging Much
The marquee event in the Euro-zone last week was the much stronger than expected IFO result which printed at 103.3 versus 101.5 expected. This was the highest reading in 14 years and initially helped to propel the unit to 1.1975 in early Thursday trade. The euro then proceeded on Friday to give back all of its gains, but the poor price action does not take away from the fact that the EZ may be finally seeing signs of an economic turnaround. The two primary forces fueling optimism amongst the Euro-zone business leaders are lower exchange rates and lower oil prices. However, therein lies the dilemma for the region. With Fridayâ,"s news that Al Queda nearly managed to sabotage the largest refinery facility in Saudi Arabia, oil once again spiked above the $60 handle. Should it remain near record highs it may squash any nascent rebound in the Euro-zone.
Next week the key report will be the German Retail Sales figures. If the recovery is indeed taking hold, EZ consumption should increase. The ECB has all but assured the market the 2.5% rates this Thursday, but if the Central Bank is to continue it monetary tightening policy going forward, it will need stronger consumer data to provide it with the necessary political cover for further hikes.
Yen: Tap Dancing Away
On Friday we wrote,â, in Japanâ,¦the typical tap dance between fiscal and monetary officials, as Governor Fukuiâ,"s yen bullish comments that QEP is nearing an end were partially offset by statements from Finance Minister Tanigaki who noted that Japan remains in a state of deflation and expressed concern over the latest volatility in the USD/JPY. â,¦This volatility will only exacerbate as the currency is pulled this way and that by the latest commentary from authorities.â,
That indeed appears to be the case. The yen gained the most amongst the majors against the dollar on liquidation of the carry trade as fears of a lift in ZIRP spread through the market. However, those fears may be vastly overblown. The BOJ may indeed move gradually on the QEP, but it will be hard pressed to abandon ZIRP if Japanese consumer spending does not perk up. Thus next weekâ,"s Household Spending data may loom large in determining if this is a true move in the USD/JPY or simply just another shake out of longs.
British Pound: Holding Its Ground
Cable managed to hold its ground this week, actually squeezing out a tiny 17 basis point gain against the buck as a better that expected GDP numbers and a vote not to cut rates by well know MPC dove Kate Barker kept the sterling bears at bay. With final MPC vote at 8-1, the market was pacified that BOE will not lower rates further for the foreseeable future.
Traders will have plenty of news to analyze this week, as both PMI Manufacturing and Services reports should shed some light on the underlying strength of the UK economy. If PMI Manufacturing manages to hold above the key 50 boom/bust level pound bulls will strengthen their case, but if the report manages to slip below 50 (its expected to rise to 52) the fears of a UK recession and a lower of the rates will quickly resurface.
Swiss Franc: No Benefit of Doubt
Last week we noted that, â,"In Switzerland, the KOF leading indicator index registered the highest reading in 5 ,½ years hitting 1.30 up from 1.22 the month prior and slightly higher than the 1.25 predicted by economists. Swiss economy appears to be running on all cylinders as both exports and consumer spending have shown healthy gains in the past few weeks. The EUR/CHF cross initially traded down to 1.5585 as a result of the news, but quickly recovered to the 1.5600 level. The pair continues to trade off interest rate differentials with the euro expected to open up a 150 basis point spread on the Swissie after the Mach 8th ECB meeting. While the Swiss economy may be experiencing better growth than its gigantic neighbor next door, Swiss monetary policy does not appear to be nearly as hawkish as that of the Eurozone. With SNB monetary authorities still coy about their interest rate intentions in the next 6 months the market is giving the benefit of the doubt to the euro.â,
Next week will bring data on consumption as well as PMI and GDP data. If the news continues to surprise to the upside, it is difficult to see how the Swisssie could weaken further against the euro. However, until the SNB officials unequivocally communicate their intentions that may in deed continue to be the case.
Boris Schlossberg is a Senior Currency Strategist at FXCM.
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