U.S. Dollar Exceeding the Estimate
On Friday, just before the release of the monthly employment numbers we noted that â,"The NFP must print near or better than the 200K level in order to support continued rate hikes from the Fed.â, Having exceeded that estimate by a comfortable 11K jobs, the NFPâ,"s proved just the right antidote to completely unwind the EUR/USD rally and make a mockery of our call last Wednesday that the â,"â,¦EUR/USD appears to be on the verge of an upside breakout.â, The fact of the matter is that 200K+ new jobs per month gives the Fed plenty of room to continue raising rates until 5.25% as it eliminates any Congressional pressure to pause ahead of the mid-term elections this fall. Indeed, the resiliency of the US economy is a sight to behold, as not even $3.00/gallon gasoline nor the quick approaching 7% 30 year mortgage are able to slow down the pace of expansion.
However, the critical question facing greenback bulls is whether the results for March represented peak values as the typically lagging labor market was simply too slow to adjust to rising costs of money and fuel. Next weekâ,"s Advanced Retail Sales may go a long way to either confirming or negating that thesis. The wage component of Fridayâ,"s report was one of the few sour spots for dollar longs as income increased only 0.2% versus 0.4% the month prior. Given that dynamic it will be interesting to see if Mr. and Mrs. Consumer continue to spend money at Wal-Mart as the cost of filling up their SUV climbs to above $100 per tank. Also on tap next week is the monthly Trade Balance. Although the number is likely to print yet another horrid gap, unless it exceeds the psychologically important -$70 Billion level, it may not have much of an impact as the market appears to have become inured to its negative implications for the time being.
Euro Fakeout!
The market was all primed for a May rate hike from the ECB, with some aggressive traders even suggesting that the Central Bank would act pre-emptively and raise rates in April. Instead, ECB President Jean Paul Trichet demurred, stating that expectations for a May increase did not reflect the bank's current stance. The euro immediately collapsed for 100 points and continued its slide on Friday after strong US NFPs. In fact for the week, the unit unwound all of its gains ending 14 basis points lower against the greenback. So why did Mr. Trichet, as some analysts wrote, â,"throw the euro longs under the bus?â, On Friday we surmised, â,"European monetary authorities were highly fearful of stifling Eurozoneâ,"s nascent economic recovery, driven primarily by the regionâ,"s critical export sector. Having learned their lesson well from the 2004 spike in the EUR/USD to 1.3600 which consequently pushed the Eurozone into a near recession as growth came to a virtual standstill and German unemployment skyrocketed above 12%, ECB officials decided to be far more gradual in their approach this time. Clearly, the European Central Bank deviated from their traditional mandate of assuring price stability and opted instead to contain the rise in the exchange rate. One key factor in their decision making process may have been the fact that the EUR/JPY cross had reached near vertical proportions, trading at an all time high of 144.50. With Euro-Asian trade flows possibly endangered by unbridled enthusiasm for the cross from currency speculators, the bank may have decided to engage in a bit of preventative policy making by in effect â,˜talking the euro downâ,". One other possible factor to ECBâ,"s sudden dovishness may have been the poor EZ Retail results which fell -0.2% from 0% expected. With EZ consumer still wobbly, the central bank may have decided to err on the side of caution.
Next week only the ZEW survey and EZ GDP are likely to exert much impact on order flow as the unit will once again look to US data for its directional guidance.
Tankan Tanks the Yen
Given the fact that Japanese economy has been firing on all cylinders as of late, the fall in the quarterly Tankan survey from 23 to 20 was a shock to yen traders that reverberated throughout the week. As we noted Monday, â,"todayâ,"s TANKAN results only served to reinforce the idea that ZIRP (Zero Interest Rate Policy) may remain in place longer than the market expects.â, As result the unit lagged all the majors dropping -49 basis points against the greenback â,“ the most for the week.
Next week the ZIRP thesis of yen bears will be truly tested as BOJ gathers for its monthly two day meeting. Having abandoned QEP (Quantitative Easing Policy) last month, the Japanese Central Bank will begin to have more impact on FX trading going forward and its monthly communiquƒ©s will be now scrutinized by the market with far greater focus than during the past six years when the bank kept monetary policy essentially unchanged. If the BOJ assumes even a slightly more hawkish posture this week, it may give traders hope that ZIRP may be lifted by summerâ,"s end and in turn could precipitate a fresh bout of carry trade liquidation.
Amongst next weekâ,"s eco news, which includes the Eco Watchers survey and Trade Balance releases, none will likely matter more than the CGPI data. With the key debate in Japan now centered on whether deflation has truly ended, any supporting evidence to that fact will embolden monetary authorities to proceed faster towards more restrictive policy. A weak CGPI number however will revive all the old arguments on deflation and may push USD/JPY higher on new carry trade flows.
British Pound Refuses to Buckle
Not exactly a stellar week on the economic front for the UK currency. PMI Manufacturing continued to contract, coming to within a whisker of the critical 50 boom/bust level by registering a reading of 50.8 versus last monthâ,"s 51.9. Further on Wednesday, Industrial Production printed a woeful -0.3% versus consensus of 0.3% confirming that UK manufacturing remains mired in recession. Yet despite the setbacks the pound managed not only to hold but rise, gaining 35 basis points â,“ the most amongst the majors. One positive factor in sterlingâ,"s favor was the PMI services report, which though slipping from last months 58.5 reading still remained at a healthy 57.4 level. Additionally, the surprise announcement by ECB head Trichet that the European central bank was unlikely to raise rates in May caused a selloff in the EUR/GBP underpinning cable as the week went by.
Next week sees Input PPI, Visible Trade Balance and unemployment data on Wednesday. Of all the releases, the claimant count may be the most critical; Last month saw the largest increase in rolls in more than a year. The market expects only a modest climb of 6.5K from Februaryâ,"s jump of 14.6K. Should the number once again surprise to the downside, the pound may not be able to maintain a stiff upper lip much longer.
Swiss Franc Finds Relative Strength
The Swiss franc finally found some respect this week outperforming the euro as the EUR/CHF cross traded 100 points off its recent swing high. The reason? Interest rates of course. With ECB no longer assured of raising rates in May, traders went back to comparing relative growth values of the two economies â,“ a comparison that Switzerland wins hands down. To further buttress its case, Swiss SVME PMI printed a whopping 65.2 versus 59.5 last month suggesting that Swiss growth remains torrid. The one negative wrinkle to the Swissie long thesis was the continued compression in inflation gauges with year over year CPI rising a very modest 1.0%. The numbers are unlikely to motivate the SNB to raise rates anytime soon, though the present pace of growth indicates that they will have to move at least 25p up in June, matching their much larger neighbor next door.
With absolutely no economic data this week, the Swissie will likely trade off the Euro-zone news, most specifically Tuesdayâ,"s ZEW survey. If that measure of EZ investment sentiment surprises to the downside once again, the EUR/CHF cross could test the 1.5700 figure as euros rate fueled rally will continue to unwind.
Boris Schlossberg is a Senior Currency Strategist at FXCM.
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