Dollar vulnerable as Fed hike prospects erode
The US Dollar finds itself in a precious position after suffering a second week of losses against its major currency counterparts. The decline played out against the backdrop of eroding Fed rate hike speculation. The priced-in policy path implied in Fed Funds futures has flattened after the FOMC rate decision disappointed the hawks and the Trump administration failed to pass its healthcare reform bill.
Central bank officials delivered a widely anticipated interest rate hike but offered nothing to suggest the pace of tightening would accelerate thereafter. A week later, the White House was forced to abandon the AHCA healthcare reform bill meant to replace so-called “Obamacare”. The ruling Republicans failed to find enough support in their own ranks to pass it through the House of Representatives.
Lingering fiscal uncertainty since December’s FOMC policy meeting probably prompted Chair Yellen and company to hold off on dialing up hawkish rhetoric even as US economic news-flow has continued to improve relative to consensus forecasts. Policymakers repeatedly pointed out that the impact of President Trump’s economic agenda on growth and inflation will greatly influence the monetary policy trajectory.
Last week’s AHCA implosion has cast doubt on the administration’s ability to implement its platform. This strikes at the heart of the “Trump trade” narrative, which envisioned a swift pullback on Fed stimulus against the backdrop of inflationary measures including deregulation, corporate tax cuts and generous infrastructure spending.
At face value, this seems to bode ill for the US Dollar as rate hike expectations moderate. However, this still leaves the Fed as the only G10 central bank intent on scaling back accommodation in 2017. A steady stream of scheduled comments from Fed officials in the week ahead may reinforce this point, capping the greenback’s losses. Whether it is able to mount a substantive recovery is another matter however.
On the data front, the third revision of fourth-quarter GDP figures is expected to show a narrow upgrade while the Fed’s favored PCE inflation gauge is expected to leave core price growth at 1.7 percent in February, unchanged from the prior month. Absent dramatic surprises to the upside, such outcomes are unlikely to generate a strong response from price action.
Data out of the Euro-Zone continues to impress, giving the impression that we may finally be seeing the ‘green shoots’ of a European economic recovery taking place. A series of PMI prints on Friday morning with a consistent theme of surprise beats further highlighted this potential as manufacturing, services and composite PMI’s from both Germany and France came-in above expectations. Given that PMI’s (Purchasing Mangers’ Index) are looked at as a leading indicator — the fact that all of these prints came-in above the expectation highlights that optimism is continuing to grow within a key segment of the European economy.
But are we at a point where the ECB is ready to let QE end (in December, 2017), allowing the ‘invisible hand’ and ‘animal spirits’ take over price action in the Euro? That’s the big question surrounding the European Central Bank at the moment, and this will likely persist until we get more signs of a confirmed recovery that could instill the confidence needed within the ECB to let market forces take-over. CPI numbers from Germany and the Euro-Zone as a whole are released on Thursday and Friday of next week, respectively, and each of these will speak to the prospect of continued economic recovery in the EU. But the immediate road ahead is not expected to be smooth as political risk will likely dominate European headlines in the coming weeks.
Dutch elections went through with a minimum of drama; but as we walk into April there’s another election lurking around-the-corner that could keep worries populating around the Euro-Zone, and that’s the French Presidential election set to take place later in the month. A Marine Le Pen win would likely be bad for the Euro, as the candidate has previously discussed the possibility of doing-away with the single currency. More recently, she’s appeared to soften her stance on this issue as she’s now reportedly backing the common currency; and even the prospect of ‘Frexit’ seems a bit more distant now after Ms. Le Pen seemed to moderate her view on this issue after a recent CSA poll indicated that 66% of French voters want to stay in the European Union.
The theme of Euro-weakness around a Le Pen win was highlighted this week after the first round of French debates was largely-considered to have been won by Ms. Le Pen’s primary competitor, Emmanuel Macron. After the debate, the Euro traded higher, eventually coming within pips of the 2017 high in EUR/USD. Given that this Presidential race is considered to be a dead heat at this point, where either candidate can come-out on top; we likely haven’t seen the end of volatility around French elections. The Telegraph’s French election poll tracker is currently showing an even 25.4% probability for both Ms. Le Pen and Mr. Macron, so this race is far from over and this will likely continue to bring some element of impact to the Euro as we move closer to the first round of elections on April 23rd.
In the more-immediate future, next week is when the UK will finally trigger Article 50 of the Lisbon Treaty in order to begin Brexit discussions (Wednesday, March 29th). This can be a tenuous issue for traders; but it appears as though the general thought is that Sterling will rally once Article 50 is actually triggered. Deductively — this can bring on Euro-weakness if it does, in-fact, take place. More likely, recent strength in Sterling is resultant of the inflation spike seen in the UK’s February CPI report. The simple prospect of ‘less dovish accommodation’ out of the Bank of England could motivate long-term shorts to close out bearish positions in GBP, thereby producing more of a ‘squeeze effect’. And if a plethora of investors are going to be buying GBP in order to cover prior shorts, they’re going to need to find capital from somewhere to do so, and selling USD while at lows may not be an attractive candidate. But regardless of the ‘whys’ it’s the ‘what’ that is important here — and Euro traders should be on guard against Sterling strength this week as Article 50 gets triggered.
The data front for the Euro next week is rather busy; although we have to wait until Thursday before we see any ‘high impact’ announcements when German CPI is released. The following morning on Friday we get more German data with Unemployment figures and later in the session, Euro-Zone CPI data for the month of March is released. Continued beats will drive additional strength to the Euro on the basis of less dovishness out of the ECB; but the predominant factors in Euro price action at the moment appear to be political in nature, so unless these inflation and unemployment numbers come out significantly-above expectations, expect the prevailing winds of political forces to denominate how this data is inferred and priced-in by market participants.
The formal triggering of Brexit on Wednesday is the main event on the UK calendar in the coming week but the markets have become so used to the idea that the UK will leave the EU in due course that it is unlikely to have a significant impact on the British Pound.
Similarly, a debate in the Scottish parliament on independence – delayed until Tuesday because of the London terrorist attack – looks unlikely to have much of an effect because if there is to be a second referendum on independence it will be so far in the future that an impact on Sterling seems remote.
Instead, in a light week for economic data, the same themes that have lifted the UK currency against both the US Dollar and the Euro recently look likely to persist. In particular, the chances of an increase in interest rates by the Bank of England over the course of this year have risen to around 40% and that could extend the Pound’s recent advance.
While concerns about Brexit and a second Scottish independence referendum might perhaps curb those gains, the resilience of the UK economy in the wake of last year’s Brexit decision should outweigh them.
The big surprise so far this month remains the decision by one member of the central bank’s monetary policy committee, Kristin Forbes, to vote for a quarter-point interest rate rise on March 16. While she was outvoted by the other MPC members who all decided to keep rates unchanged, the feeling has grown that a rate rise is on the way later in the year.
Essentially, there are two main reasons why the Bank could move. First, UK inflation climbed to 2.3% in February, above the Bank of England’s 2% target for the first time since late 2013. Second, the UK economy has so far confounded those who predicted a sharp downturn if the British people decided to leave the EU, as they did.
In particular, the first reading of fourth-quarter GDP — up 0.7% quarter/quarter — suggests that the economy is motoring ahead. That figure is likely to be confirmed on Friday, when revised data are published, keeping the prospect of a rate rise firmly on the agenda and helping the Pound to extend its gains.
The New Zealand dollar looks set to resume its downward path, and the Reserve Bank of New Zealand will not stand in its way. The NZD/USD is relatively unchanged on the week but a hawkish press statement from the central bank on March 23, after it left rates unchanged, points to the pair moving south and testing the recent lows.
After Reserve Bank governor Graeme Wheeler left interest rates unchanged at 1.75% on Thursday, he said,
“The trade-weighted exchange rate has fallen 4 percent since February, partly in response to weaker dairy prices and reduced interest rate differentials. This is an encouraging move, but further depreciation is needed to achieve more balanced growth.”
Wheeler added that monetary policy will remain “accommodative for a considerable period.”and while numerous uncertainties remain, “policy may need to adjust according.”
A recent report from rating’s agency Moody’s Investor Services gave the Government of New Zealand the thumbs-up and re-affirmed the country’s Aaa rating. Moody’s said that it expects New Zealand to be among the fastest growing Aaa-rated economies in the coming years. They agency added that while the economy is small and open, in the event of shocks the economy “responds swiftly and positively to a weaker exchange rate and lower interest rates, as seen in recent years. Exchangerate and interest-rate sensitive sectors such as tourism and construction generate economic activity and jobs to support income.”
After the recent post-FOMC relief rally, the Kiwi dollar continues to weaken. Support may kick-in at March’s low print of 0.68903 before December 2016’s low of 0.68621 comes into focus.
Gold prices are rallied for a second consecutive week with the precious metal up more than 1.56% to trade at 1248 ahead of the New York close on Friday. The advance comes amid continued weakness in the greenback with the DXY down 0.70% this week and leaves gold virtually unchanged for the month of March. The recovery closes the week just below resistance and although the broader picture still targets a new high in gold, the immediate advance is vulnerable into the close of the month while below near-term technical resistance.
Looking ahead to next week, traders will be eyeing the third and final read on U.S. 4Q GDP with consensus estimates calling for an upward revision to 2% from 1.9%. Aside from the economic docket, look for a fresh batch of Fed rhetoric to drive USD/ Gold price action with Chicago Fed President Charles Evans, Dallas Fed President Robert Kaplan, Chair Janet Yellen, Fed Governor Jerome Powell and Minneapolis Fed President Neel Kashkari slated for commentary next week. Markets are priced for three hikes in 2017 and for gold, the fuel for a sustained push higher could be sparked by either a shift in the Fed’s tone or a broader turnover in equity markets — (note the SPX posted its largest weekly loss since November this week).
Gold prices are rallied for a second consecutive week with the precious metal up more than 1.56% to trade at 1248 ahead of the New York close on Friday. The advance comes amid continued weakness in the greenback with the DXY down 0.70% this week and leaves gold virtually unchanged for the month of March. The recovery closes the week just below resistance and although the broader picture still targets a new high in gold, the immediate advance is vulnerable into the close of the month while below near-term technical resistance.
Looking ahead to next week, traders will be eyeing the third and final read on US 4Q GDP with consensus estimates calling for an upward revision to 2% from 1.9%. Aside from the economic docket, look for a fresh batch of Fed rhetoric to drive USD/ Gold price action with Chicago Fed President Charles Evans, Dallas Fed President Robert Kaplan, Chair Janet Yellen, Fed Governor Jerome Powell and Minneapolis Fed President Neel Kashkari slated for commentary next week. Markets are priced for three hikes in 2017 and for gold, the fuel for a sustained push higher could be sparked by either a shift in the Fed’s tone or a broader turnover in equity markets — (note the SPX posted its largest weekly loss since November this week).