Forex markets quiet as investors shift their focus to Fed speakers

Euro pulls lower; pound sterling in no-man’s land

United States

Aftera fairly quiet week in terms of data and trading, markets turn their attention to Fed speakers, where both Atlanta Federal Reserve President Lockhart and Richmond President Lacker were on the wire. Both speakers took on an optimistic tone and maintained their confidence in US inflation reaching its target of 2% over the medium term.

Lockhart reasoned that the ongoing job market improvement would eventually drive price gains, and maintains that there is sufficient economic momentum to justify a rate hike at one of the coming FOMC meetings.

Lacker reasoned that current inflation is depressed by transitory factors such as falling oil prices and the rising dollar. Given that such drivers cannot continue indefinitely, he noted that headline and core inflation should start to move back toward the 2% targets and the FOMC should be ready to respond appropriately.

This week’s US data was subdued across the board. Existing home sales numbers declined more than forecast, driven by a shortage of supply rather than demand, as low inventory and a limited selection of homes appear to have constrained sales.

In China, PBoC governor Zhou Xiaochuan pointed out risks posed by excessive corporate leverage, stating that corporate lending as a ratio to GDP had become too high.

On the foreign exchange side, this week was relatively quiet mainly due to the major events taking place in Europe and the short trading Easter week. The Euro started the week at the 1.1268 level and dropped to reach a low of 1.1142. The currency ended the week near the low at 1.1160.

The Sterling Pound remains in a no man’s land while the UK continues to face weak economic data and stream of UK political noises. Pro “Brexit” politicians argued that migration leaves Britain vulnerable to attack, while figures in the opposing camp, including Prime Minister David Cameron, said that being part of the economic and political union aids security. After starting the week near the high of 1.4476, the Pound spent the week dropping to close on Friday at 1.4135.

The Yen remains volatile trading between a low of 111.20 and a high of 113.30. The currency performance continues to be highly negatively correlated with the Japanese equity markets, and investors continue to sell the rally in the Dollar while awaiting potential further actions from the Bank of Japan.

On the commodities side, after a strong four week’s performance, commodities seem to reach an exhaustion point for now. Oil markets seem to find a stable phase around the current levels on hopes for an output freeze by major producers. Brent closed the week at $41.03, while West Texas at $39.46. Sentiment continue to swing on news of additional drop in the number of US operating rigs last month while expectations continue to build ahead of a potential meeting between OPEC and non-OPEC producers later this month.

On the precious metals front, Gold remains well supported in all this week’s European events. Although the situation in China seems to have reached some calm for now, the latest Brussel’s attack kept gold prices well supported. On the other side, the latest speeches from Fed members have put some pressure on the precious metal as investors seem to have started pricing a higher possibility of a Fed rate hike this year.

The Chicago Fed national overall activity index fell from +0.41 in January to -0.29 in February. All their major categories of the index from economic growth to production and employment dropped in February.

According to the report, growth in national economic activity was slightly below its historical trend. The economic growth suggested subdued inflationary pressure from economic activity over the coming year.

Industrial Production decreased by 0.5% in February after increasing by 0.8% in January. Manufacturing on the other hand increased by 0.2% after rising by 0.5% in January. While employment increased by a small 0.03 points, lower from +0.19 in January, the contribution of personal consumption and housing category moved down to -0.09 in February from -0.05 in January.

The latest figure from Markit shows that the US manufacturing sector is still in a slow-growth state. Manufacturing PMI released Tuesday came at 51.4 for March below economists’ expectation of 51.9.

While the report showed some improvement in the rate of output, new business and hiring, it remains that inventories fell at the steepest pace in over two years. According to the report, “US factories continue to endure their worst spell for three and a half years. Headwinds include reduced spending by the struggling energy sector, the strength of the dollar, persistent weak global demand and growing uncertainty caused by the looming presidential election.”

The National Association of Realtors said that existing home sales dropped 7.1% to an annual rate of 5.08 million units, the lowest level since November. Economists had forecasted a drop by 3% to a pace of 5.31 million units in February. The data has been volatile in recent months.

However, housing continues to be supported by the overall state of the economy and a growing labor market, which is starting to push up wage growth.

In February, the number of unsold homes on the market rose 3.3% from January to 1.88 million units 1.1% from a year ago.

“In my opinion, there is sufficient momentum evidenced by the economic data to justify a further step at one of the coming meetings, possibly as early as the meeting scheduled for end of April.”

In a speech given this week, Federal Reserve Bank of Atlanta President Dennis Lockhart said that steady U.S. economic growth could justify increasing shortterm interest rates as soon as next month. Despite not holding a voting seat on the FOMC, Lockhart said that “the center of the committee is pretty uniform at the moment.” He also supported the Fed’s latest decision to leave interest rates unchanged given the recent financial-market volatility and signs of global weakness.

Another nonvoting member, Richmond Fed Lacker, was also on the wires this week stating that US inflation is likely to accelerate in coming years and move toward the Federal Reserve’s 2%. According to the official, “the recent data on inflation, because they have come in firmer than expected, suggests that upside risks to inflation have increased maybe not significantly, but I think noticeably and materially.”

He added that he expected core inflation firmer this year than last year and close to 2% in 2017. He also said that the evidence indicates that inflation expectations remain “well-anchored”.

Europe & UK

Peter Praet, the member of the ECB’s executive board said last week, “If new negative shocks should worsen the outlook or if financing conditions should not adjust in the direction and to the extent that is necessary to boost the economy and inflation, a rate reduction remains in our armory.” His view differs with that the European Central Bank chief Mario Draghi who has recently implied he doesn’t expect further rate cuts.

The Eurozone recovered some momentum at the end of the first quarter, growing at the fastest rate since December 2015. Eurozone PMI rose from 53.0 in February to 53.7 in March. The improvement was a welcomed reversal of the declines seen in the prior two months. However, the average PMI reading for the first quarter of 53.4 indicated a slight slowdown in the pace of economic activity. Additionally, France Composite Output Index posted 51.1, up from 49.3 in February; higher output was indicated across both the manufacturing and service sectors. However, Germany Composite Output Index was unchanged from February’s five-month low. On the contrary, while solid growth of activity was maintained in the service sector; manufacturers reported the lowest rise in output since November 2014.

German business and investor morale both rose in March as resilient consumer sentiment helped Europe’s largest economy ride out concerns of a global slowdown. Ifo economic institute said its business climate index, rose to 106.7 from 105.7 in February. Additionally, the ZEW Indicator of Economic Sentiment increased slightly in March 2016. The index has improved by

3.3 points compared to the previous month. The head of the ZEW Research Department said, “The uncertainty linked with the future economic development and with the external value of the Euro continues to call for caution.”

UK CPI inflation came in at 0.3% year on year in February, unchanged from January’s rate. Likewise, core CPI inflation was unchanged at 1.2%. The main downward contribution to change in the CPI yearly rate came from the transport sector where prices, overall, were unchanged between January and February this year compared with a rise of 0.4% between the same 2 months a year ago. The main upward contribution to the change in the CPI yearly rate between January and February 2016 came from food and beverages where prices, overall, rose by 0.1% between January and February 2016, compared with a fall of 0.2% between the same 2 months a year ago.

UK House price growth improved during January 2016. According to the Office for National Statistics, the average UK house price rose 7.9% over the year, as the ongoing supply shortage in some areas drove prices even higher.

Rising house prices, which are growing faster than incomes in most areas of the UK, have pushed owning a home beyond the affordability of many first-time buyers.

Asia

People’s Bank of China Governor Zhou Xiaochuan sounded his concerns over rising debt levels in speech at the China Development Forum in Beijing on Sunday. Corporate lending as a ratio to gross domestic product had become too high and the country must develop more robust capital markets he said.

One option mentioned was to channel more savings into the capital markets, which would help reduce leverage in the corporate sector and boost equity financing. The overall message was that the PBoC would press ahead with necessary structural reforms even as economic growth slows.

Japan manufacturing PMI this week showed the first contraction in the industry since June 2015. The Index came back at a disappointing 49.1 after new export orders dropped sharply. The global slowdown is taking its toll on the economy as this marks the fifth straight decline in exports for Japan. Analysts expect growth to rebound modestly this current quarter but concerns about global demand has led some to predict another contraction will push Japan back into recession.

The Australian Bureau of Statistics released its housing price index for the December quarter showing a 0.2% increase for the quarter and an 8.7% increase from a year earlier. The total value of Australia’s 9.6 million residential homes increased $31.6 billion to $5.9 trillion.

The modest increase shows that housing price growth is slowing in 2016. While Sydney was by far the best performing market for the year, it was one of the worst this quarter, falling 1.6% marking its first decline since March of 2012.

Kuwait

The USDKWD opened at 0.30205 on Sunday morning.