Event risk ramps up from US GDP to ECB meet
Swiss International Financial Brokerage Co
It was the start of another rough week for the US Dollar as markets re-opened after an extended holiday weekend in the United States. DXY sank down to a fresh three-year low, extending the dramatic fall from last week after a bit of resistance began to show off of the December low. Last week’s move was pushed by a batch of releases last Friday when US CPI and Advance Retail Sales figures were released. While core inflation surprised to the upside, a miss in Retail Sales seemed to grasp markets’ attention, and this led to a strong bearish move that continued into the start of this week.
The Greenback struggled to regain its footing initially, with another lower-low printing on Tuesday evening; but since that’s come-in, support has appeared to settle just a bit above the 90.00 level on DXY. This support has held up even throughout a disappointing piece of data on Friday of this week: University of Michigan consumer confidence came-in at 94.4 versus the expectation of 97.00, and this represents a fresh six month low in that data point. But this was perhaps offset by a bit of profit taking as bears tighten up risk ahead of this week’s close.
The big piece of US data for next week comes out on Friday when Q4 GDP is released. We also get a high impact print with the Advanced Goods Trade Balance on Thursday, but before that we have some major Central Bank rate decisions out of Japan (Tuesday) and Europe (Thursday morning). Each of these can bring significant bearing on flows in the Dollar, as macro trends have been a large factor in the currency’s recent movement.
The big question surrounding both of those Central Banks at the moment is when they might be gearing up towards a stimulus taper, and while markets have been appearing to price-in such a theme out of Europe for much of last year, this is a more recent debate surrounding the Bank of Japan. While the ECB has continually evaded the topic of stimulus exit, markets spent much of last year bidding the Eurohigher in anticipation of as such. When the ECB extended their stimulus program in October, this brought a mere two weeks of weakness into EUR/ USD; but when a red-hot GDP number was released out of Germany in midNovember, buyers came right back to continue the 2017 bullish trend. This, of course, helped to create significant Dollar weakness throughout last year as forward-looking flows swapped out a weak USD with the Euro.
Regarding Japan – the Yen was one of the few currencies that could keep pace with the Dollar’s weakness for the last eight months of 2017. This created a range-bound environment in the pair, but early last week rumors began to circulate that the BoJ may be looking slowly begin tapering asset purchases when they bought fewer long-dated bonds. This created a spate of Yen strength that lasted for a few days around worries of a ‘stealth taper’, which was eventually faded out of markets, but it bears focus nonetheless as we approach next week’s BoJ rate decision. If the BoJ does signal that stimulus taper may be on the horizon, as could be noted by the insertion of the key word of ‘normalization, ’ then we will likely see Yen strength that will help to bring another leg of weakness into global US Dollar flows.
The fundamental forecast for the US Dollar will be set at neutral for next week. While the down-trend in the Greenback is extremely attractive, the inability to break below 90.00 this week, combined with the stretched nature of the longer-term trend make for a difficult backdrop to prod for continuation whilst so near multi-year lows.
While a weak US Dollar and the rising prospects of an agreed Brexit deal have been largely responsible for the Pound’s advance, the week ahead will likely be dominated by UK economic data. In particular, Tuesday’s figures for unemployment and average earnings will be important even though both will likely be little changed: the unemployment rate staying at 4.3% and the increase in average earnings at 2.5%.
The latter is particularly significant as earnings growth remains below the inflation rate and this continues to curb spending and therefore the consumption component of economic growth. That should become even more evident Friday, when the “advance” fourth-quarter readings for GDP are released. Quarter/quarter a same-again 0.4% growth figure is possible but that would still lower the year/year rate of expansion to a rather weak 1.4% from the previous 1.7%.
Data aside, Bank of England Governor Mark Carney is scheduled to speak at a panel meeting at the World Economic Forum in Davosbut is unlikely to say anything market moving. The Bank has indicated that any further interest rate increases after November’s quarter-point hike will be “limited and gradual” – widely interpreted as meaning the next rise will come late this year.
The Australian Dollar is riding pretty high as a new week gets under way.
At face value there are plenty of good reasons why it should be. The market may have been unsure as to what to make of last week’s mixed bag official employment data. Who could blame it? Growth was strong but part-time roles predominated. The participation rate rose but so did the overall unemployment rate.
Still, the Australian economy seems to be quite the labour machine. The three-month rolling average for job creation is now 35,500 per month. That could be as much as twice the country’s rate of population growth. If this keeps up, then the weak wage settlements which have bedevilled the overall inflation picture must surely be history.
Moving on, China can never be far from any assessment of Australia’s performance. Here, too the signs look good. Official growth numbers from Asia’s largest economy came in last week and topped forecasts for 2017 as a whole. China’s economy expanded by 6.9% in 2017, comfortably meeting Beijing’s target for growth of “6.5% of better” and banishing at least to some extent the bitter memory of 2016’s 26year low of 6.7%.
Mix in a generally more cautious view on the US Dollar and its Australian cousin looks well placed to benefit. So it has. AUD/USD crossed the psychologically important 0.80-point last week to reach highs not seen for four months.
The broader outlook for crude remain constructive as the Organization of the Petroleum Exporting Countries (OPEC) and its allies prolong the production cuts from 2017, but the ongoing expansion in US output may continue to drag on oil prices as the International Energy Agency (EIA) warns ‘explosive growth in the US and substantial gains in Canada and Brazil will far outweigh potentially steep declines in Venezuela and Mexico.’
With field outputs bouncing back in the week ending January 12, the US Energy Information Administration (EIA) now projects ‘total US crude oil production to average 10.3 million barrels per day (b/d) in 2018, up 10% from 2017.’ Higher energy prices may continue to fuel nonOPEC production as ‘seven new oil-producing projects are slated to come online by the end of 2019,’ and market participants may pay increased attention to the ongoing expansion in US supply as the figures are expected to exceed the previous record of 9.6 million b/d set in 1970.
In response, OPEC and its allies may keep the door open to extend the rebalancing efforts beyond 2018 as the group meets in Oman this weekend, but signs of growing supply may keep crude oil prices under pressure especially as recent price action highlights the risk for further losses. Interested in having a broader discussion on current market themes.
Gold prices snapped a five-week winning streak with the precious metal down 0.26% to trade at 1334 ahead of the New York close on Friday. The losses come despite continued weakness in the greenback with the DXY (Dollar Index) down nearly 0.4% as all three major US equity indices closing markedly higher on the week.
Looking ahead to next week traders will be eyeing central bank rate decision from the BoJ (Bank of Japan) and the ECB (European Central Bank) with the advanced read on 4th quarter US GDP highlighting the economic calendar. Consensus estimates are calling for a print of 3%, down from 3.2% q/q in Q3 with Core PCE (Personal Consumption Expenditure) expected to rise to 1.9% q/q.
With the inflation outlook remaining the laggard of the Federal Reserve’s dual mandate of maximum employment and price stability, a stronger print on these data point next week could see interest rate expectations increase with such a scenario likely to weigh on gold demand. That said, prices have turned just ahead of resistance and although the broader picture remains constructive, the rally remains vulnerable near-term.
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