The rebound in U.S. stocks on Monday was short lived with all three of the major equity indices dropping over 1%. This decline triggered a wave of risk aversion across the financial markets that sent the British pound and commodity currencies down more than 1%. Interestingly enough USD/JPY maintained its footing ending the day slightly higher which suggests that aside from risk aversion, broad-based demand for U.S. dollars is also playing a role in today’s moves. The greenback traded higher against all major currencies. There was no U.S. data on the calendar and no commentary from Federal Reserve officials. With Fed Fund futures barely changed and Treasury yields rising about the same amount as external yields, the only logical explanation for today’s move is that the mixed messages from U.S. policymakers make investors nervous. It was also one of those days where equities drove currencies as today’s decline in stocks is a continuation of Friday’s weak NFP driven sell-off. We don’t have any major U.S. economic reports scheduled for release until Thursday but lower job growth raises the risk of slower consumer spending, inflation, and weaker confidence. USD/JPY still looks like a sell especially with the recent moves in stocks but the pair may hit 102.60 before turning around. There was also a report in the Nikkei that the Bank of Japan is exploring delving deeper into negative rates and that headline sent USD/JPY sharply higher into the North American close. Considering the weakness of Japan’s economy there’s probably some merit to this report although the effectiveness is still questionable.
On Monday there were big moves in sterling on the back of the U.K. inflation report but, unfortunately, it moved in a different direction than we anticipated. CPI increased in the month of August but the rise was more modest than economists anticipated. Consumer prices rose 0.3% last month against 0.4% forecast but producer price growth slowed on an input and output basis. Core CPI also held steady at 1.3% against a forecast of 1.4%. House prices slowed materially according to a separate report from the Office of National Statistics. While the weak sterling and higher airfares drove price pressures upwards we did not see the same type of price momentum that was reported by the PMIs. U.K. employment numbers are scheduled for release tomorrow and while there’s a small case for a stronger report, wage growth is key and the sharp increase last month raises the risk of a pullback.
Yesterday, for the second day in a row the euro ended the day unchanged against the U.S. dollar. There were no revisions to German CPI and the Eurozone employment change held steady at a higher level in the fourth quarter. The German ZEW survey was weaker than expected with investors growing less confident about current and future conditions. The Eurozone ZEW index rose to 5.4 from 4.6 so while investors were less confident about the outlook for the German economy, they grew more optimistic about the Eurozone as a whole. EUR/USD still looks heavy but the pressure is coming from risk aversion and not European data.
Tuesday was a particularly tough day for commodity currencies as all 3 comm dollars fell against the greenback. The Australian and New Zealand dollars were hit the hardest despite positive data. Chinese data beat estimates as industrial production came in at 6.3% vs. 6.2% expected and retail sales also showed gains of 10.6% vs. 10.2% expected. Stronger Chinese data failed to buoy a reeling Australian dollar as the currency fell well below $0.75. The Kiwi found itself in a similar predicament as the Aussie as world markets and weakening commodity prices continue to weigh down both currencies. The Canadian Dollar continued to take a hit as the IEA came out with statements that further deepened the worrisome supply glut. The IEA said that rebalancing of the oil market will take longer than first forecasted, expecting the supply glut to run into 2017. Supply-side risks persist as both OPEC and Non-OPEC members continue to produce oil at record levels and demand continues to wane, especially in the Asia. Tonight New Zealand is slated to report their current account balance. Canada and Australia have no reports expected.
Information by courtesy of Kathy Lien, Managing Director of FX Strategy for BK Asset Management