With the Eurozone economy still mired in recession, policymakers have begun making more concerted efforts to talk down the euro as a means of stimulating exports and driving growth.
The euro (EUR) came under selling pressure against the US dollar (USD) after European Industry Commissioner Antonio Tajani tried to talk down the shared currency. As the head of an agency whose goal is to protect the export sector, Tajani complained that the euro is too strong and called on the central bank to manage the currency in a way that would help exports.
Considering that the euro has been in a downtrend since the beginning of the month and has lost over 5% since the beginning of February, some investors may be surprised by the timing of Tajani's comments. However, it is clear that the underperformance of the Eurozone economy, which is currently in recession, is a big motivation for industry officials, politicians, and central bankers to make overtures to weaken the euro now versus in February.
In addition, with the currency in a downtrend, comments such as these will have a greater impact on the euro. As the European Central Bank (ECB) considers whether to introduce negative deposit rates or purchase asset-backed securities (ABS), a weaker currency will provide additional support to the region's economy.
On Thursday, the Eurozone reported a record trade surplus for the month of March. Thanks to a rise in exports, the region's trade balance rose to 18.7B, up from 12.7B. Unfortunately, there was very little enthusiasm after the report because the details showed imports falling by 1%.
Domestic demand is a major problem for the Eurozone and was a key factor in the 0.2% contraction the region endured in the first quarter, so while the trade numbers improved, the impact on the euro was limited. Non-farm payrolls in France also fell 0.1% in the first quarter, a sign that the region's second-largest economy continues to struggle.
No Eurozone economic reports are scheduled for release on Friday, so all eyes will be on comments from ECB officials including Benoit Coeure, Joerg Asmussen, Peter Praet, and Yves Mersch, all of whom are scheduled to speak. If these policymakers confirm that negative deposit rates or ABS purchases are on the table, the EUR could extend its slide.
Dollar Hit with More Data Disappointments
Thursday was the second day in the row that US economic data surprised to the downside, and the consistent disappointments over the last 48 hours have caused some investors to wonder if the market's enthusiasm for US dollars was overblown.
See also: 4 New Data Points Weighing on the Dollar
Based on the price action of the dollar, however, investors are concerned but not overly distressed about the latest data disappointments. A number of Federal Reserve Presidents also spoke on Thursday, including Federal Open Market Committee (FOMC) voters Eric Rosengren (Boston) and Sarah Bloom Raskin (Board of Governors). Rosengren spoke about the need for continued “accommodative policy,” suggesting he does not support tapering asset purchases, and Raskin made similar comments during her speech later in the day.
Non-voting FOMC members including Richard Fisher (Dallas), Charles Plosser (Philadelphia), and JohnWilliams (San Francsico) were more vocal, however, and made it clear they support varying the amount of bonds purchased as early as June. Williams’ comments caused stocks to extend lower and the dollar to rise at the end of yesterday’s North American session.
The University of Michigan consumer confidence report for the month of May is the primary US data point scheduled for release on Friday.
AUD: Ninth Straight Day of Losses
The worst-performing currencies for Thursday were the Australian dollar (AUD) and New Zealand dollar (NZD). The AUD has now fallen against the USD for nine consecutive trading days and has lost more than 5% of its value over the last month. The NZD is performing just as poorly, although it managed to rebound on Wednesday.
Commodity dollars continue to be pounded on all sides by liquidation flows, and the AUDUSD hit a fresh low in Friday’s Asian session, dropping to 97.27 as accounts in Asia sold the unit mercilessly. There was no news about the pair, and the latest decline appears to have been caused by further unwinding of the carry trades in AUDJPY.
Now having fallen nearly 800 points in a vertical line, short Aussie has become the "obvious" trade in FX. The liquidation is being driven by the assumption that the Reserve Bank of Australia (RBA) will now embark on an easing cycle in order to stimulate the slowing Australian economy.
See related: Short AUD Is a “Go-to” FX Trade
However, as we pointed out yesterday, the Australian economy appears to be more robust and flexible that initially thought. Furthermore, one of RBA's stated goals for its recent rate cut was to drive down the value of the currency, but with the market having already done the brunt of that work, Australian policymakers will no doubt have less motivation to ease in the foreseeable future.
One other factor driving the Aussie lower is the slide in precious metals, and that may indeed continue to be a drag on the currency, especially if gold drops through the $1300/oz. barrier. The Aussie’s correlation and dependence on gold has weakened considerably, however, and any further downside damage is likely to be capped.
Furthermore, central bank reserve diversification traders are no doubt starting to bargain hunt at the current levels, and AUDUSD could begin to stabilize as the last of the liquidation flows taper off. The Aussie is now coming into long-term support at the 97.00 level and could see some profit-taking bounce over the next few days.
JPY: New Signs That “Abenomics” Are Working
It was a very busy day for Japanese data yesterday, but despite the significance of the latest economic reports, domestic data failed to have a meaningful impact on the Japanese yen (JPY). Instead, Thursday’s rally in the yen should be attributed more to deleveraging than optimism about Japan because the sell-off in USDJPY and other pairs did not begin until the early North American trading session. The downtrend gained momentum after the series of disappointing US economic releases as well.
Still, the improvements in Japan's economy are worth acknowledging. GDP growth hit 0.9% in Q1, up from 0.3% in Q4. This was the strongest pace of growth in a year and continues the trend of improvement that we have seen over the past few months. Industrial production also rose 0.9%, which bodes well for the manufacturing sector.
Most importantly, however, the Japanese were net buyers of foreign bonds for the second month in a row. At Y186.4B, purchases have slowed from last week, but the mere fact that the Japanese were net buyers for the third month in a row is enough to suggest that Bank of Japan (BoJ) policies are finally affecting investment demand, which is a necessary criteria for a stronger USDJPY rally. As long as these flows remain positive, a deep correction in USDJPY can be avoided.
In Friday’s Asian session, Japan reported a sharp rise in machinery orders, which climbed 14.2% versus 3.1% expected. The news helped to push USDJPY back to 102.50, but as we've noted, the pair has stalled at that level for the past few days. There is a reported option barrier at the 103.00 strike level that may be capping the rise, but a deeper reason for the pause in the rally is the fact that US economic data has disappointed all week long.
If today's University of Michiganconsumer confidence data misses, it could drive USDJPY back through the 102.00 level, but if it surprises to the upside, it may finally trigger the move through the 103.00 figure.
GBP/USD Has Bottom in Sight
The British pound (GBP) traded well against all major currencies on Thursday despite the lack of UK economic data. The improvements seen in the economy over the past few weeks, and the optimistic tone of the Bank of England (BoE) quarterly inflation report have finally caught up to sterling, and are lending support to the currency.
We believe that this is the beginning of what could be a more significant turn for GBPUSD, but we don't expect a move above 1.55 before incoming BoE Governor Mark Carney gives his blessing. Carney could still choose to start his term strong by easing monetary policy, and if he brings up this possibility in July, the outlook for GBPUSD could be very different.
In the meantime, from a technical and fundamental perspective, the currency pair appears poised for further gains. The charts show a potential bottom for GBPUSD above 1.52. With no UK economic reports scheduled for release on Friday, we expect sterling to hold on to its recent gains.
By Kathy Lien and Boris Schlossberg of BK Asset Management