Today’s release of the latest Chinese trade figures are of interest to FX traders, but the minutes from last month’s FOMC meeting—also due out today—shouldn’t be regarded as a reliable trade signal.
Based on the price action in the currency and equity markets, investors are feeling optimistic. Stocks rose to fresh record highs and currencies such as the euro (EUR), British pound (GBP), Australian dollar (AUD), and New Zealand dollar (NZD) have resumed or extended their gains.
The US dollar (USD) traded lower against all major currencies including the Japanese yen (JPY), which failed to make a run for 100 overnight. With no major news behind the pullback, this is likely a pause before further USDJPY gains.
See also: USD/JPY Rally Meets Its First Hurdle
The next 24 hours should get even more interesting for currency traders, with Chinese trade numbers and Federal Open Market Committee (FOMC) meeting minutes both scheduled for release. (See the complete economic calendar.)
While the Chinese trade numbers are worth watching, especially with AUDUSD hovering around 1.05, we believe FX traders should take the FOMC minutes with a grain of salt. The minutes will be from the Fed meeting held between March 19 and 20. This was right after the huge jump in non-farm payrolls (NFP) data and the big rise in retail sales, so the Fed meeting minutes will most likely be more optimistic with talk of varying asset purchases gaining traction.
Since then, we have seen a huge pullback in job growth, a decline in consumer confidence, and slower manufacturing and service sector activity. The only unambiguously positive development has been the persistent rise in US stocks.
We believe that some FOMC voters may have grown less optimistic, but based on comments from several Fed Presidents, not everyone has been fazed by the softer NFP report. FOMC voter JamesBullard (St. Louis Fed) is a known hawk who did not sound overly concerned about the recent payrolls miss.
Bullard spoke early Tuesday to NPR from Berlin and said the March payrolls number could be revised upwards. He also downplayed the labor participation rate, which fell to a 30-year low, saying that it has been falling since 2000. Bullard still believes the unemployment rate will drop to 7% and sees more willingness within the FOMC to make small adjustments in bond purchases.
Richmond Fed President Jeffrey Lacker, who is not a voting member of the FOMC this year, said he has not changed his growth forecasts following the jobs report. While we agree that the March payrolls report could be revised higher, we doubt that it will be revised so much that labor market concerns are eliminated.
The dollar did not rally on Bullard's comments, suggesting that others investors may concur with our skepticism.
The Dark Cloud Over Stronger German Data
For the fifth consecutive trading day, the euro extended its gains against the US dollar, thanks in part to better-than-expected German data. The Eurozone's largest economy reported a greater trade and current account surplus in the month of February. The trade balance rose to a high of EUR 16.8B from EUR 13.6B, while the current account surplus rose to EUR 16B from EUR 9.7B.
At first glance, these numbers are very good and suggest that the pullback in German economic activity was temporary, but a deeper look at the details show sizeable declines in exports and imports. Exports fell 1.5% versus expectations for a drop of 0.3%. Weaker exports also hurt France, which reported a larger trade deficit for the month of February.
We expect the EURUSD rally to stall at its resistance level of 1.3130, where the 50- and 100-day simple moving averages (SMAs) converge.
Meanwhile, the Swiss franc (CHF) is trading lower against the euro and higher against the dollar following mixed economic data. Retail sales ticked up in the month of February, but consumer price growth eased. For the Swiss National Bank (SNB), these inconsistent changes in Swiss data will leave monetary policy easy. No major Eurozone economic reports are scheduled for release on Wednesday.
Aussie Gains Depend on New Chinese Data
The Australian and New Zealand dollars soared on the back of stronger domestic demand and softer inflationary pressures in China. Consumer price growth in China slowed to 2.1% from 3.2%, and this decline will most likely discourage the People's Bank of China (PBoC) from shifting to a neutral bias.
The decline in price pressures will actually give the PBoC the flexibility to consider looser monetary policy. Whether or not that will be needed hinges on the Chinese trade numbers. If exports remain strong and the trade surplus increases, the AUDUSD could extend its gains above 1.05. If, however, exports plunge and the surplus shrinks, this would mark the currency pair's third failed attempt to break through this key level.
Stronger Australian business confidence also helped to lift the AUD, but that took a back seat to Chinese data. The same will be true for the latest Australian consumer confidence numbers, which should affect the AUD less than the Chinese trade numbers.
Meanwhile, the New Zealand dollar rose to a six-week high against the US dollar on the back of the CPI numbers and a stronger increase in New Zealand house prices.
The Canadian dollar (CAD) held onto its gains after mixed housing market numbers. Housing starts increased more than expected, to 184K from 183.2K, but building permits dropped to 1.7% from 1.8%. The decline in Canadian job growth had only a temporary impact on the CAD, which is now close to recapturing all of last week's losses.
USD/JPY May Rest Before Running to 100
The USDJPY failed to make a run for 100 over the past 24 hours, but this does not mean the currency pair will not try again before the end of the week. We believe that it will only be a matter of time before this level is taken out.
As indicated here yesterday by my colleague, Boris Schlossberg, the pullback in USDJPY during the Asian trading session was caused by comments from Finance Minister Taro Aso. He said that "Excessive yen gain has been corrected," which traders interpreted to mean that Japanese officials may be trying to temper the rally. Mr. Aso then quickly changed his wording to "is correcting," suggesting that authorities in Japan are not yet fully satisfied with the exchange level.
Just to reinforce the notion, Koichi Hamada, an economic adviser to Prime Minister Shinzo Abe, said that a level of 98.00-100.00 for USDJPY would be good for the economy. However, after failing to mount a run at 100.00, USDJPY remained unmoved by Mr. Hamada's dovish rhetoric.
The minutes from the March Bank of Japan (BoJ) monetary policy meeting were also released overnight, and while a few members of the central bank expressed reservations about cutting overnight lending rates, these discussions were held under former BoJ Governor Shirakawa's watch, and not that of current BoJ Governor Haruhiko Kuroda.
British Pound (GBP) Mounts a Reluctant Rally
It was a mixed day for the British pound, which strengthened against the US dollar but weakened against the Euro and Japanese yen. UK economic reports were a mixed bag, with industrial and manufacturing production increasing, but the trade deficit widening at the same time.
For sterling, the overall news was good enough to prevent a deeper correction in the GBPUSD, but it still points to a subdued outlook for the UK economy. The 1% increase in industrial production and 0.8% rise in manufacturing production failed to completely offset the larger decline experienced the month prior. The trade deficit also rose to its highest level in four months, increasing from GBP -8.168 billion to GBP -9.416 billion, and the details of the report showed a 2.1% decline in exports and 2.2% increase in imports.
Weaker external demand is bad news for the UK, but next month's report should be better because the decline in sterling during the months of February and March will actually help boost trade activity.
According to the National Institute of Economic and Social Research, GDP increased 0.1% in the month of March, the same pace of growth experienced the previous month. While this is a much-needed improvement, it has yet to offset the 0.3% decline in January. No major UK economic reports are schedule for release on Wednesday.
By Kathy Lien of BK Asset Management