The USDJPY pair is now trading lower after the Bank of Japan declined to implement further easing measures, and if US GDP data disappoints, it could bring on a test of the 98 level in short order.
In what was an otherwise quiet night of trading, the one exception was USDJPY, which weakened materially after the Bank of Japan (BOJ) disappointed investors by offering no fresh policy initiatives to stimulate the economy.
In its six-month review, the BoJ provided a balanced analysis, noting that there are upside and downside risks to the current policy of aggressive monetary easing. The BoJ noted that long-term rates may rise if investor confidence in the country's fiscal finances wanes, but stated that there were no signs that the current policy was causing excessively bullish expectations in the asset markets.
Overall, the BoJ remained relatively upbeat that the new policy initiatives will result in faster GDP growth and will spur inflation towards the 1.9% level by 2015, thus helping a rise in nominal wages. The real economic data, however, continues to show that deflation remains a nagging problem for the Japanese economy, with the core CPI figure printing at -0.5% versus -0.4% expected.
The economic news suggests that the new, highly aggressive monetary policy measures have yet to take hold as demand remains subdued. Given that background, traders were disappointed with the statement by BoJ Governor Haruhiko Kuroda that the committee did not consider any additional measures at this latest meeting. USDJPY fell in reaction, dropping to a low of 98.22 before rebounding slightly.
The latest weekly portfolio data from the Ministry of Finance (MoF) also failed to drive USDJPY above 100 because Japanese investors continued to sell foreign bonds. Despite the broadly held belief that Bank of Japan easing will force investors to go global, we have seen zero evidence of an increase in foreign bond purchases since the April 4 policy decision.
With USDJPY now a considerable distance away from the 100.00 mark, the bullish enthusiasm is now weakening by the minute. The combination of disappointing US economic performance and the lack of any additional policy initiatives by the Japanese has put a cap on the current rally, and if today's US GDP data disappoints as well, it may send the USDJPY to a test of the 98.00 level as the day progresses.
US GDP Data Faces Lofty Expectations
The US dollar (USD) traded lower against all major currencies on Thursday despite a solid weekly jobless claims report. Initial claims dropped to a six-week low of 339K, down from a prior report of 355K. Continuing claims also fell from 3.093 million to 3 million, and together, they indicate that US companies are growing more confident and laying off fewer workers as a result.
The question, however, has been job growth, not job losses, so the real test will be next week's non-farm payrolls (NFP) report. On balance, claims in April have been lower than claims in March, which should bode well for next week's release. Currently, economists are looking for payrolls to rise from 88K to 155K, but this could change since we are still a week away from the release.
US first-quarter GDP numbers are due for release on Friday, and economists are looking for a huge increase in growth. In the fourth quarter, the economy expanded by only 0.4%, but in the first quarter, growth is expected to hit 3%.
A large part of the growth is expected to come from inventories and personal consumption, and the rise in inventories represents a rebound after droughts at the end of last year caused a pullback in farm inventories.
Be forewarned, however, that with retail sales and trade numbers weakening from Q4 to Q1, we are skeptical about the strength of US GDP growth in the first three months of 2013. Three-percent growth will be hard to beat, and if the GDP surprises to the downside, it could cap the rally in USDJPY.
EUR/USD Still Stuck Around 1.30
Thursday was an extremely volatile trading day for the euro (EUR), which started the North American trading session strong thanks to the news that Enrico Lette was named Prime Minister of Italy and tasked with forming a new government.
The euro, however, ended the session on a weak note. Stronger-than-expected US jobless claims capped the rally in the euro, and the selloff gained momentum after Goldman Sachs joined the chorus of banks calling for a rate cut by the European Central Bank (ECB) next week.
Between the weak German IFO report and PMI numbers, the ECB has good reasons to ease as economic weakness spreads to core Eurozone economies. No new economic data was released from Germany, but France reported a record number of unemployed job seekers in March, while Spain reported a record unemployment rate.
Labor market conditions have deteriorated across the region, and with commodity prices declining, lower inflationary pressures could give the ECB more reason to cut rates. We already know that a number of policymakers are not adverse to the idea. Since the last meeting, we have heard a number of ECB members say that a rate cut is possible if data weakens, and now that we have seen the deterioration, we can expect their support for easing in May.
The ECB is a central bank that likes to prepare the market for potential changes in monetary policy, and as such, we would not be surprised to hear more dovish comments over the next week that would harden the case for a rate cut. Still, with all of this in mind, we can't help but point out that the EURUSD is still trading around 1.30, a level that has magnetized price action for the past week.
UK Economy Dodges Triple-Dip Recession
Thursday’s best-performing currency was the British pound (GBP), which broke through 1.53 and 1.54 to hit a high just shy of 1.55 (1.5481, to be exact) on the back of stronger-than-anticipated GDP numbers.
See related: Major Pair Makes Decisive Breakout
With the UK economy having doubled-dipped into recession over the past year, the greatest fear yesterday was that the data would show the economy slipping into its third technical recession. Thanks to a 0.6% rise in service activity, the UK economy expanded by 0.3% in the first quarter, according to the government's initial estimate.
The Bank of England (BoE) will certainly be relieved to see the country avoid the stigma of a triple-dip recession and the pressure that would have undoubtedly come upon the Bank to ease policy. While the recent decline in commodity prices helped to lower price pressures, the BoE's obsession with inflation still leaves them weary of increasing stimulus unless it is absolutely necessary.
The case for additional quantitative easing (QE) still exists, but it certainly weakened given the news. The BoE has previously warned not to make too much of the GDP report because it can be volatile, but the data is telling us unambiguously that despite all the troubles and concerns about UK growth, the economy is still growing nonetheless.
New Pipeline Could Be a Gusher for Canada
The Canadian dollar (CAD), Australian dollar (AUD), and New Zealand dollar (NZD) all traded sharply higher against the greenback following good news out of Canada. Average weekly earnings increased in the month of February, which is encouraging for the labor market and the outlook for spending, but the big story was the news that a second House Committee approved a bill that would allow construction of the Keystone Pipeline without the approval of US President Barack Obama.
To be able to transport 830,000 barrels of oil per day through this pipeline would be a huge boom for Canada. There's still a long path toward final approval (the bill now goes to the chamber for vote) and concerns about its environmental impact could still block the pipeline from being built, but nonetheless, the progress is helping to drive the CAD higher.
Meanwhile, the New Zealand dollar has also performed well ahead of its trade balance report. While the Reserve Bank of New Zealand (RBNZ) sounded optimistic earlier this week, a large decline in business PMI suggests that the data could surprise to the downside.
The Australian dollar also traded higher despite no reports on the economic calendar and no data expected overnight.
By Kathy Lien and Boris Schlossberg of BK Asset Management
- Budget, Tax & Economy
- Bank of Japan