Abysmal jobs data and other signs of US economic weakness mean that Wednesday’s upbeat FOMC meeting minutes can’t be taken at face value, but the Fed’s intent to cut stimulus nonetheless remains undeterred.
The performance of the US dollar (USD) on Wednesday was mixed, with the greenback appreciating against the euro (EUR), Japanese yen (JPY), and Swiss franc (CHF), but weakening against the commodity currencies.
The only excitement on Wednesday was actually the early release of the Federal Open MarketCommittee (FOMC) meeting minutes. The report was originally due out at 2 pm ET, but was "accidentally" released early around 9 am ET. (We’re wondering if this same person will join the unemployment rolls next month.)
As we anticipated, the notion of tapering asset purchases this year received more support in March, and that sentiment triggered a knee-jerk rally in USDJPY. According to the FOMC minutes, all but a few members of the committee felt that it was appropriate to continue asset purchases at the current pace until the middle of this year, but several see the purchases slowing later in the year and completely stopping by year end.
One member even felt that asset purchases should be slowed immediately.
This optimism and less-dovish stance from the Fed is no surprise considering that the March 19-20 FOMC meeting came on the heels of a huge jump in non-farm payrolls (NFP) data and a large rise in retail sales.
We continue to believe that FX traders should discount the minutes because since the last meeting, 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.
There is one important takeaway from today's FOMC meeting minutes, however, and it’s that the Fed is getting very close to paring back stimulus. If the March payrolls report would’ve been good, they would probably have announced plans to vary asset purchases as early as June, or else 2 FOMC meetings from now, when Fed Chairman Ben Bernanke delivers his next press conference.
There is likely to be more caution at the April 30-May 1 monetary policy meeting, but if payrolls are revised higher and there is a significant recovery in the next release, the Fed could slow asset purchases in September.
In other words, as soon as we get some consistently good reports, the central bank will be ready to taper their purchases, which could kickstart a new uptrend in the US dollar.
In the meantime, incoming economic data will be important in shaping the central bank and the market's expectations for changes in Fed policy.
Jobless claims are scheduled for release on Thursday, and after the strong rise in claims the previous week, we really need to see a sizeable decline in order for the USDJPY rally to continue. (See the complete economic calendar here.)
Why EUR/USD Could Back up to 1.30
The euro was under pressure against the US dollar for most of the North American trading session. There were no major Eurozone economic reports released outside of French industrial production, which increased 0.7% in the month of February.
The Federal Reserve's talk of tapering asset purchases supported the dollar, but not before the EURUSD pair failed right at the 50-day simple moving average (SMA) at 1.3210. Early gains in the European trading session failed to last.
The European Central Bank (ECB) is publishing its monthly report Thursday, and given ECB President Mario Draghi's concerns about downside risks, we expect more caution from the central bank. Final German consumer prices are also scheduled for release, and no major changes are expected.
Judging from the daily chart of the EURUSD, the fact that the currency pair ended the day near its lows suggests that we could see a deeper correction to 1.30. If the ECB monthly report is as pessimistic as we expect and US jobless claims rebound, these fundamental forces could drive the EURUSD to the 1.30 level.
Jobs Data Could Send AUD/USD Above 1.05
Wednesday’s best-performing currencies were the Australian dollar (AUD) and New Zealand dollar (NZD). The AUDUSD is now trading well above 1.05 while the NZDUSD climbed to fresh yearly highs with more gains likely.
Late Tuesday, China reported its first trade deficit in more than a year, with export growth slowing materially. AUD and NZD soared, however, because imports rose a whopping 14.1% year-over-year (y/y), a sign of strong consumption that is nothing but good news for countries that rely on Chinese demand like Australia and New Zealand.
Japanese demand for higher-yielding investments is also contributing to the persistent rallies in the AUD and NZD, but the sustainability of these gains will hinge, in part, on the latest Australian employment numbers. After a surge in job growth in February, job losses are expected for March.
Last month, Australia reported its largest gain in employment in 13 years. Even though nearly all of the increase was in part-time work, it was still good news for consumption, and the economy as a whole.
No one expects the blockbuster jobs number in February to be repeated in March, but if employment change remains positive and full-time jobs increase, it may be enough for the AUD to extend its gains.
The NZDUSD completely ignored the decline in credit card spending, but the business PMI report could affect NZD.
Canada had no economic data on the calendar, but the new housing price index will be released on Thursday.
USD/JPY Stopped Short of 100…For Now
While Japanese yen crosses climbed to fresh highs after the early release of the FOMC minutes, USDJPY has yet to hit 100. The currency pair is slowly grinding higher, and its sluggish movement suggests that the first real test of 100 may not be the one that breaks.
No major Japanese economic reports were released overnight, and Bank of Japan (BoJ) Governor Haruhiko Kuroda's comments did not hurt or help the yen. According to Kuroda, the BoJ has done what is necessary and possible for now, and while they will check on policy needs every month, they don't see a need to adjust policy that often. This suggests that they may not announce additional measures at the end of this month.
Given the significant weakness in the yen, both BoJ Governor Kuroda and Prime Minister Shinzo Abe felt the need to say that their policies are not aimed at intentionally weakening the yen, but strong easing can cause stocks to rise and the yen to weaken.
Upcoming machine orders and domestic CGPI reports are not expected to have much impact on the yen, and we still believe that the key 100 level will be tested very soon.
Dovish Bank of England (BoE) Comments Sink British Pound
The British pound traded slightly higher against the euro today but ended the day unchanged against the US dollar. With no UK data on the calendar, sterling was hit by comments from policymakers.
David Miles, who is one of the most dovish members of the Bank of England (BoE), said the UK needs "very expansionary monetary policy," as "growth is likely to remain very weak." He felt the country was in an incredibly difficult situation with growth lacking and inflation uncomfortably above the Bank’s target.
At the last monetary policy meeting, Miles was among the minority voting in favor of more quantitative easing, and on Wednesday morning, he reiterated that more stimulus is the right policy. Unfortunately, other members of the central bank including Fisher, who is also one of the more dovish members, felt that there are limits to what monetary policy can do.
While there's a general feeling that the hands of central bank are tied, we continue to believe that sterling is poised for further losses. Unfortunately, that may not happen until next week, as there are no major UK economic reports on the calendar for the rest of the week.
By Kathy Lien of BK Asset Management