The US dollar has continued to rally on the heels of yesterday’s aggressive policy announcement by the Federal Reserve, potentially confirming the popular belief that the dollar has put in a sustainable bottom.
Today’s price action in the US dollar (USD) confirms that yesterday's Federal Reserve meeting marked a major turning point for the greenback. The dollar continued to rip higher against all major currencies as investors around the world price in the new expectations for US monetary policy.
Fed Chairman Ben Bernanke was crystal clear yesterday when he said that bond buying could be tapered this year and ended completely by the middle of next year. Few expected the Fed to end quantitative easing (QE) so quickly, let alone be this clear about timing.
In response, the US dollar and US Treasury yields have soared as investors embrace the outcome we expected all along, which includes changes to the amount of asset purchases by the Fed in September.
This morning's US economic reports added fuel to the dollar rally by confirming that the US economic recovery has regained momentum. The increase in jobless claims was quickly forgotten, and investors bid up the dollar after stronger manufacturing and housing market reports.
The Philadelphia Fed survey jumped to 12.5 from -5.2, while existing home sales rose 4.2%. The improvements in manufacturing activity in the Philadelphia and New York regions show that the sector is recovering after a brief pullback in April. Low interest rates, on the other hand, continue to lend support to housing market demand.
Jobless claims hit 354K, up from 336K, but claims have been very low in recent weeks, so an uptick is not unusual. Leading indicator growth also slowed significantly, but this report carries less significance than the Philly Fed and existing home sales reports.
Aussie Suffers Tough Triple Whammy
Meanwhile, the Australian dollar (AUD) has been hit hard by the selloff in the greenback. The AUDUSD slipped to a fresh 2.5-year low, adding to losses that now top 12% since April.
The AUD received a triple blow last night from weaker Chinese PMI manufacturing numbers from HSBC, the Fed's plans to taper, and fears of bond outflows.
While the decline in the currency will eventually help the economy, before it does, underlying concerns about demand from China and the shift in Fed policy could drive the AUDUSD to 0.90, although the pair needs to first break through the 38.2% Fibonacci retracement of the 2008-to-2011 rally at 0.9150.
The NZDUSD has been today's biggest loser after New Zealand’s GDP growth slowed from 1.5% to 0.3% in the first quarter.
UK Data That’s All the Envy
Stronger Eurozone PMI numbers failed to spare the euro (EUR) from losses. Improvements in the manufacturing and service sectors drove the PMI composite index up to 48.9 from 47.7. However the response in the euro was muted because of the deeper contraction in German manufacturing activity. The German data needed to be unambiguously positive—like UK retail sales—to prevent further losses in the euro.
Consumer demand in the UK jumped 2.1% in the month of May, with retail sales excluding autos rising by the same amount. Healthier consumer appetites will contribute positively to UK GDP growth in the second quarter and leave incoming Bank of England (BoE) Governor Mark Carney to inherit a stronger economy in July.
By Kathy Lien of BK Asset Management